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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 10, 1998
REGISTRATION NO. 333-62489
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AMERICAN DIVERSIFIED HOLDINGS, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
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NEVADA 6211 86-0854150
(STATE OR JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) NO.)
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10900 WILSHIRE BOULEVARD, 9TH FLOOR
LOS ANGELES, CALIFORNIA 90024
(310) 209-5090
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)
JAMES BUCHANAN REA, JR.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
AMERICAN DIVERSIFIED HOLDINGS, INC.
10900 WILSHIRE BOULEVARD, 9TH FLOOR
LOS ANGELES, CALIFORNIA 90024
(310) 209-5090
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE OF PROCESS)
THE COMMISSION IS REQUESTED TO SEND COPIES OF ALL COMMUNICATION TO:
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MICHAEL B. JEFFERS, ESQ. RONALD WARNER, ESQ.
JEFFERS, WILSON, SHAFF & FALK, LLP ARTER & HADDEN LLP
18881 VON KARMAN AVENUE, SUITE 1400 725 S. FIGUEROA STREET, 34TH FLOOR
IRVINE, CALIFORNIA 92612 LOS ANGELES, CALIFORNIA 90017
(949) 660-7700 (213) 430-3000
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APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
As soon as reasonably practicable after the effective date of this Registration
Statement
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION
REGISTERED REGISTERED SHARE PRICE(1) FEE
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Common Stock, no par value(2).......... 1,993,334 $14.00 $27,906,676 $15,061.00
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Total.................................. 1,993,334 $27,906,676 $15,061.00
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(1) Estimated solely for purposes of calculating the registration fee, pursuant
to rule 457(a) under the Securities Act.
(2) Assumes the sale of up to 260,000 shares of Common Stock, which may be
issued to cover over-allotments, if any. The Company has granted to the
Underwriters an option to purchase a proportionate share of the 260,000
shares reserved to cover over-allotments, based upon the ratio that the
number of shares to be sold by the Underwriters bears to the 1,733,334
shares to be offered and sold in this Offering. The remainder of the 260,000
additional shares will be available to the Company to cover over-allotments,
if any, in connection with the sale of shares to certain directors,
officers, employees and affiliates of the Company, and their respective
contacts and associates, at the Price to Public (the "Direct Offering").
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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CROSS REFERENCE SHEET
BETWEEN ITEMS OF FORM SB-2 AND PROSPECTUS
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ITEM IN FORM SB-2 LOCATION IN PROSPECTUS
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Front of Registration Statement and outside
front cover of Prospectus.................. Facing Page; Cross Reference Sheet; Outside
Front Cover Page
Inside Front and Outside Back Cover Page of
Prospectus................................. Inside Front Cover Page; Outside Back Cover
Page
Summary Information and Risk Factors......... PROSPECTUS SUMMARY; RISK FACTORS
Use of Proceeds.............................. PROSPECTUS SUMMARY; RISK FACTORS; USE OF
PROCEEDS
Determination of Offering Price.............. UNDERWRITING
Dilution..................................... DILUTION
Selling Security Holders..................... Not Applicable
Plan of Distribution......................... Inside Front Cover Page; SECURITY OWNERSHIP
OF MANAGEMENT AND CERTAIN SECURITYHOLDERS;
UNDERWRITING; DIRECT OFFERING
Legal Proceeding............................. DESCRIPTION OF BUSINESS -- Legal Proceedings
Directors, Executive Officers, Promoter and
Control Persons............................ DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT
EMPLOYEES
Security Ownership of Certain Beneficial
Owners and Management...................... SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN
SECURITY HOLDERS
Description of Securities.................... Outside Front Cover Page; CAPITALIZATION;
DESCRIPTION OF SECURITIES; UNDERWRITING
Interest of Named Experts and Counsel........ LEGAL MATTERS; EXPERTS
Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities................................ DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT
EMPLOYEES
Organization Within Last Five Years.......... DESCRIPTION OF BUSINESS; DIRECTORS, EXECUTIVE
OFFICERS AND CERTAIN EMPLOYEES; INTEREST OF
MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS
Description of Business...................... PROSPECTUS SUMMARY; DESCRIPTION OF BUSINESS
Management's Discussion and Analysis or Plan
of Operations.............................. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Description of Property...................... DESCRIPTION OF PROPERTIES
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ITEM IN FORM SB-2 LOCATION IN PROSPECTUS
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Certain Relationships and Related
Transactions............................... INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN
TRANSACTIONS
Market for Common Equity and Related
Shareholder Matters........................ RISK FACTORS; DESCRIPTION OF SECURITIES;
UNDERWRITING
Executive Compensation....................... REMUNERATION OF DIRECTORS AND
OFFICERS -- Executive Compensation
Financial Statements......................... CONSOLIDATED FINANCIAL STATEMENTS
Changes in and Disagreement With Accountants
on Accounting and Financial Disclosure..... Not Applicable
Indemnification of Directors and Officers.... Information not required in Prospectus;
Indemnification of Directors and Officers
Other Expenses of Issuance and
Distribution............................... Use of Proceeds
Recent Sales of Unregistered Securities...... Not Applicable
Exhibits..................................... Not Applicable
Undertakings................................. Information Not Required in Prospectus;
Undertakings
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Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED NOVEMBER 10, 1998
PROSPECTUS
AMERICAN DIVERSIFIED HOLDINGS, INC.
LOGO
1,733,334 SHARES
COMMON STOCK (NO PAR VALUE)
------------------------
American Diversified Holdings, Inc. (the "Company") is offering hereby
1,733,334 shares of the Company's Common Stock, no par value (the "Common
Stock"). As of the date of this Prospectus, the Company has one class of stock
outstanding, the Common Stock offered hereby. A significant portion of the
1,733,334 shares of Common Stock offered hereby (up to shares) are
being offered to certain directors, officers, employees and affiliates of the
Company, and their respective business contacts and associates, at the Price to
Public (the "Direct Offering"). See "Direct Offering." Except as otherwise
indicated, all share information for 1998 and per share information for the
periods presented reflect the 1:10 reverse stock split on May 26, 1998; and the
1:2 reverse stock split on August 20, 1998.
Prior to this offering (the "Offering"), there has been no public market for
the Company's Common Stock and there can be no assurance that any such market
will develop. It is currently anticipated that the initial public offering price
will be $ per share (the "Price to Public"). The Company's Common Stock
has been approved for quotation on the National Association of Securities
Dealers' Automated Quotation System ("NASDAQ") under the symbol "AMDV," subject
to the completion of this Offering and payment of the initial listing fee. The
public offering price for the Shares has been determined arbitrarily by
negotiations between the Company and the Underwriters and does not necessarily
bear any relationship to the Company's results of operations, net worth,
prospects, or other commonly recognized criteria of value. See "Risk Factors"
and "Underwriting."
THESE SECURITIES ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK AS WELL
AS IMMEDIATE AND SUBSTANTIAL DILUTION. SEE "RISK FACTORS" AND "DILUTION."
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
CALCULATION OF REGISTRATION FEE
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UNDERWRITING DISCOUNTS PROCEEDS TO
PRICE TO PUBLIC AND COMMISSIONS(1) COMPANY(2)
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Per Share.................................... $ $ $
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Total(3)(4).................................. $ $ $
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(1) Excludes value of warrants to be issued to Millennium Financial Group, Inc.
(the "Representative") to purchase, at a purchase price representing a
premium of 50% over the Price to Public, such number of shares of the
Company's Common Stock equal to ten percent of the total number of shares
placed by and sold through the Representative in this Offering (the
"Representative's Warrants"). The Underwriters' discount will apply only to
shares placed by and sold through the Underwriters. The Company also has
agreed to pay to the Representative a management fee equal to two percent of
the aggregate proceeds generated from the sale of shares in the Direct
Offering. The Company has agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933.
See "Underwriting."
(2) Before deducting expenses of this offering payable by the Company estimated
at $242,000.
(3) The Company has granted the Underwriters an option exercisable within 45
days after the date of this Prospectus to purchase up to such additional
number of shares of Common Stock equal to 15% of the total number of shares
placed by and sold through the Underwriters, on the same terms and
conditions set forth above to cover over-allotments, if any (the
"Underwriters' Over-Allotment Option"). In addition, the Company may issue
up to such additional number of shares of Common Stock equal to 15% of the
total number of shares sold in the Direct Offering to cover over-allotments
in connection with the Direct Offering, if any (the "Company's
Over-Allotment Shares"). If the Underwriters' Over-Allotment Option is
exercised in full, and the Direct Offering and the Company's Over-Allotment
Shares are sold in full, the total Price to Public, underwriting discount
and net proceeds to the Company will be approximately $ , $
and $ , respectively. See "Underwriting" and "Direct Offering."
(4) Includes $ expected to be received by the Company from the Direct
Offering if the Direct Offering is sold in full.
The shares of Common Stock offered hereby are offered by the several
Underwriters when, as and if delivered to and accepted by the Underwriters and
subject to their right to reject orders, in whole or in part, and subject to
certain other conditions. It is expected that the shares of the Common Stock
will be ready for delivery on or about , 1998, against payment
in immediately available funds.
------------------------
Millennium Financial Group, Inc.
THE DATE OF THIS PROSPECTUS IS NOVEMBER , 1998
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TABLE OF CONTENTS
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PAGE
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PROSPECTUS SUMMARY.......................................... 1
The Company............................................... 1
Business Strategies....................................... 3
The Offering.............................................. 4
RISK FACTORS................................................ 5
Limited Operating History and Losses From Operations
Creates Uncertainty About Future Results............... 5
Need for Additional Capital............................... 5
Delay in Commencing Operations............................ 5
Dependence on Computer Systems............................ 6
Dependence on Intellectual Property Rights................ 6
Management of Growth...................................... 6
Volatile Nature of Securities Business.................... 6
Rapidly Evolving Markets.................................. 7
Risks Associated with New Products and New Markets........ 7
Dependence on Key Management and Principal Consultants.... 8
Risks Associated with Strategic Acquisitions and
Relationships.......................................... 8
Regulation................................................ 8
Lack of Trademark Protection.............................. 9
Immediate and Substantial Dilution........................ 9
Potential for Security Compromises........................ 9
Effect of Net Capital Requirements........................ 9
Broad Discretion in the Use of Proceeds................... 9
No Assurance of Public Trading Market or Qualification for
NASDAQ Inclusion; Possible Volatility of Stock Price... 10
Shares Eligible for Future Sale........................... 10
Litigation and Potential Securities Laws Liability........ 11
Dependence on Cash Inflows to Mutual Funds................ 11
Dependence on Systems and Third Parties................... 11
Competition............................................... 11
THE COMPANY................................................. 13
USE OF PROCEEDS............................................. 14
DILUTION.................................................... 15
DIVIDEND POLICY............................................. 16
CAPITALIZATION.............................................. 17
DESCRIPTION OF BUSINESS..................................... 18
General................................................... 18
ADAM...................................................... 18
ADAG...................................................... 19
The Business Opportunity.................................. 20
Industry Developments in Germany.......................... 21
Business Strategy......................................... 22
Development of Products and Services...................... 23
Mutual Fund Products...................................... 23
Discount Securities Brokerage Services.................... 23
Marketing................................................. 25
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Customer Service.......................................... 26
Competition............................................... 27
Government Regulation..................................... 28
Net Capital Requirements; Liquidity....................... 29
Employees................................................. 30
Systems................................................... 30
Servicemark Application................................... 31
Legal Proceedings......................................... 31
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS....... 32
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS.... 32
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL
STATEMENTS................................................ 33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION.................................. 34
Plan of Operation......................................... 34
ADAM's Historical Operations.............................. 34
Year 2000 Compliance...................................... 36
DESCRIPTION OF PROPERTY..................................... 36
DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES..... 36
Management................................................ 36
Principal Advisors........................................ 38
ADAG's Executive Team..................................... 39
Management Committees..................................... 39
REMUNERATION OF DIRECTORS AND OFFICERS...................... 40
Executive Compensation.................................... 40
Employment Agreements..................................... 40
1998 Stock Option and Incentive Plan...................... 41
Stock Option Grants....................................... 42
Individual Grants......................................... 42
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN
SECURITYHOLDERS........................................... 43
Preferred Stock........................................... 43
INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS... 44
DESCRIPTION OF SECURITIES................................... 44
General................................................... 44
Common Stock.............................................. 45
Preferred Stock........................................... 45
SHARES ELIGIBLE FOR FUTURE SALE............................. 46
UNDERWRITING................................................ 47
DIRECT OFFERING............................................. 48
LEGAL MATTERS............................................... 48
EXPERTS..................................................... 48
ADDITIONAL INFORMATION...................................... 48
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.................. F-1
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PROSPECTUS SUMMARY
The summary information below should be read in conjunction with, and is
qualified in its entirety by, the detailed information appearing elsewhere in
this Prospectus. Capitalized terms used herein shall have the definitive
meanings assigned to them in the text below.
This Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act. Forward-looking statements may be found
throughout this Prospectus, particularly under "Prospectus Summary," "Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operation" and "Description of Business." Such forward-looking
statements are indicated by the use of such words as "intends," "expects,"
"may," "anticipates," "estimates," "desires," "believes" and similar
expressions. Actual results may differ from those described by forward-looking
statements as a result of many risks and uncertainties, including, but not
limited to, those described under "Risk Factors." Prospective investors are
advised not to rely upon forward-looking statements, but rather base their
investment decision on the Company's actual results to date.
THE COMPANY
American Diversified Holdings, Inc., a Nevada corporation (the "Company"),
is a development stage enterprise which was formed to offer a full range of
financial services in the United States and Europe. The Company is a holding
company primarily engaged in the management of its two wholly-owned
subsidiaries, American Diversified Asset Management, Inc., a Nevada corporation
("ADAM") which is located in Los Angeles, California, and American Diversified
AG Wertpapierhandelsbank, a German corporation ("ADAG") which is located in
Berlin, Germany. The principal business activities of the Company and its
subsidiaries will be to provide financial services and distribute financial
service products to individuals and institutional investors in the United
States, Germany and other European Union ("EU") countries. The Company and its
subsidiaries will offer financial services consisting mainly of full service
securities brokerage, Internet discount brokerage, asset management, sponsoring
and distributing mutual funds, underwriting and related financial services.
ADAM
Through its U.S. subsidiary, ADAM, the Company is engaged in the management
and distribution in the U.S. of American Diversified Funds, Inc., an open-end
investment company registered under the Investment Company Act of 1940, which
currently offers a series portfolio, the American Diversified Global Value Fund,
a value-based equity fund. The Company plans to expand ADAM's mutual fund
business by increasing the assets of the Global Value Fund and by developing new
mutual fund series in the U.S. and Europe. ADAM is in the process of registering
a newly developed fund, the American Diversified International Value Fund for
U.S. distribution (collectively with the Global Value Fund, the "Funds"). Ladas
& Hulings, Inc. ("Ladas & Hulings"), a leader in value investing with over 25
years of experience, became sub-advisor to the Global Value Fund in April 1998
and will provide the day-to-day investment management (sub-advisory services)
for the Funds.
ADAM is in the process of registering an umbrella fund, American
Diversified Funds, plc, in Ireland under the Undertaking for Collective
Investments in Transferrable Securities ("UCIT's") directive for European ("EU")
distribution, which will offer three sub-funds: the Global Value, International
Value, and SmallCap Value portfolios. Marketing and distribution services in
Germany and other EU countries will be provided by American Diversified AG
Wertpapierhandelsbank ("ADAG"), the Company's German subsidiary, and through
alliances with medium-sized banks, broker-dealers, insurance agents, and by
captive sales forces.
The Company is in the process of separating its investment management and
broker-dealer businesses by forming a new wholly-own subsidiary, American
Diversified Global Equities, Inc. ("ADGE"), which will assume the broker-dealer
and underwriting functions of ADAM (including the underwriting and distribution
1
<PAGE> 8
of mutual funds). ADAM will remain as the investment advisor to the Funds and
will continue to provide asset management services. See "The Company" and
"Description of Business -- General."
ADGE will be the distributor for the Company's mutual funds in the U.S. and
will act as broker for on-line brokerage execution in U.S. markets for ADAG. The
Company plans to expand the present investment management business of ADAM by
growing the Funds and introducing an asset management business for high net
worth individuals and institutional accounts, using Ladas & Hulings as the asset
manager.
ADAG
Through its German subsidiary, ADAG, the Company is engaged in the
distribution of mutual funds and provides asset management services and
underwriting services to clients in Germany. ADAG will begin providing
securities brokerage services to individual investors and institutions in Europe
through the Internet and ADAG's registered representatives after ADAG has
received a full banking license in Germany, which is expected to occur by the
end of the 1998 calender year. ADAG will offer trade execution for stocks,
mutual funds, options and bonds, as well as market data and research tools to
investors in Europe. ADGE will act as the clearing broker for ADAG on all
transactions involving U.S. securities which are executed in the U.S. The
electronic infrastructure and primary systems necessary to operate ADAG's
securities brokerage business are currently in place and fully functional. ADAG
has developed substantial name recognition in Germany through the aggressive
advertisement of its services during the last four months. To date, ADAG has
received 10,000 applications for new accounts and expects to generate further
interest in its services through continued advertising in the coming months,
although ADAG does not intend to take orders or otherwise commence its brokerage
business in Germany until it has received a full banking license. In addition,
ADAG intends to engage in underwriting initial public offerings of small to
medium size European companies, especially in Germany.
The Company plans to transfer all of the proprietary technology, systems
and software of the Company and its subsidiaries to American Diversified
Technologies, Inc., which is being organized as a new wholly-owned subsidiary of
the Company in the U.S. See "Description of Business -- General."
The Company believes that there is a new and growing market in the EU for
investment products denominated in U.S. dollars primarily due to the following
factors: (i) the planned transition in 1999 to a single European currency, the
EURO; (ii) the creation of new and expanding capital markets in Eastern Europe;
(iii) implementation of the UCITS directive in October 1989, which was designed
to create a single EU mutual funds market and has now expanded the range of
available funds for distribution in Europe; (iv) the continuing growth of the
mutual fund market; and (v) the Xetra(R) electronic trading system of the
Frankfurt Stock Exchange has expanded the number of tradeable instruments and
execution possibilities for electronic security trading. The integration of
other major European Stock Exchanges into this system and NASDAQ's interest in
participating, creates the possibility of a Pan-European stock market for the
future. In addition, regulatory reforms in Germany and other EU countries have
enabled smaller financial services companies to compete for investment dollars
traditionally flowing to savings account deposits at commercial banks.
Management believes that an international financial services group with offices
in both the United States and Europe can attract a diverse clientele, including
institutional investors, banks, and individual investors. See "Description of
Business -- The Business Opportunity."
The Company's executive officers and employees have a wide range of
experience and expertise in the development, marketing and sale of financial
services and products in the United States and Europe. While the Company has
entered into employment agreements with certain of its executive officers, no
assurance can be given that the Company will be able to enforce such agreements.
2
<PAGE> 9
BUSINESS STRATEGIES
The Company seeks to exploit the opportunities created primarily as a
result of regulatory reforms and changing conditions in the financial services
industry and to expand its market share by pursuing the following five key
strategies:
- Market Distinct Brands. ADAG will market distinct brands of financial
products with a range of services and commission rate structures designed
to attract specific groups of investors in Europe. The Company believes
that, by tailoring products and services for customers within specific
demographic categories, ADAG can attract a broader range of investors
seeking brokerage services at discount prices. ADAG will offer discount
on-line brokerage services under the AMDIV.NET(TM) brand name, which has
been created for investors seeking simple and efficient execution
services at the lowest possible transaction cost, and investors who are
comfortable with the Internet and prefer to trade exclusively through
electronic communications in exchange for low-priced trade executions.
AMERICAN DIVERSIFIED(R) has been created to provide ADAG's high net-worth
customers with a full range of brokerage services, private asset
management and mutual fund products, and underwriting services.
AMDIV.PRONET(TM) is a technologically advanced financial system that will
provide ADAG's correspondent European brokerage firms and financial
institutions with special terminals to access the major European and U.S.
stock markets through the Company's integrated computer network.
- Create Technologically Innovative Solutions to Investor Needs. Since
April 1997, the Company has worked on the development of its integrated
electronic systems, which combine the Company's newly developed software
with existing electronic services in the U.S. and Europe. AMDIV.NET(TM)
and AMDIV.PRONET(TM) each comprise a single-source trading system for
U.S. and European stocks, which offer immediate execution services. The
"Dial-In" feature of AMDIV.PRONET(TM) provides institutional
correspondents with a secure link to Europe's and the U.S.'s major stock
markets using special terminals, which enable direct access through the
Company's integrated computer network. The Company is actively pursuing
additional technologies to service the rapidly evolving financial
services industry. See "Description of Business -- Development of
Products and Services" and "Risk Factors -- Dependence on Intellectual
Property Rights."
- Provide Transaction Value to Investors. The Company strives to offer
investors transaction value by providing specified services at prices
that are among the lowest in the discount brokerage industry.
AMDIV.NET(TM) will be offered at a flat commission rate on Internet-only
trades for equity orders having a market value of up to EURO 11,000.
AMERICAN DIVERSIFIED(R) will provide investors with access to trained
registered representatives and other customized services for a fee equal
to .44% of the order volume for each equity order. Through more efficient
operations, synergies of strategic alliances, increasing volume and the
use of advanced technology, the Company strives to minimize costs, which
will allow it to offer some of the best transaction values in the
industry. See "Description of Business -- Development of Products and
Services" and "Description of Business -- Competition".
- Expand Mutual Fund Products and Distribution. ADAM has been expanding its
sponsorship of mutual funds by developing one new portfolio in the U.S.,
the International Value Fund. In addition, ADAM is in the process of
registering an umbrella fund in Dublin, Ireland under the UCITS directive
for European distribution, which will offer three sub-funds: Global
Value, International Value and SmallCap Value portfolios. The
Ireland-based funds will be distributed in Germany and other EU countries
through ADAG's distribution network and other channels in Europe.
- Expand the Underwriting of Initial Public Offerings. ADAG will engage in
underwriting initial public offerings for small and medium size EU
companies which plan to be listed on NASDAQ and the Frankfurt Stock
Exchange in Frankfurt, Germany. ADAG has commenced due diligence review
of four companies in connection with proposed initial public offerings.
ADAG intends to expand its underwriting business to take advantage of the
increased demand for equity financing among small and medium size
companies in the EU.
3
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THE OFFERING
Common Stock Offered by the
Company in this Offering.... 1,733,334(1)
Common Stock to be Outstanding
After this Offering......... 8,551,295(1)(2)(3)
Preferred Stock to be
Outstanding After this
Offering.................... None(2)
Use of Proceeds............... To fund the Company's expanded marketing and
promotional activities; to provide the reserves
necessary to satisfy the German net capital
requirements; to finance the cost of capital
expenditures in the U.S. and Europe, including
the additional cost of software development; to
fund the Company's planned expansion and
acquisitions; for general corporate purposes;
and to pay all expenses incurred in connection
with this Offering.
Risk Factors.................. The Common Stock offered hereby should be
considered a speculative investment, including
the loss of the entire investment. See "Risk
Factors."
Dilution...................... Purchaser will be subject to immediate and
substantial dilution in the per share tangible
book value of the Common Stock offered hereby,
and may be subject to further and substantial
dilution as a result of additional securities
offerings in the future. See "Dilution."
Nasdaq National Market Symbol
(Reserved)(5)............... AMDV
- ---------------
(1) Does not include up to a total of 260,000 additional shares of Common Stock
issuable upon exercise of the Underwriters' Over-Allotment Option and sale
of the Company's Over-Allotment Shares in full. Includes up to shares of
Common Stock which may be purchased in the Direct Offering. See
"Underwriting" and "Direct Offering."
(2) The Company previously had outstanding 5,000,000 shares of Series A
Preferred Stock, par value $1.00 per share (the "Series A Preferred Stock"),
all of which were converted into 1,666,611 shares of Common Stock (the
"Converted Shares") in October 1998.
(3) Does not include up to shares of Common Stock reserved
for issuance upon exercise of the Representative's Warrants ( if
the Underwriters' Over-Allotment Option is exercised, and the Company's
Over-Allotment Shares are sold, in full).
(4) Although the Company has applied for inclusion of the Common Stock on the
NASDAQ, there can be no assurance that the Common Stock will be included for
quotation on NASDAQ, or if so included that the Company will be able to
continue to meet the requirements for continued quotation. In addition,
there can be no assurance that a public trading market will develop or that
if such market develops, it will be sustained. See "Risk Factors -- No
Assurance of Public Trading Market or Qualification for NASDAQ Inclusion;
Possible Volatility of Stock Price."
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RISK FACTORS
In addition to the other information contained in this Prospectus, the
following risk factors should be carefully considered in evaluating the Company
and its business before purchasing any of the Units offered hereby. This
Prospectus contains forward-looking statements within the meaning of Section 27A
of the Securities Act. Discussions containing such forward-looking statements
may be found in the material set forth under "Prospectus Summary," "Use of
Proceeds," "Management Discussion and Analysis of Financial Condition and
Results of Operations" and "Description of Business," as well as within the
Prospectus generally. Actual results could differ materially from those
described in the forward-looking statements as a result of the risks and
uncertainties set forth below and within the Prospectus generally.
LIMITED OPERATING HISTORY AND LOSSES FROM OPERATIONS CREATES UNCERTAINTY ABOUT
FUTURE RESULTS
The Company is a development stage enterprise which was formed on February
5, 1997 for the purpose of engaging in the financial services business through
its subsidiaries in Europe and the United States. Except for the merged
operations of ADAM, the Company has a limited operating history and is in the
process of implementing an aggressive business expansion strategy involving the
development and distribution of sophisticated financial products and services in
Europe and the United States. No assurance can be given that the Company will be
able to successfully develop and market its proposed products and services in
any of its targeted market sectors.
In addition, from its inception through August 31, 1998, the Company has
devoted the bulk of its resources to raising capital and implementing the first
phase of its business plan and has experienced aggregate losses of $4,658,516.
See the "Unaudited Pro Forma Consolidated Statement of Operations" of the
Company for an analysis of the losses of the Company and the merged operations
of ADAM on a pro forma basis. The Company and its subsidiaries are expected to
have further and substantial losses during its start-up phase primarily due to
the high costs associated with the formation of a new banking institution and
the marketing and 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. There is no assurance that the Company
will ever operate profitably. Any future success that the Company might enjoy
and its results of operations in the future will also depend upon many factors
which may be beyond the control of the Company or which cannot be predicted at
this time. These factors may include changes in the securities and banking
industries, technological advances or product obsolescence, increased levels of
competition including the entry of additional competitors and increased success
by existing competitors, changes in general economic conditions, increases in
operating costs including costs of personnel and equipment, reduced margins
caused by competitive pressures and other factors. These conditions may have a
materially adverse effect upon the Company or may force the Company to reduce or
curtail operations.
NEED FOR ADDITIONAL CAPITAL
The Company believes that the net proceeds of this Offering will be
sufficient to finance the cost of operations through December 31, 2002. However,
additional capital will be required to effectively support the operations and to
otherwise implement the Company's overall business strategy. The Company has no
commitments for any such additional capital at this time and there can be no
assurance that financing will be available when needed on terms that are
acceptable to the Company. In addition, if the costs and expenses to be incurred
for commencing marketing and product development exceed the proceeds of this
Offering, the need for additional working capital may arise earlier than
expected. The inability to obtain additional capital will restrict the Company's
ability to grow and may reduce the Company's ability to continue as a going
concern.
DELAY IN COMMENCING OPERATIONS
ADAG has applied for a full banking license in Germany to engage in its
planned securities brokerage business. The Company cannot provide any assurance
or guarantee that the regulatory approvals necessary for
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<PAGE> 12
ADAG to commence its planned securities brokerage operations will be given in a
timely manner or at all. Any delay in commencing operations will increase
pre-opening expenses and postpone realization of potential revenues by ADAG and
the Company. Absent the receipt of revenues and commencement of profitable
operations, the Company's accumulated deficit will continue to increase (and
book value per share decrease) as operating expenses such as salaries and other
administrative expenses continue to be incurred.
DEPENDENCE ON COMPUTER SYSTEMS
The Company will receive and process trade orders through the Internet and
personal terminals. These methods of trading will be heavily dependent on the
integrity of the electronic systems supporting them. Extraordinary trading
volumes could cause the Company's computer systems to operate at an unacceptably
low speed or even fail. Any significant degradation or failure of the Company's
computer systems or any other systems in the trading process (e.g., online
service providers, record keeping and data processing functions performed by
third parties and third-party software such as Internet browsers) could cause
customers to suffer delays in trading. Such delays could cause substantial
losses for customers and could subject the Company to claims from customers for
losses, including litigation claiming fraud or negligence. There can be no
assurance that the Company's network structure will operate appropriately in the
event of a computer systems failure or that, in the event of a earthquake, fire
or any other natural disaster, power or telecommunications failure, act of God
or war, the Company will be able to prevent an extended computer systems
failure. Any computer systems failure that causes interruptions in the Company's
operations could have a material adverse effect on the Company's business,
financial condition and operating results. See "Description of
Business -- Systems."
DEPENDENCE ON INTELLECTUAL PROPERTY RIGHTS
The Company's success and ability to compete are dependent to a significant
degree on its proprietary technology. The Company relies primarily on copyright,
trade secret and trademark law to protect its proprietary technology. The
Company has registered and unregistered trademarks, various registered and
unregistered copyrights and certain licenses of technology with third parties.
The Company has no patents. The Company relies on German common law and trade
secret laws for protection of its proprietary software, technology and systems,
and currently is developing non-competition and confidentiality agreements with
its associates and consultants. It is possible that third parties may copy or
otherwise obtain and use the Company's proprietary technology without
authorization or otherwise infringe on the Company's proprietary rights. It is
also possible that third parties may independently develop technologies similar
to those of the Company. Policing unauthorized use of the Company's intellectual
property rights may be difficult, particularly because it is difficult to
control the ultimate destination or security of information transmitted over the
Internet. In addition, the laws of foreign countries may afford inadequate
protection of intellectual property rights. Failure of the Company to adequately
protect its intellectual property rights could have a material adverse effect on
the Company's financial condition and results of operations.
MANAGEMENT OF GROWTH
The Company plans to expand its business with the formation of subsidiaries
in Austria, Spain, Ireland 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.
VOLATILE NATURE OF SECURITIES BUSINESS
A substantial portion of the Company's revenues will be derived from
securities brokerage services. The securities business is volatile and is
directly affected by national and international economic conditions, broad
trends in business and finance and fluctuations in volume and price levels of
securities transactions, all of which are beyond the control of the Company.
Reduced trading volume generally results in reduced
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<PAGE> 13
transaction revenues and decreased profitability. Severe market fluctuations in
the future could have a material adverse effect on the Company's business,
financial condition and operating results. The securities business is also
subject to various other risks, including customer default, employees'
misconduct, and errors and omissions and litigation. Losses associated with
these risks could have a material adverse effect on the Company's business,
financial condition and operating results. The securities industry has undergone
many fundamental changes during the last two decades, including regulation and
deregulation at federal and state levels, the emergence of discount brokers, the
dominance of institutional investors and consolidation. Several current trends
are also affecting the securities industry, including increased use of
technology and greater self-reliance of individual investors. See "Description
of Business." There can be no assurance that these trends or future changes in
the securities business will not have a material adverse effect on the Company's
business, financial condition and operating results. In addition, commissions
charged to customers of discount brokerage services have steadily decreased over
the past several years, and the Company expects such decreases to continue.
There can be no assurance that such decreases will not have a material adverse
effect on the Company's business, financial condition and operating results. See
"-- Competition."
RAPIDLY EVOLVING MARKETS
The market for electronic discount brokerage services is at an early stage
of development and is rapidly evolving. As is typical for new and rapidly
evolving markets, demand and market acceptance for recently introduced services
and products are subject to a high level of uncertainty. The Company's planned
services over the Internet involve alternative approaches to securities
transactions and, as a result, intensive marketing and sales efforts may be
necessary to educate prospective customers regarding the uses and benefits of
the Company's electronic discount brokerage services and products. Consumers who
already obtain brokerage services from more traditional full-commission
brokerage firms, or even discount brokers, may be reluctant or slow to change to
obtaining brokerage services over the Internet, automated touch tone telephone
and personal computer. Moreover, the security and privacy concerns of existing
and potential users of the Company's services may inhibit the growth of
electronic discount brokerage trading. There can be no assurance that the market
for electronic brokerage services will continue to grow.
Sales of some of the Company's services and products will depend upon the
broader adoption of the Internet by consumers as a medium for commerce and
communication. Use of the Internet depends on the development of the necessary
infrastructure and complementary services and products, such as high speed
modems and high speed communication lines. As the number of users and amount of
traffic on the Internet continues to increase, there can be no assurance that
the Internet infrastructure will continue to be able to support the demands
placed on it. In addition, delays in the development or adoption of new
standards and protocols to handle increased levels of Internet activity or
increased governmental restrictions could impede further use of the Internet.
Moreover, consumer concerns about the Internet (including security, reliability,
cost, ease of use, accessibility and quality of service) remain unresolved and
may negatively affect the growth of Internet use. As a result, there can be no
assurance that the number of the Company's transactions generated over the
Internet will continue to increase.
RISKS ASSOCIATED WITH NEW PRODUCTS AND NEW MARKETS
The market for financial services, particularly the market for electronic
discount brokerage services, is characterized by rapid technological change,
changing customer requirements, frequent service and product enhancements and
introductions and emerging industry standards. The introduction of services or
products embodying new technologies and the emergence of new industry standards
can render existing services or products obsolete and unmarketable. The
Company's future success will depend, in part, on its ability to develop and use
new technologies, respond to technological advances, enhance its existing
services and products and develop new services and products on a timely and
cost-effective basis. There can be no assurance that the Company will be
successful in effectively developing or using new technologies, responding to
technological advances or developing, introducing or marketing service and
product enhancements or new services and products. In addition, the Company may
enter into new markets in connection with enhancing its existing services and
products and developing new services and products. There can be no assurance
that the
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<PAGE> 14
Company will be successful in pursuing new opportunities or will compete
successfully in any new markets. See "-- Risks Associated with Strategic
Acquisitions and Relationships."
DEPENDENCE ON KEY MANAGEMENT AND PRINCIPAL CONSULTANTS
The Company will rely on the business and technical expertise of its
executive officers and certain other key employees, particularly its Chairman of
the Board and Vice President -- International Development, Peter Hartmann and
its President and Chief Executive Officer, James Buchanan Rea, Jr. The Company
is also dependent upon the advisory services of its principal consultants, Ladas
& Hulings, Inc., and its founder, Mr. William R. Hulings. The Company does not
maintain key man life insurance on these individuals. The loss of the services
of any of these executives or consultants could have a material adverse affect
on the Company and 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. See
"Directors, Executive Officers and Significant Employees."
RISKS ASSOCIATED WITH STRATEGIC ACQUISITIONS AND RELATIONSHIPS
The Company is planning to pursue strategic acquisitions of complementary
businesses and technologies. Acquisitions entail numerous risks, including
difficulties in the assimilation of acquired operations and products, diversion
of management's attention to other business concerns, amortization of acquired
intangible assets and potential loss of key employees of acquired companies.
There can be no assurance that the Company will be able to integrate
successfully any operations, personnel, services or products that might be
acquired in the future or that any acquisition will enhance the Company's
business, financial condition or operating results.
REGULATION
The international investment management and broker-dealer operations of the
Company and its subsidiaries 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. As a registered
broker-dealer and a registered investment advisor in the United States, ADAM is
subject to the regulatory authority of the National Association of Securities
Dealers, Inc. ("NASD") and the Securities and Exchange Commission (the
"Commission"). ADAM must comply with applicable provisions of the Securities
Exchange Act of 1934 (the "Exchange Act") and the Investment Company Act of
1940. See "Risk Factors -- Government Regulation." One of the most important
regulations with which ADAM must comply with as a registered broker-dealer is
the Commission's rule 15c3-1 (the "Net Capital Rule") which requires the
broker-dealer subsidiaries of the Company to maintain a minimum amount of net
capital, as defined under such regulations. See "-- Effect of Net Capital
Requirements." After the transfer of ADAM's broker-dealer functions to ADGE is
completed, ADGE will be subject to regulation as a broker-dealer, including the
Net Capital Rule.
The Company and its German subsidiary, ADAG, will also be subject to
securities regulation in Germany and the various EU jurisdictions where they
establish business operations or distributes financial services products.
Compliance with many of the regulations applicable to the Company involves a
number of risks, particularly in areas where applicable regulations may be
subject to interpretation. In the event of non-compliance with an applicable
regulation, governmental regulators and the NASD may institute administrative or
judicial proceedings that may result in censure, fine, civil penalties
(including treble damages in the case of insider trading violations), issuance
of cease-and-desist orders, deregistration or suspension of the non-compliant
broker-dealer or investment adviser, suspension or disqualification of the
broker-dealer's officers or employees or other adverse consequences. The
imposition of any such penalties or orders on the Company could have a material
adverse effect on the Company's operating results and financial condition. See
"Description of Business -- Government Regulation."
The regulatory environment in which the Company operates is subject to
change. The Company may be adversely affected as a result of new or revised
legislation or regulations imposed by the Commission, other
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<PAGE> 15
United States or foreign governmental regulatory authorities or the NASD. The
Company also may be adversely affected by changes in the interpretation or
enforcement of existing laws and rules by these governmental authorities and the
NASD.
LACK OF TRADEMARK PROTECTION
The Company has registered "AMERICAN DIVERSIFIED" as a servicemark in the
U.S. and in Germany, and has applied for but has not been issued any registered
servicemark for its "AmDiv" service-name in Germany. 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.
See "Description of Business -- Servicemark Application."
IMMEDIATE AND SUBSTANTIAL DILUTION
The Price to Public is significantly higher than the net tangible book
value per share of the Company's Common Stock. Purchasers in the Offering will
experience immediate and substantial dilution in the net tangible book value of
their investment in the Common Stock of approximately $ per share. See
"Dilution."
POTENTIAL FOR SECURITY COMPROMISES
The secure transmission of confidential information over public networks
will be a critical element of the Company's operations. The Company will be
required to rely on encryption and authentication technology, including public
key cryptography technology, to provide the security and authentication
necessary to effect secure transmission of confidential information over the
Internet. There can be no assurance that advances in computer capabilities, new
discoveries in the field of cryptography or other events or developments will
not result in a compromise of the technologies or other algorithms which may be
used by the Company to protect customer transaction and other data. Any such
compromise of the Company's security could have a material adverse effect on the
Company's business, financial condition and operating results.
EFFECT OF NET CAPITAL REQUIREMENTS
The Commission, the NASD and various other regulatory agencies have
stringent rules with respect to the maintenance of specific levels of net
capital by securities brokers, including the Commission's Uniform Net Capital
Rule (the "Net Capital Rule"), which govern the Company's U.S. broker-dealer
subsidiary. The Company's German subsidiary, ADAG, will be subject to similar
net capital requirements under the German Banking Supervisory Act. Failure to
maintain the required net capital may subject a firm to suspension or revocation
of registration by the Commission and suspension or expulsion by the NASD and
other regulatory bodies and ultimately could require the firm's liquidation. In
addition, a change in the applicable net capital rules, the imposition of new
rules or any unusually large charge against net capital could limit those
operations of the Company that require the intensive use of capital, such as the
financing of customer account balances, and also could restrict the Company's
ability to withdraw capital from its brokerage subsidiaries, which in turn could
limit the Company's ability to pay dividends, repay debt and repurchase shares
of its outstanding stock. A significant operating loss or any unusually large
charge against net capital could adversely affect the ability of the Company to
expand or even maintain its present levels of business, which could have a
material adverse effect on the Company's business, financial condition and
operating results. See "Description of Business -- Government Regulation" and
"Net Capital Requirements; Liquidity."
BROAD DISCRETION IN THE USE OF PROCEEDS
The Company expects to use the net proceeds primarily to fund its
operations, planned expansion and for other general corporate purposes.
Consequently, the Board and management of the Company will have broad discretion
in allocating the net proceeds of the Offering, which creates uncertainty for
shareholders and could adversely affect the Company's financial condition and
future results of operations. See "Use of Proceeds."
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<PAGE> 16
NO ASSURANCE OF PUBLIC TRADING MARKET OR QUALIFICATION FOR NASDAQ INCLUSION;
POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Common
Stock. The Company has been approved for quotation of the Common Stock on the
NASDAQ National Market under the trading symbol "AMDV." There can be no
assurance that an active public market will develop or be sustained for the
Common Stock. The initial public offering price will be determined through
negotiations between the Company and the representatives of the Underwriters and
may not be indicative of the market price for the Common Stock after the
completion of the Offering. The market price of the Common Stock after
completion of the Offering could be subject to significant fluctuations in
response to quarterly variations in operating results, announcements of
technological innovations or new services or products by the Company or its
competitors, changes in financial estimates by securities analysts or other
events or factors, many of which are beyond the Company's control. In addition,
the stock market has experienced significant price and volume fluctuations that
have particularly affected the market prices of equity securities of many
technology companies and that often have been unrelated to the operating
performance of such companies. These broad market fluctuations may adversely
affect the market price of the Common Stock. There can be no assurance that
purchasers of Common Stock will be able to resell their Common Stock at prices
equal to or greater than the initial public offering price. See "Underwriting."
Moreover, if for any reason, the Company's Common Stock is not eligible for
continued listing on NASDAQ or another public trading market, purchasers of the
Common Stock may have difficulty selling their securities should they desire to
do so. Under newly adopted rules of the National Association of Securities
Dealers, Inc. ("NASD"), in order to qualify for initial quotation of securities
on NASDAQ, a company, among other things, must have at least $18.0 million in
net tangible assets, 1.1 million in public float shares, $18.0 million in market
value of public float and a minimum bid price of $5.00 per share. For continued
listing, a company, among other things, must have $4.0 million in net tangible
assets, 750,000 in public float shares, $5.0 million in market value of public
float and a minimum bid price of $1 per share. If the Company is unable to
satisfy the requirements for quotation on NASDAQ, trading, if any, in the Common
Stock could be conducted in the over-the-counter market in what are commonly
referred to as the "pink sheets" or on the NASD OTC Electronic Bulletin Board.
As a result, an investor may find it more difficult to dispose of, or to obtain
accurate quotations as to the price of, the Common Stock offered hereby. The
above-described rules may materially adversely affect the liquidity of the
market of the Company's securities.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have approximately
8,551,295 shares of Common Stock outstanding out of a total of 20,000,000 shares
of Common Stock authorized, after conversion of the previously outstanding
5,000,000 shares of Series A Preferred Stock into 1,666,611 shares of Common
Stock, but assuming no exercise of the Representative's Warrants and excluding
up to 260,000 shares of Common Stock which may be issued to cover
over-allotments, if any. The shares of Common Stock offered hereby will be
freely tradeable without restriction or further registration under the
Securities Act of 1933, as amended (the "Securities Act"), by persons other than
"affiliates" of the Company within the meaning of Rule 144 promulgated under the
Securities Act. The remaining shares of Common Stock outstanding will be
"restricted"shares which may be sold in the public securities market without
registration under the Securities Act to the extent permitted by Rule 144 (or
Rule 145, as applicable) promulgated under the Securities Act or any exemption
under the Securities Act. Of the 6,817,961 restricted shares which have been
issued (including the 1,666,611 Converted Shares), 500,000 shares of Common
Stock are currently eligible for sale under Rule 144 and 6,317,961 shares of
Common Stock will be eligible for sale under Rule 144 beginning in March 1999,
subject to the restriction on transfer of stock held by the Company's officers
and directors. See "Underwriting."
Shares of Common Stock not issued or reserved for issuance may be issued
without any action or approval of the Company's shareholders. Any such issuance
could be used as a means of discouraging, delaying or preventing a change in
control of the Company or could dilute the public ownership of the Company.
Future sales of a substantial amount of Common Stock in the public market, or
the perception that
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<PAGE> 17
such sales may occur, could adversely affect the market price of the Common
Stock prevailing from time to time in the public market. See "Shares Eligible
for Future Sale."
LITIGATION AND POTENTIAL SECURITIES LAWS LIABILITY
Many aspects of the Company's business involve substantial risks of
liability. An underwriter is exposed to substantial liability under federal and
state securities laws, other federal and state laws and court decisions,
including decisions with respect to underwriters' liability and limitations on
indemnification of underwriters by issuers. For example, a firm that acts as an
underwriter may be held liable for material misstatements or omissions of fact
in a prospectus used in connection with the securities being offered or for
statements made by its securities analysts or other personnel. In recent years
there has been an increasing incidence of litigation involving the securities
industry, including class actions that seek substantial damages. The Company
also will be subject to the risk of litigation from its other business
activities, including litigation that may be without merit. As the Company
intends actively to defend any such litigation, significant legal expenses could
be incurred. An adverse resolution of any future lawsuits against the Company
could materially adversely affect the Company's future operating results and
financial condition.
DEPENDENCE ON CASH INFLOWS TO MUTUAL FUNDS
A slowdown or reversal of cash inflows to mutual funds and other pooled
investment vehicles could lead to lower underwriting and brokerage revenues for
the Company since mutual funds purchase a significant portion of the securities
offered in public offerings and traded in the secondary markets. The recent
demand for new equity offerings has been driven in part by institutional
investors, particularly large mutual funds, seeking to invest cash received from
the public. The public may withdraw additional cash from mutual funds as a
result of a decline in the market generally or as a result of a decline in
mutual fund net asset values. To the extent that a decline in cash inflows into
mutual funds or a decline in net asset values of these funds reduces demand by
fund managers for initial public or secondary offerings, the Company's business
and future results of operations could be materially adversely affected.
Moreover, a slowdown in investment activity by mutual funds may have an adverse
effect on the securities markets generally.
DEPENDENCE ON SYSTEMS AND THIRD PARTIES
The Company's international investment management and broker-dealer
operations will be highly dependent on third-party communications and
information systems, including certain systems provided by clearing brokers. Any
failure or interruption of the Company's future clearing broker or third party
trading systems, could cause delays or other future problems in the Company's
securities trading activities, which could have a material adverse effect on the
Company's operating results. Such failures and interruptions may result from the
inability of certain computing systems (including those of the Company's
clearing broker, and other third party vendors) to recognize the year 2000.
There can be no assurance that the year 2000 issue can be resolved prior to the
upcoming change in the century. Although the Company may incur substantial
costs, particularly costs resulting from charges by its third party service
providers, in correcting year 2000 issues, such costs are not sufficiently
certain to estimate at this time. See "Management's Discussion and Analysis of
Financial Condition and Results of Operation -- Year 2000 Compliance." In
addition, there can be no assurance that such third party trading systems will
not suffer any systems failure or interruption, including one caused by an
earthquake, fire, or any other natural disaster, power or telecommunications
failure, act of God or war, or that the Company's back-up procedures and
capabilities in the event of any such failure or interruption will be adequate.
COMPETITION
The investment management business is highly competitive. 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 a better developed operating infrastructure. A large number of the Company's
competitors also offer a
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<PAGE> 18
broader range of investment products and services than the Company, and have
better name recognition and a more extensive customer base as compared to the
Company.
The Company encounters significant competition in connection with the
operation of its business in the U.S., and expects to encounter substantial
competition for brokerage services and the distribution of U.S. mutual funds to
its targeted potential clientele in its primary marketing area in Germany. 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. 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 competitors may in the future be able to
respond more quickly to new or changing opportunities, technologies and customer
requirements than the Company and may be able to undertake more extensive
promotional activities, offer more attractive terms to customers and adopt more
aggressive pricing policies than the Company. Moreover, current and potential
competitors have established or may establish cooperative relationships among
themselves or with third parties or may consolidate to enhance their services
and products. The Company expects that new competitors or alliances among
competitors will emerge and may acquire significant market share. These
competitive conditions may have a material adverse effect on the Company's
revenues, profitability and ability to meet its business objectives. See
"Description of Business -- Competition."
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THE COMPANY
The Company is a development stage enterprise which was formed to engage in
the financial services business in Europe and the United States. The Company was
incorporated in the State of Nevada on February 5, 1997. The Company's primary
function is the management of its subsidiaries, ADAM, ADAG and other
subsidiaries which are being formed.
ADAM was founded in October 1997 to operate as a registered investment
advisor and broker-dealer. Effective March 31, 1998, ADAM merged with James
Buchanan Rea, Inc. ("JBRI") a California corporation, and succeeded to the
business of JBRI as a Registered Investment Adviser and licensed NASD
Broker/Dealer, Underwriter and Distributor. ADAM serves as Advisor, Underwriter
and Distributor to American Diversified Funds, Inc., a diversified, open-end
investment company registered under the Investment Company Act of 1940, with a
single series portfolio, the American Diversified Global Value Fund (formerly
the Rea-Graham Balanced Fund), a series mutual fund. See "Description of
Business -- General."
The Company is organizing ADGE as a new wholly-owned subsidiary in the
U.S., and plans to transfer ADAM's broker-dealer and underwriting functions
(including, the sponsorship and distribution of mutual funds) to ADGE. See
"Description of Business -- General."
ADAG is a licensed distributor of financial products and underwriter in
Germany, which 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 the stock exchanges. See "Description of
Business -- General."
American Diversified Technologies, Inc., is being formed to own the
proprietary technology systems and software of the Company and its subsidiaries.
Although the Company has a limited operating history, its management team
has extensive expertise and experience in the banking and financial services
industries in Europe and the United States. The principal executive offices of
the Company are located at American Diversified Holdings, Inc., 10900 Wilshire
Boulevard., 9th floor, Los Angeles, CA 90024.
13
<PAGE> 20
USE OF PROCEEDS
If all 1,733,334 shares of Common Stock offered by this Prospectus are
sold, the Company will receive net proceeds of approximately $
(assuming the public offering price is $ , and assuming the Underwriters'
Over-Allotment Option is not exercised and none of the Company's Over-Allotment
Shares are sold). If the Underwriters' Over-Allotment Option is exercised and
the Company's Over-Allotment Shares are sold in full, the Company would receive
approximately an additional $ . Net proceeds are determined after
deduction of all commissions, discounts and expenses paid to the underwriters
(estimated to be $ , if the Underwriters' Over-Allotment Option and the
Company's Over-Allotment Shares are sold in full) and after all expenses of the
Offering (estimated to be $242,000). Proceeds from the sale of the shares
offered in the Direct Offering are not subject to reduction for Underwriters'
discounts or commissions, but the Company has agreed to pay to the
Representative a management fee in connection with the Direct Offering. See
"Underwriting." The proceeds of the shares sold in the Direct
Offering are not subject to reduction for Underwriters' discount or commission.
The Company intends, in the following order of priority, to use the net
proceeds of this Offering to:
<TABLE>
<CAPTION>
PERCENTAGE OF
AMOUNT NET PROCEEDS
---------- -------------
<S> <C> <C>
Marketing Activities........................................ $ %
- -- Advertising expenses, production of TV-Commercials in
conjunction to expand the Company's customer base
Net Capital Lock-up......................................... $ %
- -- Funds to be deposited in a special escrow account to
satisfy the German net capital requirement
Capital Investments......................................... $ %
- -- Expenditures for computer equipment and other technology,
furniture and fixtures for the new office premises in
Europe and the U.S.
Software Development........................................ $ %
The remainder of the net proceeds will be used for the
development and acquisition of new forms of technology to be
used in the Company's business and for other general
corporate purposes, which may include the acquisition of the
complementary businesses and the increase of the Company's
net capital position. The Company does not currently have
any agreements with respect to any such acquisitions. Prior
to the application of the net proceeds to the Company as
described above, such funds will be invested in short-term
investment grade securities................................. $ %
</TABLE>
The amount and timing of working capital expenditures may vary
significantly depending upon numerous factors, including the progress of the
Company's development and marketing efforts, the timing and costs involved in
obtaining regulatory approvals, competing technological and market developments,
the costs associated with commercialization of the Company's services and
products.
The Company believes that its available cash and existing sources of
funding, together with the proceeds of this Offering and interest earned
thereon, will be adequate to maintain its current and planned operations through
December 31, 2002. Thereafter, the Company may be required to obtain additional
capital to continue operations, as to which there can be no assurance. See "Risk
Factors -- Need for Additional Capital."
Until used, the Company intends to invest the net proceeds of this Offering
in interest-bearing, investment-grade securities. While the net proceeds are so
invested, the interest earned by the Company on such proceeds will be limited by
available market rates. See "Management's Discussion and Analysis of Financial
Condition and Results of Operation -- Plan of Operation."
14
<PAGE> 21
DILUTION
As of August 31, 1998, there were 6,817,961 shares of Company Common Stock
outstanding, a net tangible book value per share of approximately $1.68 adjusted
on a pro forma basis to reflect the 1:2 reverse split of the outstanding shares
of the Company's Common Stock which was declared effective August 20, 1998, and
the conversion of the 5,000,000 shares of the Series A preferred Stock into
1,666,611 shares of Common Stock. Net tangible book value per share represents
the amount of the Company's total tangible assets less the Company's total
liabilities, divided by the number of shares the Company's Common Stock
outstanding.
After giving effect to the sale of the 1,733,334 shares of Common Stock
under this Offering at a price of $ per share and the application of the
net proceeds therefrom, and after giving effect to the 1:2 reverse stock split
effective August 20, 1998 and the conversion of the 5,000,000 shares of Series A
Preferred Stock into 1,666,611 shares of Common Stock (but assuming no exercise
of the Underwriters' Over-Allotment Option, no exercise of the Representative's
Warrants, no exercise of the options granted pursuant to the 1998 Stock Option
and Incentive Plan and no sale of the Company's Over-Allotment Shares) there
would be a total of 8,551,295 shares of Company Common Stock outstanding with a
net tangible book value of approximately $ per share. This would represent
an immediate increase in pro forma net tangible book value of $ per share
to existing shareholders and an immediate dilution of $ per share to new
investors. Dilution is determined by subtracting net tangible book value per
share after the Offering from the amount paid by new investors per share of
Common Stock. The following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $
Pro forma net tangible book value per share as of August
31, 1998(1)............................................ $1.68
Increase attributable to new investors.................... $
-----
Adjusted pro forma net tangible book value per share after
this Offering............................................. $
------
Dilution per share to new investors prior to exercise of the
Representative's Warrants................................. $
======
</TABLE>
- ---------------
(1) After giving effect to the conversion of the previously outstanding
5,000,000 shares of Series A Preferred Stock into 1,666,611 shares of Common
Stock.
The following table summarizes, on a pro forma basis, as of August 31,
1998, the difference between the existing shareholders and the new investors
with respect to the number of shares of Common Stock (assuming no exercise of
the Over-Allotment Option or the Representative's Warrants and no sale of the
Company's Over-Allotment Shares) purchased from the Company, the total
consideration paid and the average price per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholder................ 6,817,961(1) 79.7% $16,586,931(2) % $ 2.43
New Investors....................... 1,733,334 20.3% $ % $
Total..................... 8,551,295 100.0% $ 100.0%
</TABLE>
- ---------------
(1) After giving effect to the conversion of the 5,000,000 outstanding shares of
Series A Preferred Stock into the 1,666,611 Converted Shares, but assuming
no exercise of any of the options granted pursuant to the 1998 Stock Option
Plan.
(2) Reflects the capital contribution of the existing holders of the Company's
shares of Common Stock.
15
<PAGE> 22
DIVIDEND POLICY
Holders of shares of Common Stock are entitled to dividends when, as and if
declared by the Board of Directors, out of funds legally available therefor.
Holders of the previously outstanding shares of Series A Preferred Stock were
entitled to an annual cumulative preferential dividend of $.09 per share, when
and as declared by the Board of Directors. On July 2, 1998, the Company declared
dividends of $.045 per share on the Series A Preferred Stock. Before any
dividends may be paid or declared with respect to the Common Stock, the Company
is required to pay dividends which had accrued and have not been paid with
respect to the Series A Preferred Stock for any period prior to the conversion
of the Series A Preferred Stock. The Company does not expect to pay any
dividends on the Common Stock in the foreseeable future. The Company intends to
use all retained earnings for working capital and to finance the anticipated
growth and expansion of its business enterprise.
16
<PAGE> 23
CAPITALIZATION
The following table sets forth the Company's capitalization (i) as of
August 31, 1998; and (ii) on a Pro Forma basis as adjusted to reflect the
conversion of the 5,000,000 shares of Series A Preferred Stock into 1,666,611
shares of the Company's Common Stock and the receipt of net proceeds from the
sale of 1,733,334 shares of Common Stock offered hereby, after deducting
underwriting discounts and commissions and estimated Offering expenses:
<TABLE>
<CAPTION>
AUGUST 31, 1998
----------------------
PRO FORMA
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Stockholders' equity:
Preferred Stock, no par value, 10,000,000 shares
authorized, of which 5,000,000 have been designated
shares of Series A Preferred Stock, par value $1.00,
and which have been issued and are outstanding; Pro
Forma As Adjusted: 10,000,000 shares authorized; no
shares issued and outstanding.......................... $ 4,726 -0-
Common Stock, no par value, 20,000,000 shares authorized;
5,151,350 shares issued and outstanding(1)(2); Pro
Forma As Adjusted: 20,000,000 shares authorized;
8,551,295 shares issued and outstanding................ 12,237
------- -------
Deficit Accumulated during Development Stage.............. (4,884) (4,884)
Accumulated Other Comprehensive Income (Loss)............. (84) (84)
Total stockholders' equity........................ $11,995 $
======= =======
</TABLE>
- ---------------
(1) Assumes the sale of 1,733,334 in the Offering (and 900,000 Shares in the
Direct Offering) and that neither the Underwriters' Over-Allotment Option
nor any of the Representative's Warrants are exercised, and that none of the
Company's Over-Allotment Shares are sold. Excludes all options granted to
officers, directors and employees of the Company pursuant to the 1998 Stock
Option and Incentive Plan. See "Remuneration of Directors and
Officers -- 1998 Stock Option and Incentive Plan."
(2) After giving effect to the 1:2 reverse stock split, effective August 20,
1998. Excludes the 1,666,611 Converted Shares issued upon the conversion of
the Series A Preferred Stock.
17
<PAGE> 24
DESCRIPTION OF BUSINESS
GENERAL
The Company, through its subsidiaries, ADAM in the U.S. and ADAG in
Germany, is a service and technology driven international provider of financial
services consisting mainly of full service discount securities brokerage, asset
management, sponsoring and distributing mutual funds, underwriting and related
services. The Company and its subsidiaries have assembled a staff of management,
brokerage, asset management and marketing personnel, including several former
key employees of major German banks and their subsidiaries.
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
Company's business strategy is to provide individuals and small- to medium-sized
European banks with direct access to American financial markets 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. In addition, the
planned transition to the EURO in January 1999, is expected to increase the
demand for investments denominated in U.S. dollars.
The Company and its subsidiaries intend to market their services and
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. 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, Dublin, Ireland and Zurich, Switzerland. See
"Risk Factors -- Management of Growth."
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 was exempt from U.S. securities laws
under Regulation S. The 5,000,000 shares of Series A Preferred Stock were
converted into 1,666,611 shares of Common Stock in October 1998. Since its
inception in February 1997, the Company has sold approximately 4,500,000 (post
1:2 reverse split) shares of Common Stock for an aggregate consideration of
approximately $11,600,000 in private transactions pursuant to applicable
exemptions from registration under U.S. state and federal securities laws.
ADAM
Through its U.S. subsidiary, ADAM, the Company is engaged in the management
and distribution in the U.S. of American Diversified Funds, Inc., an open-end
investment company registered under the Investment Company Act of 1940, which
currently offers a series portfolio, the American Diversified Global Value Fund,
a value-based equity fund. The Company plans to expand ADAM's mutual fund
business by increasing the assets of the Global Value Fund and by developing new
mutual fund series in the U.S. and Europe. ADAM currently has in registration a
newly developed fund, the American Diversified International Value Fund, for
U.S. distribution (collectively with the Global Value Fund, the "Funds"). Ladas
& Hulings, Inc. ("Ladas & Hulings"), a leader in global value investing with
over 25 years of experience, became sub-advisor to the Global Value Fund in
April 1998 and will provide the day-to-day investment management (sub-advisory
services) for the Funds.
ADAM is in the process of registering an umbrella fund, American
Diversified Funds, plc, in Ireland under the UCITS directive for European ("EU")
distribution, which will offer three sub-funds: the Global Value, International
Value, and SmallCap Value portfolios. Marketing and distribution services will
be provided in Germany and other EU countries by ADAG, and through alliances
with medium-sized banks, broker-dealers, insurance agents, and by-captive sales
forces.
18
<PAGE> 25
The Company is in the process of separating its investment management and
broker-dealer businesses by forming a new wholly-owned subsidiary, ADGE, which
will assume the broker-dealer and underwriting functions of ADAM (including the
underwriting and distribution of mutual funds). In connection with the
organization of ADGE, ADAM's broker-dealer license will be transferred to ADGE,
which will also enter into a new distribution agreement with ADAM with respect
to distribution of the Funds. ADAM will remain as the investment advisor to the
Funds and will continue to provide asset management services.
ADGE will be the distributor for the Company's mutual funds in the U.S. and
will act as broker for on-line brokerage execution in U.S. markets for ADAG. The
Company plans to expand the present investment management business of ADAM by
growing the Funds and introducing an asset management business for high net
worth individual and institutional accounts using Ladas & Hulings as the asset
manager.
ADAM has expanded its operations to New York to facilitate the distribution
of the Fund and new portfolios of American Diversified Funds, Inc. to U.S.
investors, and to increase the Company's domestic marketing and promotional
efforts. In August 1998, the Company retained Mr. Joseph E. Breslin to serve as
the Company's representative in New York City. Mr. Breslin will oversee the
management and development of the New York office, and will be primarily
responsible for expanding distribution of the Company's mutual fund series
through broker-dealers in New York. Mr. Breslin will also be responsible for the
recruitment of additional personnel and will serve as the Company's liaison in
the City of New York. Mr. Breslin is an attorney and has served as the President
and Director of an established group of mutual funds. See "Directors, Executive
Officers and Significant Employees."
ADAM has hired additional executives and support staff in the area of asset
management and brokerage services and retained experts in the areas of
technology, marketing, public relations, and management. New computer systems,
office equipment, phone systems, and technology are being added to insure that
efficient, cost effective, and customer oriented, investment products and
services are available in both the U.S. and EU markets.
ADAG
ADAG is presently engaged in mutual fund distribution and provides asset
management services and underwriting services to clients in Germany. ADAG has
developed substantial name recognition through the aggressive advertisement of
ADAG's services during the last four months. Commencing on or about January 2,
1999, after approval of its full German banking license, ADAG will provide
securities brokerage services to individual investors and institutions in Europe
through the Internet and registered representatives. The Company cannot provide
any assurance or guarantee that the regulatory approvals necessary for ADAG to
commence its planned securities brokerage operations will be given in a timely
manner or at all. See "Risk Factors -- Delay in Commencing Operations" ADAG will
offer trade execution for stocks, mutual funds, options and bonds, as well as
market data and research tools to investors in Europe. ADGE will act as the
clearing broker for ADAG on all transactions involving U.S. securities which are
executed in the U.S. The electronic infrastructure and primary systems necessary
to operate ADAG's securities brokerage business are currently in place and fully
functional. ADAG has received over 10,000 applications for new accounts during
the last four months through the aggressive advertisement of its services in
Germany, although ADAG does not intend to take orders or otherwise commence its
brokerage business in Germany until it has received a full banking license. In
addition, ADAG intends to engage in underwriting initial public offerings of
small to medium size European companies, especially in Germany.
The Company plans to transfer all of the proprietary technology, systems
and software of the Company and its subsidiaries to American Diversified
Technologies, Inc., which is being organized as a new wholly-owned subsidiary of
the Company in the U.S.
The Company has developed a creative approach to the planned delivery of
brokerage and advisory services in Europe. ADAG will provide retail and
institutional financial services under two distinct brand names, each of which
will offer a range of services and commission rates designed to attract
investors within specific demographic categories. This branding strategy will
allow ADAG to align the cost structures of its brokerage business with the level
of services desired by its customers. By providing clearing and execution
19
<PAGE> 26
services, ADAG will be able to expand its customer base, provide synergies to
its retail brokerage business, enhance mutual fund distribution and diversify
its revenues. AMERICAN DIVERSIFIED(R) will provide ADAG's high-net-worth
customers with a full range of brokerage services, private asset management and
mutual fund products, and is expected to engage in underwriting initial public
offerings of fast growing smaller companies. AMDIV.NET(TM) will provide discount
on-line securities brokerage services, research and investment analysis tools
exclusively through the Internet using advanced electronic systems.
AMDIV.NET(TM) also will provide European investors interested in the U.S.
securities market with multi-lingual service and with toll-free telephone access
from seven European countries. AMDIV.PRONET(TM) is a technologically advanced
financial system that will provide ADAG's correspondent European brokerage firms
and financial institutions with special terminals to access the major European
and U.S. stock markets through the Company's integrated computer network.
AMDIV.PRONET(TM) is expected to provide securities clearing and execution
services to approximately 700 independent broker-dealers, depository
institutions, registered investment advisers and financial planners in Germany.
See "-- Development of Products and Services."
THE BUSINESS OPPORTUNITY
The Company believes that there is a new and growing market in the EU for
investment products denominated in U.S. dollars primarily due to the following
factors: (i) the planned transition in 1999 to a single European currency, the
EURO; (ii) the creation of new and expanding capital markets in Eastern Europe;
(iii) implementation of the UCITS directive in October 1989, which was designed
to create a single EU mutual funds market and has now expanded the range of
available funds for distribution in Europe; (iv) the continuing growth of the
mutual fund market; and (v) the Xetra(R) electronic trading system of the
Frankfurt Stock Exchange has expanded the number of tradeable instruments and
execution possibilities for electronic security trading. The integration of
other major European Stock Exchanges into this system and NASDAQ's interest in
participating, creates the possibility of a Pan-European stock market for the
future. Additionally, regulatory reforms in Germany and other EU countries have
enabled smaller financial services companies to compete for investment dollars
traditionally flowing to savings account deposits at commercial banks.
The services offered by the Company are typically provided in Germany today
through banks and savings institutions, cater primarily to large institutional
individual investors, rather than to individuals. Management of the Company
believes it has identified a niche market in Germany and the EU for providing
discount securities brokerage services to individual and small institutional
investors, including the marketing of U.S. mutual 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 prefer to market only to large institutional
clients and require minimum account balances in the $1,000,000 range. On the
investment banking side, there were approximately 31 public equity securities
offerings in Germany during 1997, and 71 have been completed to date in 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.
Management believes that an international financial services group with
offices in both the United States and Europe can attract a diverse clientele,
including institutional investors, banks and individuals. The Company is
particularly focusing on Germany. The interest of German investors in foreign
securities and equity investments is growing rapidly, as are the German capital
markets. Germany's sole clearing organization, Deutsche Boerse Clearing has
reported a rise in deposits of foreign securities from 53.4 billion German Marks
to 100.8 billion German Marks, an increase of 47.4 billion German Marks (+88.8%)
during the years 1996 to 1997. During the first six months of 1998, the deposits
of foreign securities totaled 136.5 billion German Marks. Management believes
that these favorable conditions have created a strong demand for the
implementation of advanced electronic trading systems with direct access to the
worldwide equity markets.
20
<PAGE> 27
INDUSTRY DEVELOPMENTS IN GERMANY
Before January 1998, the German market for financial products was
traditionally dominated by a group of large banks and insurance companies
marketing savings oriented investment vehicles to their depositors. Companies
interested in expanding their asset base through capital investment or
acquisitions have been generally required to fund the undertaking through cash
flow generated from operations or bank loans.
In an effort to harmonize financial services regulations within the EU,
German policies were changed with the revision of existing banking laws (6.
Novelle des KwGs) which became effective on January 1, 1998. These changes
allowed for the unbundling of investment services in Germany and have brought
small and medium sized distributors of financial products under the regulation
and supervision of the "Bundesaufsichtsamt fur das Kreditwesen (BaKred)" the
authority regulating the German banking industry.
At the same time the demand for equity financing has steadily grown after
the initial public offering of Deutsche Telekom in 1996. The "Neuer Markt" was
created in March 1997 on the Frankfurt Stock Exchange to provide a market for
technologically innovative companies. The market growth potential in Germany is
significant. Prior to opening the "Neuer Markt", only 10 to 20 companies
annually registered on the established exchanges in Germany. Since March 1997
the number of initial public offerings has increased by approximately 230%. The
Company believes that the market will continue to expand as more entrepreneurs
realize the competitive advantage associated with a higher capital base.
These developments brought about the advent of regulated brokerage and
financial services firms, which provide financial advisory services and trade
execution services at a lower price than the banking institutions. Although
investors have been able to use discount brokerage services provided by
subsidiaries of major banks, the Company believes that many investors will
prefer to use the Internet discount brokerage services to be provided by the
Company, which will offer faster execution and are expected to be more efficient
and competitively priced as compared to traditional bank brokerage services.
The unbundling of brokerage services from the banking industry has
permitted investors to pick and choose among various financial service providers
for specified services. As a result, firms have emerged which provide the
services usually provided by banking institutions. Firms now specialize in
providing investment advice, financial information, and financial planning
services. Other firms specialize in providing underwriting services and discount
securities brokerage.
Consumers now have greater access to powerful, yet inexpensive technology
and are becoming more comfortable with and proficient in the use of this
technology. The use of this new technology to sort and deliver vast amounts of
information, to facilitate inexpensive communication of data and for the
completion of financial transactions has been growing at an accelerating rate.
Specifically, the Internet has produced thousands of new cyber-investors every
day, primarily through the World Wide Web.
Investors are becoming more self-reliant and value conscious in the pursuit
of their financial goals. Investors are increasingly willing to acquire the
information and understanding of investment alternatives and have become
increasingly sophisticated and knowledgeable about investing. Access to a broad
range of financial information and advice has decreased the necessity for
full-service brokers. These investors make their own decisions about their
financial future and tend to seek greater value, often in the form of lower
transaction costs. As a result, management believes the use of discount brokers
and directly marketed no-load mutual funds has increased in Germany.
Management believes the convergence of these trends is creating a new
marketplace for financial services. It is also creating a new investor, who is
self-reliant, comfortable with the use of technology and value oriented. The
Company seeks to be the leading provider of financial services in Germany, and
eventually the EU, to this new investor.
21
<PAGE> 28
BUSINESS STRATEGY
The Company seeks to exploit the opportunities created primarily as a
result of regulatory reforms and changing conditions in the financial services
industry and to expand its market share by pursuing the following key
strategies:
- Market Distinct Brands. ADAG will market distinct brands with a range of
services and commission rates designed to appeal to specific groups of
investors within the financial services market. The Company believes
that, by tailoring products and services for customers within specific
demographic categories, ADAG can attract a broader range of investors
seeking brokerage services at discount prices. AMDIV.NET(TM) will offer
discount on-line brokerage services for investors seeking simple and
efficient execution services at the lowest possible transaction cost, who
are comfortable with the Internet and prefer to trade exclusively through
electronic communications in exchange for low-priced trade executions.
AMERICAN DIVERSIFIED(R) will provide ADAG's high-net-worth customers with
a full range of brokerage services, private asset management and mutual
fund products, and underwriting services. AMDIV.PRONET(TM) is a
technologically advanced financial system that will provide ADAG's
correspondent European brokerage firms and financial institutions with
special terminals to access the major European and U.S. stock markets
through the Company's integrated computer network. Through this market
segmentation approach, management believes that the Company and its
subsidiaries will be able to deliver products and services tailored to
meet the specific needs of its customers in the most cost efficient
manner. See "-- Development of Products and Services."
- Create Technologically Innovative Solutions to Investor Needs. The
Company plans to be the technology leader in the retail brokerage and
clearing and execution businesses. Since April 1997, the Company has
worked on the development of its integrated electronic systems, which
combine the Company's newly developed software with existing electronic
services in the U.S. and Europe. AMDIV.NET(TM) and AMDIV.PRONET(TM) each
comprise a single-source trading system for U.S. and European stocks,
which offer immediate execution services. The "Dial-In" feature of
AMDIV.PRONET(TM) provides institutional correspondents with a secure link
to Europe's and the U.S.'s major stock markets using special terminals,
which enable direct access through the Company's integrated computer
network. The Company is actively pursuing additional technologies to
service the rapidly evolving financial services industry. See
"-- Development of Products and Services." The Company believes it has
adequate protection for the proprietary technology it has developed under
German law, but is developing confidentiality and non-competition
agreements and other internal security measures to protect its developed
technology in the U.S. and the other EU countries. See "Risk
Factors -- Dependence on Intellectual Property Rights."
- Provide Transaction Value to Investors. The Company strives to offer
investors transaction value by providing specified services at prices
that are among the lowest in the discount brokerage industry.
AMDIV.NET(TM) will be offered generally at a flat commission rate on
Internet-only trades for equity orders having a market value of up to
EURO 11,000. AMERICAN DIVERSIFIED(R) will provide investors with access
to trained registered representatives and other customized services for a
fee equal to .44% of the order volume, for each equity order. Through
more efficient operations, synergies of strategic alliances, an
increasing number of transactions and the use of advanced technology, the
Company strives to minimize costs, which allows it to offer low cost
investment services. See "-- Development of Products and Services" and
"-- Competition".
- Expand Mutual Fund Products and Distribution. ADAM has been expanding its
sponsorship and distribution of mutual funds by developing one new
portfolio in the U.S., the International Value Fund. In addition, ADAM is
in the process of registering an umbrella fund in Dublin, Ireland, under
the UCITS directive for European distribution, which will offer three
sub-funds: the Global Value, International Value and SmallCap Value
portfolios. The Ireland-based funds will be distributed in Germany and
other EU countries through ADAG's distribution network and other channels
in Europe.
22
<PAGE> 29
- Expand the Underwriting of Initial Public Offerings. ADAG will engage in
underwriting initial public offerings for small and medium size EU
companies which plan to be listed on NASDAQ and the Frankfurt Stock
Exchange in Frankfurt, Germany. ADAG has commenced due diligence review
of a few companies in connection with proposed initial public offerings.
ADAG intends to expand its underwriting business to take advantage of the
increased demand for equity financing among small and medium size
companies in the EU.
DEVELOPMENT OF PRODUCTS AND SERVICES
The Company has developed a broad range of products and services designed
to address specific consumer needs and the Company is actively pursuing
opportunities to improve and increase the products and services offered to
customers. The development of products and services by the Company and its
subsidiaries will continue to require substantial capital expenditures. See "Use
of Proceeds." The Company expenses all research and development costs as they
are incurred. The Company regularly monitors the costs and projected benefits of
its product and service developments to determine their continued viability. The
Company does not believe that the failure of any of its products and services
would have a material adverse effect on the Company's future business, financial
condition or operating results. See "Risk Factors -- Rapidly Evolving Markets"
and "Risk Factors -- Risks Associated with New Products and New Markets."
MUTUAL FUND PRODUCTS
ADAM's mutual fund families in the U.S. will consist of value-oriented
mutual funds, including:
- American Diversified Global Value Fund
- American Diversified International Value Fund*
ADAM's mutual fund families established in Ireland for distribution in the
EU will consist of value-oriented mutual funds, including:
- American Diversified Global Value Fund*
- American Diversified International Value Fund*
- American Diversified SmallCap Value Fund*
The Funds are managed by ADAM, based on Benjamin Graham's "value
investment" principles. Mr. Graham authored "Security Analysis" and "The
Intelligent Investor," which are recognized texts on the fundamental value of
common stocks. Ladas & Hulings, a leader in value investing with over 25 years
of experience, will serve as investment sub-advisor to the Funds and will
provide their day-to-day management. Portfolios managed by Ladas & Hulings have
been rated by Nelson's Information as among the "Top 20" Money Managers -- 10
year returns.
A principal component of the Company's planned expansion involves marketing
the Funds to institutional investors. The Company plans to develop a special
class of institutional series or shares for distribution to institutional
investors. As the Funds grows in size, the revenues and profitability of ADAM
are expected to increase because ADAM's revenues and income will be based on the
net assets of the Funds and with other mutual funds that it may manage in the
future.
DISCOUNT SECURITIES BROKERAGE SERVICES
ADAG will provide Internet-discount brokerage services under the brand name
AMDIV.NET(TM) and brokerage services for its high-net-worth clients under the
brand name AMERICAN DIVERSIFIED(R). See "-- Servicemark Application." ADAG has
also developed AMDIV.PRONET(TM), a brand of services for European brokerage
firms, banking institutions and other institutional correspondents to access the
major U.S. and European stock markets on special terminals through the Company's
integrated computer network.
- ---------------
*In registration.
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<PAGE> 30
Through this market segmentation approach, ADAG will offer a variable range of
services and competitive rate structures designed to attract specific groups of
individual and institutional investors in Europe.
The development of the Company's products and services will continue to
require substantial capital expenditures. See "Use of Proceeds."
The following chart summarizes by brand these planned services and the
average commission per trade which ADAG expects to charge its customers:
<TABLE>
<CAPTION>
AMERICAN DIVERSIFIED(R) AMDIV.NET(TM) AMDIV.PRONET(TM)
----------------------- ------------- ----------------
<S> <C> <C> <C>
WAYS TO TRADE
Internet................... -- EURO 12.00* EURO 10.00*
Personal terminal.......... EURO 20.00 -- --
Professional Terminal...... -- -- EURO 14.00*
Registered
representative.......... EURO 22.00** -- --
PRODUCTS
U.S.-Stocks................ x x x
European-Stocks............ x x x
Foreign-Stocks............. x x x
Mutual funds............... x x x
Options.................... x x x
Bonds...................... x x x
Foreign securities......... x x x
SERVICES OFFERED
Live quotes................ x*** -- x
10 Minute delayed quotes... -- x --
Research tools............. x*** x x
Credit card................ x -- --
Debit card................. -- x --
Check writing.............. x -- --
News search................ x*** x x
Program investing.......... x x x
Day trading................ x*** x x
</TABLE>
- ---------------
* For equity orders having a market value of up to EURO 11,000, which is
expected to be equal to approximately U.S. $ at the anticipated
exchange rate of .
** 0.20% of the market value or a minimum charge of Euro 22.00.
*** With personal terminal only.
LOGO
AMDIV.NET(TM) will be a discount broker that offers technologically
advanced delivery systems for sophisticated on-line investors via the Internet.
AMDIV.NET(TM) customers in Germany and other EU countries will be able to place
trades, obtain quotes and review pertinent account information electronically
using the Internet. AMDIV.NET's(TM) web site will allow customers to enter
orders for stocks, mutual funds and options, to view their balances, positions,
order status, quotes and transaction history and to use research provided by
various data service providers. The research and market data available for
AMDIV.NET(TM) customers will include historical and intra-day charts, company
reports, earnings estimates, stock screening and general market information.
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<PAGE> 31
AMDIV.NET(TM) will offer an advanced program trading feature, which will
allow customers to create conditions under which orders will be placed and then
have their personal computer monitor the market to automatically place the
order. Customers will be able to design baskets of stocks to track and trade.
Investors also will be able to place spread, straddle and buy/write orders using
the AMDIV.NET(TM) features no other competing online-brokerage in Europe offers.
In addition, the system will provide investors access to multiple news and
research services. Customers will be able to access company highlights or
detailed company reports and earnings estimates from a variety of data banks. A
prototype system offering the above-described features is in the final stage of
development and is undergoing testing at this time.
In addition, AMDIV.NET(TM) will offer a wide range of third-party research
services to assist its customers in selecting the best trading strategy. Stock
research will include professional reports on over 20,000 listed companies on
the major U.S. and European exchanges, qualitative and quantitative analyses on
all major industry sectors and ranking tables, including performance ratios for
large, middle and small cap stocks. AMDIV.NET's(TM) stock alerts will notify
clients of earnings announcements, dividend reports, price changes of more than
three percent and other significant events affecting investments.
AMDIV.NET(TM) will cater to investors who are comfortable with the Internet
and prefer to trade exclusively through electronic communications in exchange
for low priced trade executions. Customer inquiries will be accepted via e-mail
and representatives are required to respond within two hours, although responses
usually are sent by return e-mail promptly. Although AMDIV.NET(TM) will maintain
toll-free telephone numbers for customer inquiries, these inquiries will be
limited to technical support and customer inquires during specified time
intervals. AMDIV.NET(TM) expects to charge a commission of EURO 12.00 for equity
orders having a market value of up to EURO 11,000. Management believes that
AMDIV.NET(TM) will offer one of the lowest commission rates in the industry in
Germany, especially on U.S.-securities.
LOGO
AMDIV.PRONET(TM) will be a wholesale provider, in Germany and other EU
countries, of discount brokerage and other financial services to independent
broker-dealers, registered investment advisors and financial planners, including
smaller banks, who serve their own retail customers. AMDIV.PRONET(TM) will act
as the discount brokerage arm of correspondent institutional clients by
providing their retail customers with access to equity and bond markets. ADAG
will maintain a staff of registered representatives to service the retail
customers of correspondent institutional clients using AMDIV.PRONET(TM).
MARKETING
The Company and its subsidiaries seek to increase their market share
through direct-response advertising, advertising on their own and other Web
sites, a public relations program and co-marketing. ADAG has recently completed
an aggressive marketing campaign in Germany designed to bring brand name
recognition to ADAG's product lines. The Company intends to significantly
increase its spending on print, television, radio, direct mail, telemarketing
and online advertising during the next fiscal year. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Overview." From
time to time, the Company may choose to increase spending on advertising to
target specific groups of investors or to decrease advertising expenditures in
response to market conditions.
ADAG's marketing focus in Germany is on advertising its discount brokerage
services as a less expensive and more efficient way of initiating transactions,
building awareness of the Company's product lines and the benefits of the
Company's services. Print advertisements are placed in a broad range of the
leading business, technology and financial publications, including HANDELSBLATT,
WIRTSCHAFTSWOCHE, CAPITAL, FOCUS and in the financial section of major daily
newspapers in Germany. ADAG also employs online advertising through Yahoo!,
America Online, CompuServe and other popular Web sites such as, FOCUS-Online.
ADAG's commercials are featured regularly on N-TV, Germany's leading channel for
stock exchange reports and during business programs of other major television
networks. ADAG also uses telemarketing and
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<PAGE> 32
direct mail to advertise its products and services. ADAG's aggressive
advertising program in Germany has significantly contributed to the increase in
new account applications, which may be utilized by ADAG after it has commenced
its broker-dealer operations.
ADAM plans to expand the advertising of its mutual fund products in the
U.S., and to build awareness of the Funds' value investment approach. To promote
its marketing and expansion efforts, ADAM has engaged the services of R.J.
Lauren, a public relations consulting firm based in Westlake Village,
California. R.J. Lauren will be primarily responsible for developing marketing
programs to promote ADAM's mutual funds in the U.S. In addition, R.J. Lauren
will promote the Company's asset management services and assist the Company in
issuing press releases as necessary to inform the public of recent developments
affecting the Company's business and operations.
At the Company's Web sites, prospective customers both in the U.S. and
Europe will be able to obtain detailed information on the services offered by
the Company and its subsidiaries, use an interactive demonstration system,
request additional information and complete an account application online.
Visitors to the Company's German Web site can obtain detailed information about
the U.S.-equity markets, NASDAQ and all major European stock exchanges. The
Company's programmers have developed a search engine which provides financial
information from over 800 sources. See "Risk Factors -- Dependence on
Intellectual Property Rights." Visitors to ADAM's U.S.-based Web site will be
able to obtain performance information on the funds, request literature and
prospectuses online, download reports and get basic information about ADAM's
value investment approach. Based on the increased number of visits to the
Company's Web sites, the Company believes that on-line advertising is a
significant factor in increasing brand awareness and generating leads, as
consumers increasingly look to the Internet as a key source of information and
commercial activity.
The Company also pursues public relations opportunities to build brand
awareness, which has resulted in interview appearances on television and radio
stations in Germany, profiles in the business section of a variety of daily
national newspapers, and attendance at trade conferences for the brokerage
industry in Germany. The Company also actively seeks speaking opportunities at
industry conferences and events in Europe.
CUSTOMER SERVICE
The Company and its subsidiaries strive to optimize the level of customer
service provided to their clients by (i) expanding their use of technology to
handle most typical inquiries generated in the course of customers' securities
trading and related activities, (ii) ensuring adequate staffing with properly
trained and motivated personnel in their customer service departments, enabling
prompt response to customer inquiries and (iii) tailoring customer service to
the particular expectations of the clients of each of their respective services.
In order to optimize the level of service provided to European customers,
ADAG has installed advanced call handling capabilities and provides 24 hours,
365-day live customer service through an 800-number. The new phone-systems
provide automated answering, departmental call forwarding, information on
expected wait times, summary market data while on hold and integrated voice-mail
and response capabilities. The new telephone systems also allow linkage between
the caller identification units and the customer database to provide customer
service representatives with immediate access to customer's account data. It is
expected that these telephone systems will increase call-handling efficiency and
enhance the customers' experience when calling for service, particularly during
periods of heavy market activity.
The Company and its subsidiaries have also developed software and Web sites
which provide basic information on how to use the Company's services. For those
inquiries that cannot be answered through one of the Company's automated
systems, customers are encouraged to use e-mail for matters that are not time
sensitive. The Company's operating standards require a response within two hours
of receipt of the e-mail for such matters; however, the Company strives to
respond within 30 minutes of the original message. The Company also maintains
electronic bulletin boards where customers and potential customers can ask
questions and exchange information about the Company's services.
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<PAGE> 33
The Company plans to monitor the level of overall customer satisfaction
through use of customer response cards sent with trade confirmations or through
periodic surveys. Written comments, e-mails and electronic postings by customers
will be regularly reviewed by the Company's senior officers. The Company has
established a policy to respond to all customer questions or complaints,
regardless of their mode of transmission.
COMPETITION
All aspects of the Company's investment management business are intensely
competitive. The Company competes with U.S. brokerage firms which have
affiliates in Germany and other EU countries and with German banking
institutions which are authorized, under German law, to offer both traditional
brokerage functions and investment advisory services. The Company encounters
significant competition in connection with the operation of its business in the
U.S. for its mutual fund products. The Company's competitors in the U.S. include
numerous enterprises with extensive experience in the financial services sector.
Therefore, the Company intends to use the bulk of its marketing resources to
promote its investment products in Europe, where it expects initially to
encounter only limited competition for its discount brokerage services and the
distribution of mutual funds to its targeted potential clientele in Germany, its
primary marketing area. The services offered by the Company are typically
provided in Germany today through banks and savings institutions, which cater
primarily to large institutional individual investors rather than to
individuals. Management of the Company believes it has identified a niche market
in Germany and the EU for providing discount securities brokerage services to
individual and small institutional investors, including the marketing of U.S.
mutual 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 prefer to market
only to large institutional clients and require minimum account balances in the
$1,000,000 range. On the investment banking side, there were approximately 31
public equity securities offerings in Germany during 1997, and 71 have been
completed to date in 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.
The Company expects competition to continue and intensify in the future.
There are currently approximately ten discount brokerage firms in Germany, all
of them wholly owned subsidiaries of German commercial banks. These discount
brokerage firms include Comdirect Bank, ConSors Dicount Broker, Advance Bank,
Brokerage24 and Direkt Anlage Bank. The Company also encounters competition from
the established banks, which provide full-commission brokerage services as well
as mutual fund sponsors and other organizations, some of which provide
electronic services. Although these competitors are well established, they
generally lack the ability to provide prospective customers with the desired
capabilities in international securities trading. None of these competitors
offer direct execution of U.S. securities after 5:30 P.M., when the German
exchanges stop trading and, during the trading session, fast order execution for
U.S. securities is limited to the stock of the U.S. companies listed on one of
the German exchanges.
The Company believes, that providing investors with the ability to buy,
sell and execute trades in U.S. securities until the close of the trading
session in the U.S., 10 P.M. German time, will give the Company's Internet
brokerage a significant advantage over all its competitors. This will give
ADAG's on-line customers the ability for day trading in U.S. securities during
the entire period from 8:30 A.M. to 10 P.M. German time.
The Company believes that the principal competitive factors affecting the
market for its discount brokerage services are price, customer service, quality
and speed of trade execution, delivery platform capabilities, ease of use,
graphical user interface, breadth of services and innovation. Firms compete on
the elements of price, technology, financial strength and customer service.
Based on management's experience, preliminary market research and the success
the Company's marketing campaign has enjoyed to date, the Company believes that
it can competes effectively with respect to each of these factors.
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<PAGE> 34
In addition, 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 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. This lack of entry barriers may facilitate the introduction of new
investment products by the Company, although it may also lead to increased
competition from other securities firms.
The general financial success of companies within the securities industry
over the past several years has strengthened existing and emerging competitors.
The Company believes that such success will continue to attract new competitors
to the industry such as large U.S. discount brokers such as e*trade, Charles
Schwab, AmeriTrade and similarly structured groups. Charles Schwab has already
commenced operations in Great Britain and is monitoring the German and European
markets closely. "e*trade" has signed a licensing agreement with E trade Central
Europe, Inc, which is owned by two emerging German financial services firms.
Commercial banking institutions and other financial institutions have become a
competitive factor in the securities industry by offering their customers
discounted financial services. While it is not possible to predict the type and
extent of competitive services that the banking institutions and other newly
emerging financial institutions ultimately may offer, the Company may be
adversely affected by such competition.
There can be no assurance that the Company will be able to compete
effectively with current or future competitors or that the competitive pressures
faced by the Company will not have a material adverse effect on the Company's
business, financial condition and operating results. See "Risk Factors --
Competition."
GOVERNMENT REGULATION
The 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.
ADAM's operations in the U.S. are subject to extensive regulation under
U.S. federal and state securities laws. The Commission is the federal agency
responsible for administering the federal securities laws in the U.S. In
general, broker-dealers are required to register with the Commission under the
Exchange Act. Under the Exchange Act, every registered broker-dealer that does
business with the public is required to be a member of and is subject to the
rules of the NASD. The NASD has established Rules of Fair Practice, which are
subject to the Commission's approval, for all securities transactions among
broker-dealers and private investors, trading rules for the over-the-counter
markets, and operational rules for its member firms. The NASD conducts
examinations of member firms, investigates possible violations of the federal
securities laws and its own rules, and conducts disciplinary proceedings
involving member firms and associated individuals. The NASD administers
qualification testing for all securities principals and registered
representatives for its own account and on behalf of the state securities
authorities.
In addition, broker-dealers are subject to extension regulations under
state laws. A recent amendment to the federal securities laws prohibits the
states from imposing substantive requirements on broker-dealers, which exceed
those imposed under federal law. The recent amendment, however, does not
preclude the states from imposing registration requirements on broker-dealers
that operate within their jurisdiction or from sanctioning such broker-dealers
for engaging in misconduct.
ADGE is being established to assume the broker-dealer and underwriting
functions of ADAM. After the transfer is completed, ADGE will be subject to
regulation as a broker-dealer and will continue as a registered investment
advisor under the Investment Company Act of 1940, as amended. ADGE will also
succeed to ADAM's broker-dealer registration in the State of California.
ADAG, the Company's German subsidiary, is subject to regulation under
German law and in the various EU jurisdictions it may operate under in the
future. Germany recently revised its banking laws and for the first
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time, financial service providers and broker-dealers are subject to rules and
regulation and supervision of the various regulatory agencies, mainly the
Bundesaufsichtsamt fuer das Kreditwesen ("BaKred"), the body regulating the
banking industries, as well as the Bundesaufsichtsamt fuer Wertpapierhandel
("BAWH"), the body regulating the securities transactions and stock exchanges
and the Bundesbank, Germany's Central Bank. The revision of the banking law was
adopted in October 1997 and became effective on January 1, 1998. ADAG currently
has a license which permits it to engage in product distributions, underwriting
and asset management activities. Due to the uncertainties regarding
interpretation of the new laws, ADAG has filed an application with the "BaKred"
to extend its current license to a full banking license. Upon approval of its
full banking license, ADAG will commence operations as a fully licensed bank and
brokerage firm. The Company cannot provide any assurance or guarantee that the
regulatory approvals necessary for ADAG to commence its planned securities
brokerage operations will be given in a timely manner or at all. See "Risk
Factors -- Delay in Commencing Operations."
All marketing activities by ADAG regulated by the BaKred, and all such
marketing materials are required to be reviewed by the Company's compliance
officer prior to release. If ADAG were to engage in soliciting orders or making
investment recommendations, it would become subject to additional rules and
regulations governing, among other things, the suitability of recommendations to
customers and sales practices.
ADAG will be engaged in clearing and settling transactions and maintaining
customer accounts. In its capacity as a depository bank, ADAG has to be a member
of the "Einlagensicherungsfond", the depository trust fund of the German Banking
Association. There can be no assurance that ADAG will be accepted as a member in
the future. As a depository bank, ADAG will be further required to comply with
the rules of banking institutions, including rules relating to possession and
control of customer funds and securities, margin lending and execution and
settlement of transactions.
NET CAPITAL REQUIREMENTS; LIQUIDITY
As a registered broker-dealer and member of the NASD, ADAM, the Company's
U.S. subsidiary, is subject to the Net Capital Rule. The Net Capital Rule, which
specifies minimum net capital requirements for registered brokers-dealers, is
designed to measure the general financial integrity and liquidity of a broker-
dealer and requires that at least a minimum part of its assets be kept in
relatively liquid form. As the planned successor to ADAM's broker-dealer
functions, ADGE will be subject to the same rules and requirements as a
broker-dealer. ADAM is in compliance with applicable net capital requirements.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operation -- ADAM's Historical Operations."
As a depository bank, ADAG will be subject to the net capital requirements
of the "Kreditwesengesetz." The law presently requires a minimum net capital of
10 million German Marks (approximately $5.6 million), for the operations planned
by ADAG. The BaKred can increase the net capital requirement at any time.
In general, net capital is defined as net worth (assets minus liabilities),
plus qualifying subordinated borrowings and certain discretionary liabilities,
and less certain mandatory deductions that result from excluding assets that are
not readily convertible into cash and from valuing conservatively certain other
assets. Among these deductions are adjustments (called "haircuts"), which
reflect the possibility of a decline in the market value of an asset prior to
disposition.
Failure to maintain the required net capital by either subsidiary may
subject a firm to suspension or revocation of registration by the Commission or
BaKred, and suspension or expulsion by the NASD and other regulatory bodies and
ultimately could require the firm's liquidation. The Net Capital Rule prohibits
payments of dividends, redemption of stock, the prepayment of subordinated
indebtedness and the making of any unsecured advance or loan to a stockholder,
employee or affiliate, if such payment would reduce the firm's net capital below
a certain level. The Net Capital Rule also provides that the Commission may
restrict for up to 20 business days any withdrawal of equity capital, or
unsecured loans or advances to stockholders, employees or affiliates ("capital
withdrawal") if such capital withdrawal, together with all other net capital
withdrawals during a 30-day period, exceeds 30% of excess net capital and it is
determined that the capital withdrawal may be detrimental to the financial
integrity of the broker-dealer. In addition, the Net Capital Rule provides that
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the total outstanding principal amount of a broker-dealer's indebtedness under
certain subordination agreements, the proceeds of which are included in its net
capital, may not exceed 70% of the sum of the outstanding principal amount of
all subordinated indebtedness included in net capital, par or stated value of
capital stock, paid in capital in excess of par, retained earnings and other
capital accounts for a period in excess of 90 days.
A change in the Net Capital Rule, the imposition of new rules or any
unusually large charge against net capital could limit those operations of the
Company that require the intensive use of capital, such as the financing of
customer account balances, and also could restrict the Company's ability to
withdraw capital from its brokerage subsidiaries, which in turn could limit the
Company's ability to pay dividends, repay debt and repurchase shares of its
outstanding stock. A significant operating loss or any unusually large charge
against net capital could adversely affect the ability of the Company to expand
or even maintain its present levels of business, which could have a material
adverse effect on the Company's business, financial condition and operating
results. The Company's broker-dealer subsidiary is expected to maintain a
minimum net capital well in excess of the present minimum net capital
requirement.
ADAM is a member of Securities Investor Protection Corporation ("SIPC"),
which provides, in the event of the liquidation of a broker-dealer, protection
for customers' accounts held by each of them of up to $500,000 for each customer
account, subject to a limitation of $100,000 for claims for cash balances.
ADAM's SIPC membership will be transferred to ADGE.
EMPLOYEES
As of August 31, 1998, the Company employed a total of 24 full-time
associates, including management, and 12 part-time associates. The Company
believes that its future success will depend on its continued ability to attract
and retain highly skilled and qualified employees. The Company believes that its
relations with its employees are good.
The Company's employment assessment process is a critical factor in
identifying candidates whose abilities and potential create the opportunity to
be a successful associate with the Company. The assessment process includes an
in-person interview, a work-related behavioral trait profile, a cognitive
reasoning assessment test, a telephone structured interview to measure
communication skills, and a data entry "keyboarding" or computer skills test
when appropriate. The Company believes based on its experience to date that its
employment assessment process has a positive impact on the Company's success.
The Company has approved a policy of paying cash bonuses to its management
and non-management employees out of a pool based on a percentage of annual
income. Bonuses are based upon the success of the Company and the individual job
performance of the employee.
The Company believes that the continuous training of its management,
employees and part-time associates is a key factor for the Company's ability for
rapid growth. The Company has established a training facility in Berlin and
implemented a training schedule.
SYSTEMS
The Company will use a variety of systems to support investors and the
Company's correspondents. The Company currently is developing a sophisticated
proprietary computer network that will link the various trading applications to
the proprietary core system, the AMDIV Operating System ("AMDOS"). All of the
customer trading applications will interface and feed data through standardized
messaging and formatting into AMDOS. AMDOS will deliver quotes and information
to the investor and route trades to the market. AMDOS will then update account
balances and positions via multiple lines of communication. AMDOS also will
support other operations such as clearing functions, account administration and
record keeping.
The Company's technology relies on a scalable computer system connected to
the Internet backbone. To enhance the reliability of the system and integrity of
data, the Company maintains multiple backup systems. A backup power supply
supports the operations facility. Tape backups are made nightly to prevent a
loss of data.
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See "Risk Factors -- Dependence on Computer Systems" and "-- Dependence on
Intellectual Property Rights."
The Company's technology is supported by an internal staff of programmers,
developers and operators 24 hours a day, seven days a week. The programming
staff is supplemented by a team of quality control analysts, Web page
developers, technical writers and design specialists who ensure the final
product is user-friendly and dependable. In addition to supporting the systems,
the staff continually enhances software and hardware and develops new services.
Software is designed to be versatile and easily adaptable to new and emerging
technologies.
The secure transmission of confidential information over public networks is
a critical element of the Company's operations. The Company relies on encryption
and authentication technology, which is in part provided by outside sources,
including public key cryptography technology provided by Veresign to provide the
security and authentication necessary to effect secure transmission of
confidential information over the Internet. See "Risk Factors -- Potential for
Security Compromises."
A major advantage is the Company's direct fiberoptic connections to the
Internet through a main backbone of UUNETt. ADAG is connected to the fiberoptic
network COLT Telecom, one of Europe's most progressive providers of commercial
fiberoptic networks. COLT Telecom is servicing the majority of the German
banking industry and stock exchanges. ADAG has signed agreements to receive
unlimited network capacity for its data and telecommunication needs on a
scalable basis at competitive prices. The Company plans to connect the premises
in Berlin and Los Angeles by a direct line by the end of 1998.
All proprietary technology, systems and software of the Company and its
subsidiary will be transferred to American Diversified Technologies, Inc., which
is being established as a wholly-owned subsidiary of the Company in the U.S. The
Company believes that it has adequate protection for its proprietary technology,
systems and software under German law, but is developing confidentiality and
non-competition agreements, and other internal security measures to further
protect its proprietary interests. See "Risk Factors -- Dependence on
Intellectual Property Rights."
SERVICEMARK APPLICATION
The Company has registered "AMERICAN DIVERSIFIED" as a servicemark in the
U.S. and in Germany, and has applied for but not been issued any registered
servicemark for its or "AmDiv(TM)" service-name in Germany. ADAG is planning to
register its trademarks in Germany and other European countries. 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.
LEGAL PROCEEDINGS
The Company is not a party to, nor is the Company's property the subject of
any pending legal proceeding.
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UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated financial statements have
been prepared by the Company's management from its historical financial
statements, which are contained elsewhere in this prospectus. The Unaudited Pro
Forma Statement of Operations presented below reflects the Company's results of
operations adjusted for the acquisition of James Buchanan Rea, Inc. ("JBRI") as
of March 31, 1998, and the related issuance of common stock as described in the
accompanying notes. The pro forma adjustments have been applied to the
historical consolidated statement of operations for the fiscal year ended August
31, 1998, and the unaudited results of operations of JBRI for the seven months
ended March 31, 1998, as if the acquisition occurred on September 1, 1997. The
balance sheet of JBRI and the results of operations of JBRI for the five months
ended August 31, 1998, are included in the historical consolidated balance sheet
and statement of operations. The acquisition has been accounted for using the
purchase method of accounting. For purposes of the pro forma statements, the
purchase price 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 pro forma adjustments
presented herein. The pro forma statements should be read in connection with the
notes thereto.
AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED AUGUST 31, 1998
<TABLE>
<CAPTION>
HISTORICAL
AMERICAN JBRI PRO FORMA
DIVERSIFIED NOTE(1) ADJUSTMENTS PRO FORMA
----------- ------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue....................................... $ 45,585 $95,678 $ -- $ 141,263
----------- ------- -------- -----------
Expenses:
Travel and entertainment.................... 120,222 -- -- 120,000
Employee compensation and benefits.......... 1,010,213 66,786 -- 1,076,999
Professional fees........................... 633,977 3,133 -- 637,110
Advertising and promotion................... 1,974,044 3,070 -- 1,977,114
Administrative.............................. 727,196 20,762 -- 747,958
Other Operating Expenses.................... 130,718 -- -- 130,718
Depreciation and amortization............... 88,004 2,071 31,065(2) 121,140
Interest.................................... 19,789 -- -- 19,789
----------- ------- -------- -----------
4,704,163 95,822 31,065 4,831,050
----------- ------- -------- -----------
Operating (loss)............................ (4,658,578) (144) (31,065) (4,689,787)
Nonoperating income......................... 139,589 -- -- 139,589
----------- ------- -------- -----------
(Loss) before income taxes.................. (4,518,989) (144) (31,065) (4,550,198)
Income taxes................................ -- -- --(3) --
----------- ------- -------- -----------
Net (loss).................................. $(4,518,989) $ (144) $(31,065) $(4,550,198)
=========== ======= ======== ===========
Average common shares outstanding........... 5,085,838 -- 69,271 5,155,109
=========== ======= ======== ===========
Basis and diluted (loss) per common share... $ (0.93) $ -- $ -- $ (0.93)
=========== ======= ======== ===========
</TABLE>
32
<PAGE> 39
AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The unaudited pro forma consolidated statement of operations for the year
ended August 31, 1998 was prepared as if the acquisition had occurred on
September 1, 1997.
These pro forma financial statements are not necessarily indicative of the
results of operations that might have occurred had the acquisition and financing
taken place at the beginning of the period or as of August 31, 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:
<TABLE>
<S> <C> <C>
(1) Represents JBRI unaudited results of operations for the
seven months ended March 31, 1998. JBRI results for the five
months ended August 31, 1998 are included with the
historical results
(2) Record amortization of goodwill on a straight line basis
over a period of 7 years for the seven months ended March
31, 1998 (amortization from March 31, 1998 through August
31, 1998 has been included with historical amounts)
Amortization expense........................................ $31,065
-------
(3) The tax benefit for the pro forma 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
</TABLE>
33
<PAGE> 40
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
The following discussion is based upon and should be read in conjunction
with the Company's financial statements, including the notes thereto, and the
cautionary statements regarding forward-looking statements.
The Company was organized on February 5, 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.
PLAN OF OPERATION
The Company and its subsidiaries will offer financial services consisting
mainly of full service securities brokerage, Internet discount brokerage, asset
management, sponsoring and distributing mutual funds, underwriting and related
financial services. The Company is a development stage enterprise and, has not
generated any significant revenue from operations to date since its inception on
February 5, 1997.
The Company has financed its development activities through the sale of
equity securities to its existing stockholders in private transactions. As of
August 31, 1998, the Company had approximately $309,000 in cash to conduct
operations. At the current expense rate, the Company anticipates that such
funds, together with $11,621,000 received from escrow by the Company in
connection with the sale of the "Bearer Note" issued by Immofin
Grundstuecksverwaltungsgessellschaft Conradi & Hilber GbRmbH, will be sufficient
to continue operations until December 31, 1999. Thereafter, the Company will be
dependent upon the receipt of additional capital to sustain operations. WITHOUT
ADDITIONAL CAPITAL, THERE IS SUBSTANTIAL UNCERTAINTY ABOUT THE ABILITY OF THE
COMPANY TO ACHIEVE ITS BUSINESS PLAN. See "Interest of Management and Others in
Certain Transactions."
The Company intends to continue on-going development of its products and
services during the fiscal year ending August 31, 1999, to the extent permitted
by available financing. The Company and its subsidiaries do not anticipate any
significant sale of equipment during the fiscal year ending August 31, 1999, but
do expect to purchase technology and various equipment and technology for
development purposes at an anticipated cost of $3.5 million.
The Company has recently expanded staffing at both executive and employee
levels and does not currently anticipate any additional significant changes in
the number of employees or compensation payable to employees. See "Description
of Business -- Employees" and "Directors, Executives and Significant Employees."
ADAM'S HISTORICAL OPERATIONS
ADAM merged with and into James Buchanan Rea, Inc., a California
corporation ("JBRI"), effective March 31, 1998, to acquire an existing mutual
fund operation and establish a presence for the Company in the U.S. JBRI served
as the investment advisor and distributor to the Rea-Graham Balanced Fund
(renamed the American Diversified Global Value Fund; interchangeably, the
"Fund"), a series mutual fund of American Diversified Funds, Inc. (formerly
named the "Rea-Graham Funds, Inc."), a diversified open-end investment company
registered under the Investment Company Act of 1940. ADAM has succeeded JBRI as
a registered broker-dealer and registered investment advisor and the
shareholders of the Fund have approved ADAM as investment advisor to the Fund.
The Fund was originally organized as a private limited partnership in 1976.
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 continued
to operate as a separate series mutual fund of Rea-Graham Funds, Inc., which was
succeeded by American Diversified Funds, Inc., following the merger.
Pursuant to the revised investment advisory agreement, the Fund pays ADAM a
monthly advisory fee equal on an annual basis to one percent 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
34
<PAGE> 41
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 ADAM a distribution fee payable monthly equal on an
annual basis to .35% of the Fund's average daily net assets.
The following discussion is based upon and should be read in conjunction
with JBRI's financial statements for the period ended December 31, 1996 and
December 31, 1997, and the Company's financial statements for the period ended
August 31, 1998 together with the notes related thereto.
JBRI'S OPERATIONS FOR THE PERIOD ENDED DECEMBER 31, 1996 COMPARED TO THE
PERIOD ENDED DECEMBER 31, 1997
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 December 31, 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.
Liquidity and Capital Resources. 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.
JBRI was 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:
<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>
THE COMPANY'S OPERATIONS FOR THE FISCAL YEAR ENDED AUGUST 31, 1998
Results of Operations. For the fiscal year ended August 31, 1998, the
Company reported operating revenue of $45,585 which is substantially
attributable to ADAM. ADAM reported revenues and operating expenses of $39,585
and $248,400, respectively during the year ended August 31, 1998. ADAG is still
in the developmental stage and did not commence any significant business
operations during the 1998 fiscal year.
Liquidity and Capital Resources. Initial promotional costs associated with
marketing efforts in Germany and costs associated with operating ADAG in Germany
increased the Company's monthly liquidity requirements to approximately $80,000
during the fiscal year ended August 31, 1998 as opposed to, $20,000 during the
fiscal year ended August 31, 1997. The costs incurred for employee compensation
and advertising increased from $20,841 and $7,220 during the fiscal year ended
August 31, 1997 to $1,010,213 and $1,974,044
35
<PAGE> 42
for the fiscal year ended August 31, 1998. Cash inflows from the sale of
5,000,000 shares of Series A Preferred Stock sold during the period provided the
working capital.
ADAM is subject to the net capital rule (Rule 15c3-1) 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 rules are defined in Rule 15c3-1. The net capital, required net capital
and net capital ratio for ADAM as of August 31, 1998 were $110,461, $5,000, and
0.16 to 1, respectively.
YEAR 2000 COMPLIANCE
The Company and its subsidiaries will rely upon a significant number of
computer software programs and operating systems in conducting their operations,
including systems and software utilized by third party service providers. The
Company has reviewed its computer systems, including information technology
("IT") and non-IT systems, and has determined that they are in compliance with
the requirements of the Year 2000. The Year 2000 problem, however, is pervasive
and complex as virtually every computer operation will be affected in some way
by the rollover of the two digit year to 00. Failure of any of the Company's
third party service providers to adequately address this issue could result in a
substantial interruption of the Company's normal plan of operation and business
affairs, and could result in significant losses from operations. Although the
Company could incur substantial costs in connection with the failure of third
party computing systems and software, such costs are not sufficiently certain to
estimate at this time. The Company also has not developed any plan to address
these contingencies. Consequently, no assurance can be given that the potential
failure of third party systems will not increase the Company's operating costs
or create uncertainties that may have an adverse effect on the Company's
operating results or financial condition. See "Risk Factors -- Dependence on
Third Party Systems."
DESCRIPTION OF PROPERTY
The Company and its subsidiaries currently has three business offices under
lease. The Company has a one-year lease expiring in March 1999, from CB
Commercial, Inc., for office space located at 12100 Wilshire Boulevard, Suite
680, Los Angeles, California 90025, at $2,370 per month, which is the office
space formerly occupied by JBRI. The Company recently sub-leased new office
space from Froley Revy Investment Company, Inc., for a term of three years at
$8,561 per month, and has moved its principal business address to the newly
sub-leased premises located at 10900 Wilshire Boulevard, 9th floor, Los Angeles,
California 90024. ADAG has entered into a five-year lease expiring January 2003
for office space in Berlin from 58 Grundstucksverwaltungsgesellschaft -- Bull
and Liedtke, Hamburg, at $3,700 per month. All three 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
business activities of the Company and its subsidiaries 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 initial market area and a shared commitment
to its future growth and success.
Peter Hartmann, age 43, 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.
36
<PAGE> 43
James Buchanan Rea Jr., age 43, 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.
Joel Epstein, age 38, Executive Vice President, Chief Financial Officer and
Treasurer, 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 of the Company and Managing Director of
American Diversified Emissionsberatungs GmbH (ADAG's German subsidiary). Mr.
Kuettner qualified as a CPA in 1983 and served with the accounting firm of
Arthur Anderson & Co in Toronto, Seattle and Berlin from 1980 to 1993. Mr.
Kuettner moved to Germany in 1991 and has been practicing as an independent CPA
since 1993. 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.
Arthur Gray, Jr., age 75, is an Advisory Director. Mr. Gray is expected to
be nominated for election to the Board after the Bylaws are amended to authorize
an expansion of the Board. As an Advisory Director, Mr. Gray is invited to
attend Board meetings, but is not a member of the Board. Since 1993, Mr. Gray
has been a Managing Director of SG Cowen Investment Counselors in New York City.
He currently serves as the Chairman of the Board of Seventh Generation, Inc.,
the President of Lerner-Gray Foundation and is a director of Genelabs
Technology, Inc. Mr. Gray is an Honorary Trustee of the American Museum of
Natural History, a Director of the Smithsonian Museum of Natural History and an
Honorary Director of Pathways for Youth. Mr. Gray has extensive experience in
the financial services sector. From 1984 to 1993, Mr. Gray served
37
<PAGE> 44
as the President and CEO of Dreyfus Personal Management. Mr. Gray attended the
Massachusetts Institute of Technology for two years before entering military
service in World War II.
John Barrier, age 41, Chief Technical Officer, has over 24 years of
experience in network engineering, software development and project planning and
implementation. Mr. Barrier's past assignments include system engineering and
supervision of hard- and software development projects for King Khaled
International Airport, Saudi Arabia, the Ground Launch Cruise Missile (GLCM)
program and Sundstrand Power Systems, San Diego. Prior to joining the Company,
from 1996 to 1997, Mr. Barrier was the Vice President of Software and Technology
with NTN Communications, Inc., a Carlsbad, California provider of Interactive
programs, where he was responsible for the management of 50 Windows NT servers,
all technology requirements for Hospitality and Online networks and the
development of front-end and back-end software for AOL. In 1995 he was the lead
network Administrator for Premis software in Houston where he developed the
Quick Comp software for Texas Workers' Compensation, client database. From 1992
to 1995, Mr. Barrier was the Supervisor of Systems Engineering at King Khaled
International Airport located in Riyadh, Saudi Arabia, where he was responsible
for systems design, network interface and the development of a Windows based
hypertext help system. Mr. Barrier received his Bachelor of Science degree in
Electrical Engineering Technology from Northern Arizona University. Mr. Barrier
joined the Company on November 1, 1998.
Messrs. Rea, Hartmann, Corcovelos, Epstein, Graf and Fitzgerald reside in
the U.S. Mr. Kuettner resides in Berlin, Germany.
PRINCIPAL ADVISORS
Ladas & Hulings, Inc. ("Ladas & Hulings"), a registered investment advisor
founded in 1970 and headquartered in Scottsdale, Arizona, with regional offices
in Austin, Texas, and Palm Beach, Florida, is investment sub-advisor to the
Fund. Ladas & Hulings is also expected to serve as investment sub-advisor to the
new small-cap and international funds to be offered by ADAM in the future. Ladas
& Hulings currently has approximately $270.0 million in assets under management,
including $180.0 million in domestic managed accounts and $90.0 million in
non-domestic managed accounts. Ladas & Hulings' investment style is
substantially similar to that of the Company's, involving the use of fundamental
investment analysis applied and adapted to the global equity markets.
Mr. William R. Hulings, age 62, President and Chief Investment Officer of
Ladas & Hulings, had over 25 years of experience in investment management. Mr.
Hulings has Masters of Science and MBA degrees from the University of Southern
California.
The Company has retained Mr. Joseph Breslin, age 44, to head the Company's
expanded offices in New York. Mr. Breslin has over 16 years of experience in
investment management services and the mutual funds industry. Since September
1994, Mr. Breslin has served as the President of a wholly owned consulting firm
specializing in all aspects of the investment management business, including
institutional and retail marketing, design and formation of mutual funds and
other investment services, advising on the sale or acquisition of investment
management firms or funds and expense/profitability analyses of all aspects of
mutual fund operations. From 1985 to July 1994, Mr. Breslin variously served as
the Vice President and General Counsel, President and Director of the Mutual
Fund Group at Spears, Benzak, Salomon & Farrell. From 1981 to 1985, Mr. Breslin
was Senior Vice President -- Finance and General Counsel of National Securities
and Research Corporation. Mr. Breslin received his law degree from Fordham
University in 1980 and his Bachelor of Science degree in Accounting from
Georgetown University in 1975.
Mr. Stanley Lanzet, age 54, has been retained by the Company as its
investment banking advisor and consultant in the Company's New York office. Mr.
Lanzet is President and Chairman of Lanzet Global Securities Corp., an
investment research firm founded in 1993 specializing in small and medium cap
stocks and emerging market investing. Mr. Lanzet has been an investment analyst
since 1967. From 1992 to mid-1993, Mr. Lanzet was a Managing Director/Principal
of Bear Stearns and Co. and the Director of Research for Emerging Markets.
38
<PAGE> 45
Prior to joining Bear Stearns, Mr. Lanzet was a Senior Vice-President and
the Associate Director of Research at Arnhold and S. Bleichroeder, Inc. from
1988 to 1992. Mr. Lanzet is a member of the New York Society of Security
Analysts and holds a B.B.A. degree in Economics from the City College of New
York and an M.B.A. in Investments from New York University.
ADAG'S EXECUTIVE TEAM
ADAG's executive team includes a young group of experienced managers with
an average age of 38 and 17 years practical experience in the banking sector.
The German educational system provides graduates an opportunity to literally
"learn on the job" with a potential employer after completing high school. The
apprenticeship program, which leads to a Diploma in Commercial Banking, consists
of theoretical and practical instruction over a 2 to 3 year period. The employer
who is satisfied with a student's performance will generally offer that
individual a full-time position after completion of his studies. ADAG's Board of
Management consists of the following executives:
Bernward J. Rohmann, age 47, Chief Executive Officer (Vorstand), has over
22 years international experience in the banking industry, in leading positions
with major financial institutions during the last 7 years. Mr. Rohmann studied
at the Ruhr-University, Bochum, Germany where he graduated 1975 with a degree as
economist (Diplom Okonom). From 1991 through 1997 Mr. Rohmann was the Head of
DM-Treasury Department at JP Morgan, Frankfurt where he also served as a member
of the JP Morgan Investment Committee for pension funds. Between 1991 and 1992
he was the responsible General Manager for reorganizing the London Branch of
Hessische Landesbank. From July 1992 through December 1993 Mr. Rohmann was a
member of the Executive Management Board in charge of Capital Markets,
Securities and the UBS Invest Division of Schweizerische Bankgesellschaft in
Frankfurt. From February 1994 through December 1996 Mr. Rohmann was a member of
the Executive Management Board in charge of Securities, treasury, Controlling
and DATA Processing of National Westminster Bank plc in Frankfurt. Mr. Rohmann
received a diploma for participating in the Advanced Management Program for
Overseas Bankers of the Wharton School in Philadelphia. He joined the Company on
September 1, 1998.
Dernst-Henning Graf von Hardenberg, age 57, Senior Executive, has more than
30 years of experience in banking and has held leading positions with major
German banks. Mr. Graf von Hardenberg began as an apprentice with Commerzbank
AG, Hamburg in 1962, where he was assigned to the corporate credit department.
In 1968, he joined IKB Deutsche Industriebank AG, Dusseldorf, and was promoted
in 1973 to head the credit department of the bank's Berlin branch, of which he
was appointed General Manager in 1981. Mr. Graf von Hardenberg has also served
on the Executive Management Board of Berliner Industriebank AG, Berlin. He was
later appointed to the Executive Management Board of Deutsche Handelsbank AG,
Berlin, where he was responsible for Corporate Lending and Treasury. Since 1994,
Mr. Graf von Hardenberg has been advising start-up companies on raising equity
and on organizing their respective finance and controlling functions. He is also
the Managing Partner of J. Strauss Verlag GmbH, Potsdam. He joined the Company
on November 1, 1998.
Additional key personnel will be hired to fill the rest of the positions in
the coming weeks and months.
MANAGEMENT COMMITTEES
The Company expects to formally establish management committees in Germany
and in the U.S. that institute policies and procedures regarding the Company's
daily operations regarding risk, expense and operations. The committee in
Germany will include Messrs. Rohmann, von Hardenberg, Kuettner, and assigned
executives from each of the Company's subsidiaries. The committee in the U.S.
will include James Buchanan Rea Jr., Joel Epstein, Michael Graf and Peter
Hartmann. The committees provide oversight and assist the subsidiaries in
achieving their goals. The committees may suggest the establishment of, or
changes to, policies and procedures of the subsidiaries to strengthen controls
in areas of risk, expense and operations. The committees, however, do not take
the place of the decision-making authority vested in each of the subsidiaries.
39
<PAGE> 46
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 to be
rendered to the Company in all capacities by the Company's directors and
executive officers. 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, Chief Financial
Officer and Treasurer..................................... -0- $125,000
T. Michael Graf, Executive Vice President of Asset
Management................................................ -0- $125,000
Ronald Kuettner, Director(1)(2)............................. $ 66,667 $100,000
</TABLE>
- ---------------
(1) See "Employment Agreements" below for a description of Mr. Rea's, and Mr.
Hartmann'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.
(2) Mr. Kuettner was the Company's Chief Financial Officer and received
compensation in that capacity during the fiscal year ended August 31, 1998
pursuant to an employment agreement. Mr. Kuettner has since resigned as the
Company's Chief Financial Officer and is employed as Managing Director of
American Diversified Emissionsberatungs GmbH, a subsidiary of ADAG in
Germany. His employment agreement with the Company has been terminated.
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.
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 (and of ADGE). 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
40
<PAGE> 47
and operating budget. Mr. Rea's employment agreement also includes a buyout
provision, pursuant to which Mr. Rea is entitled, at any time during the term of
his employment agreement, to require the Company to repurchase all of his shares
of the Company's Common Stock at a purchase price equal to the greater of the
consideration paid for or the fair market of such shares, in the event that Mr.
Rea is no longer employed with the Company, in the event of a change in control
(as defined in the employment agreement) or sale of substantially all of the
Company's assets, or at such time as the Company is no longer a registered
broker-dealer. The buyout provision terminates in the event that the Company has
effected a registered public offering of its Common Stock under the Securities
Act in an amount of at least $5.0 million and there exists a public trading
market for the Common Stock.
The Company has also entered into an employment agreements with Mr.
Hartmann. 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 (but not including any buyout rights).
1998 STOCK OPTION AND INCENTIVE PLAN
General. The Company's 1998 Stock Option and Incentive Plan (the "1998
Stock Option and Incentive Plan") provides for the Incentive Stock Options of
("ISO's") and Non-qualified Stock Options ("NQSO's").
Purpose. The 1998 Stock Option and Incentive Plan is intended to provide
incentive to key employees, officers, directors and others expected to provide
significant services to the Company, to encourage proprietary interest in the
Company, to encourage such key employees to remain in the employ of the Company,
to attract new employees with outstanding qualifications, and to afford
additional incentive to others to increase their efforts in providing
significant services to the Company.
Administration. The 1998 Stock Option and Incentive Plan will be
administered by a committee, established by the Board of Directors (the
"Committee"), which will at all times be composed of "non-employee directors;"
provided, however, that the Board of Directors may abolish the Committee at any
time and revest administration of the 1998 Stock Option and Incentive Plan in
the Board of Directors or a reconstituted Committee. No member of the Committee
will vote on any matter affecting his or her own compensation.
The value of one share of Common Stock, is determined as follows: (i) If
the shares are traded on an exchange, the price at which Share traded at the
close of business on the date of valuation; (ii) If the shares are traded
over-the-counter on the NASDAQ System, the closing price if one is available, or
the mean between the bid and asked prices quoted on the NASDAQ System at the
close of business on the date of valuation; and (iii) If neither (i) or (ii)
applies, the fair market value as determined by the Board or the Committee in
good faith. Such determination will be conclusive and binding on all persons.
Vesting of Options and Awards. The stock options and award granted under
the 1998 Stock Option and Incentive Plan will vest as determined by the
Committee or the Board of Directors.
Eligible Persons. Officers and directors and employees of the Company and
other persons expected to provide significant services to the Company are
eligible to participate in the 1998 Stock Option and Incentive Plan. ISO's may
be granted to the officers and key employees of the Company. NQSO's and other
awards may be granted to the directors, officers, key employees, agents and
consultants of the Company or any of its subsidiaries, provided that the
Committee finds that the value of services rendered or to be rendered to the
Company is at least equal to the value of the awards being granted.
Under current law, ISO's may not be granted to any director of the Company
who is not an employee, or to directors, officers and other employees of
entities unrelated to the Company.
41
<PAGE> 48
Shares Subject to the Plan. Subject to anti-dilution provisions for stock
splits, stock dividends and similar events, the 1998 Stock Option and Incentive
Plan authorizes the grant of stock options to purchase up to 1,000,000 shares of
the Company's Common Stock, provided that at no time shall options be granted to
purchase an aggregate of more than five percent of the outstanding shares of the
Company's Common Stock.
Term of the Plan. Unless previously terminated by the Board of Directors,
the 1998 Stock Option and Incentive Plan will terminate on May 26, 2008, and no
options may be granted under the 1998 Stock Option and Incentive Plan
thereafter, but existing options will remain in effect until the options are
exercised or terminated by their terms.
Term of Options. Each stock option must terminate no more than ten years
from the date it is granted (or five years in the case of ISO's granted to an
employee who is deemed to win an excess of ten percent of the combined voting
power of the Company's outstanding equity stock). Stock options may be granted
on terms providing for exercise either in whole or in part at any time or times
during their restrictive terms, or only in specified percentages at the stated
time periods or intervals during the term of the stock option.
Option Exercise. The exercise price of any stock option granted under the
1998 Stock Option and Incentive Plan is payable in full in cash, or its
equivalent as determined by the Committee. The Company may make loans available
to option holders to exercise stock options evidenced by a promissory note
executed by the option holder and secured by a pledge of Common Stock with fair
value at least equal to the principal of the promissory note, unless otherwise
determined by the Committee.
Amendment and Termination of Stock Option Plan. The Board of Directors may,
without affecting any outstanding stock options, from time to time revise or
amend the 1998 Stock Option and Incentive Plan, and may suspend or discontinue
it at any time. However, no such revision or amendment may, without stockholder
approval, increase the number of shares subject to the 1998 Stock Option and
Incentive Plan, modify the class of participants eligible to receive options
granted under the 1998 Stock Option and Incentive Plan or extend the maximum
option term under the 1998 Stock Option and Incentive Plan.
Outstanding Options. The Company has granted options to acquire 100,000
shares of Common Stock pursuant to the 1998 Stock Option and Incentive Plan. Of
these stock options, 40,000 have been granted to the two independent directors
and will vest six months from the date on which the options were granted. All
stock options granted pursuant to the 1998 Stock Option and Incentive Plan are
exercisable at a price of $3.00 per share. The 1998 Stock Option and Incentive
Plan provides that, in connection with any reorganization, merger,
consolidation, recapitalization, stock split or similar transaction, the
Committee will appropriately adjust the number of shares of Common Stock subject
to outstanding stock options and the total number of shares for which stock
options may be granted under the Plan.
STOCK OPTION GRANTS
The following table sets forth information concerning stock options granted
to date in 1998 to each member of the Board of Directors and Executive Officers,
the corporate secretary and an employee of ADAM.
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE
AT ASSUMED ANNUAL RATES
PERCENT OF TOTAL OF STOCK APPRECIATION FOR
OPTIONS GRANTED TO EXERCISE PRICE 10-YEAR OPTION TERM
EMPLOYEES DURING OR BASE PRICE -------------------------
NAME GRANT THE YEAR(1) (S/SHARE) DATE 5%($) 10%($)
---- ------ ------------------ -------------- ------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
James B. Rea, Jr............ 35,000 35% $3.00 6/17/08 $ $
Thomas H. Fitzgerald, Jr.... 20,000 20% $3.00 6/17/08 $ $
Thomas C. Corcovelos........ 20,000 20% $3.00 6/17/08 $ $
Michael B. Jeffers.......... 20,000 20% $3.00 6/17/08 $ $
Isabel Bautista............. 5,000 5% $3.00 6/17/08 $ $
</TABLE>
42
<PAGE> 49
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN SECURITYHOLDERS
The Company declared a 1:10 reverse stock split of its Common Stock,
effective May 26, 1998. The Company recently declared another 1:2 reverse 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 October 30, 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 10900 Wilshire
Boulevard, 9th Floor, Los Angeles, California 90024.
<TABLE>
<CAPTION>
PERCENTAGE
SHARES BENEFICIALLY
BENEFICIALLY OWNED(1)
OWNED -------------------
------------ BEFORE AFTER
NUMBER OFFERING OFFERING
------------ -------- --------
<S> <C> <C> <C>
Dr. Michael Klug............................................ 489,500 7.2% 5.7%
Pfalzburger Strasse 20, 10717 Berlin, Germany
Eureka Consulting, Inc...................................... 422,000 6.2% 4.9%
1350 E. Flamingo Road #742, Las Vegas, NV 89119
Prodevco, Inc............................................... 406,000 6.0% 4.7%
7135 Pintale Drive, Carlsbad, CA 92009
Klaus Conradi............................................... 300,000 4.4% 3.5%
Kurfurstendamm 15, Berlin, D-10719, Germany
Peter Hartmann.............................................. 451,750 6.6% 5.3%
James Buchanan Rea, Jr...................................... 121,250 1.8% 1.4%
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)........... 938,000 13.8% 11.0%
</TABLE>
- ---------------
* Less than one percent
(1) Beneficial ownership is determined in accordance with the applicable rules
under the Exchange 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 6,817,961 shares of Common Stock outstanding prior to this
Offering and 8,551,295 shares of Common Stock outstanding after this
Offering (assuming the sale of all of the shares of Common Stock offered
hereby), and conversion of the 5,000,000 shares of Series A Preferred Stock.
PREFERRED STOCK
As of August 31, 1998, the Company had 5,000,000 shares of Series A
Preferred Stock issued and outstanding, held by approximately 320 individual
preferred shareholders. All of the Series A Preferred Stock was converted into
1,666,661 shares of Common Stock in October 1998.
43
<PAGE> 50
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
1:10 reverse stock split, effective May 26, 1998, and the 1:2 reverse 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. 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
promulgated 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 (pre-reverse splits)
shares of Common Stock to American Diversified Corporation ("ADC"), a Delaware
corporation, the principal shareholders of which are by 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 1:10 reverse stock split
of the Common Stock, effective May 26, 1998, and 1:2 reverse stock split of the
Common Stock, effective August 20, 1998. The shares previously held by ADC have
since been transferred to various 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 unrelated third parties for
20,200,000 Deutchmarks (approximately $11,584,186, including accrued interest).
Cash proceeds from the sale of the Bearer Note were released from escrow and
transferred to the Company's German bank account on October 12, 1998. (See Note
2 to "Consolidated Financial Statements," page F-8) .
DESCRIPTION OF SECURITIES
Upon the closing of this Offering, the authorized capital stock of the
Company will consist of 20,000,000 shares of Common Stock, no par value, of
which 8,551,295 will be outstanding after the closing of this Offering (assuming
all of the shares offered hereby are sold, but assuming that none of the
Company's Over-Allotment Shares are sold and that the Underwriter's
Over-Allotment Option is not exercised) and 10,000,000 shares of the Company's
Preferred Stock, no par value, none of which will be outstanding. 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 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 shares of Preferred Stock may be issued from time to time in one 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.
44
<PAGE> 51
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.
Effective May 26, 1998, the Company declared a 1:10 reverse stock split of
its Common Stock. The Company subsequently declared a 1:2 reverse stock split of
its Common Stock, effective August 20, 1998. Based upon the number of shares
outstanding as of the date of this Prospectus, and after giving effect to the
sale of the Common Stock offered hereby and the conversion of the Series A
Preferred Stock, there will be 8,551,295 shares of Common Stock outstanding
(assuming no exercise of outstanding options, warrants or the Underwriter's
Over-Allotment Option, and no sale of the Company's Over-Allotment Shares).
PREFERRED STOCK
As of March 31, 1998, the Company sold 5,000,000 shares of Series A
Preferred Stock, par value $1 per share, pursuant to a private placement
conducted in Germany in reliance upon the exemption from U.S. securities laws
under Regulation S. The Series A Preferred Stock was entitled to an annual
cumulative preferential dividend of $.09 per share, when and as declared by the
Board of Directors. All of the Series A Preferred Stock were converted into
1,666,611 Shares of Common Stock in October 1998, and there are no shares of
Series A Preferred Stock currently outstanding. The Series A Preferred Stock
ranked 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 is
required to pay dividends on the Series A Preferred Stock which had accrued and
have not been paid for any period prior to the conversion the Series A Preferred
Stock, before any dividends may be paid or declared with respect to the Common
Stock.
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 are 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.
45
<PAGE> 52
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have approximately
8,551,295 shares of Common Stock outstanding after giving effect to the
conversion of the 5,000,000 shares of Series A Preferred stock and assuming the
sale of all of the 1,733,334 shares offered hereby but (assuming no exercise of
the Underwriters' Over-Allotment-Option). Of these shares the 1,733,334 shares
sold to the public in this Offering will be freely tradable without restrictions
or further registration under the Securities Act, except for any shares
purchased by affiliates of the Company within the meaning of the Securities Act,
which will be subject to the resale limitations of Rule 144. Of the remaining
6,817,916 shares, 5,151,350 shares are held by existing shareholders and were
issued by the Company in private transactions in reliance upon one or more
exemptions under the Securities Act and are "Restricted Securities" as that term
is defined in Rule 144 promulgated under the Securities Act, and 1,666,611
shares were issued upon conversion of the previously outstanding 5,000,000
shares of Series A Preferred Stock, which were previously issued in a private
placement completed as of March 31, 1998. See "Description of Capital
Stock -- Preferred Stock." The holders of restricted shares generally will be
entitled to sell these shares in the public securities market without
registration under the Securities Act to the extent permitted by Rule 144 (or
Rule 145, as applicable) promulgated under the Securities Act or any exemption
under the Securities Act. Generally, under Rule 144, each person holding
restricted securities for a period of one year may, every three months after
such one year holding period, sell in ordinary brokerage transactions or to
market makers an amount of shares equal to the greater of one percent of our
then outstanding Common Stock or the average weekly trading volume during the
four weeks prior to the proposed sale. In addition, sales under Rule 144 may be
made only through unsolicited "broker's transactions" or to a "market maker" and
are subject to various other conditions. The limitation on the number of shares
which may be sold under Rule 144 and the "broker's transaction" requirement do
not apply to restricted securities sold for the account of a person who is not
and has not been the Company's "affiliate" (as that term is defined in the Act)
during the three months prior to the proposed sale and who has beneficially
owned the securities for at least two years. Of the 6,817,961 restricted shares,
500,000 shares of Common Stock are currently eligible for resale under Rule 144,
and 6,317,961 shares of Common Stock will be eligible for resale under Rule 144
beginning in March 1999.
In addition, the Company intends to file a registration statement of Form
S-8 with respect to the shares of Common Stock issuable upon exercise of options
under the 1998 Stock Option and Incentive Plan (the "Plan"). The Plan authorizes
the issuance of options relating to up to 1,000,000 shares of Common Stock.
Currently, there are options covering 100,000 shares of Common Stock that have
been issued under the Plan which generally vest over three years. See "1998
Stock Option and Incentive Plan." Upon filing of such registration statement,
the holders of such options may, subject to vesting requirements, exercise and
sell their shares immediately without restriction, except affiliates who are
subject to certain volume limitations and manner of sale requirements of Rule
144. Upon registration, such shares may be sold in the market without
limitation. Sales of such shares may decrease the market price for the Company's
Common Stock.
Future sales of a substantial amount of Common Stock in the public market,
or the perception that such sales may occur, could adversely affect the market
price of the Common Stock prevailing from time to time in the public market. See
"Risk Factors -- Shares Eligible for Future Sale."
46
<PAGE> 53
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting agreement
(the "Underwriting Agreement"), the Company has agreed to sell to each of the
underwriters named below (the "Underwriters"), and each of the Underwriters, for
whom Millennium Financial Group, Inc. is acting as representative (the
"Representative"), has severally agreed to purchase, the number of shares of
Common Stock set forth opposite its name below.
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
----------- ----------------
<S> <C>
Millennium Financial Group, Inc. ...........................
--------
Total.............................................
========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters thereunder are subject to approval of certain legal matters by
counsel and to various other conditions. The nature of the Underwriters'
obligations is such that they are committed to purchase and pay for all of the
above shares of Common Stock if any are purchased. The Underwriters propose to
offer the shares of Common Stock directly to the public at the public offering
price set forth on the cover page of this Prospectus.
The Company granted to the Underwriters a 45-day over-allotment option to
purchase up to such additional number of shares of Common Stock equal to 15% of
the total number of Firm Shares sold in this Offering, at the public offering
price less the underwriting discount. The Underwriters may exercise such option
only to cover over-allotments made in connection with the sale of the shares of
Common Stock offered hereby.
The Company has also agreed to issue to the Representative warrants (the
"Representative's Warrants") to purchase the number of shares of the Company's
Common Stock equal to ten percent of the total number of Firm Shares sold in
this Offering at a price per share equal to 150% of the initial public offering
price of the Common Stock. The Representative's Warrants will be exercisable for
a period of five years commencing on the effective date of this offering and
will contain certain demand and "piggyback" registration rights with respect to
the Common Stock issuable upon the exercise of the Representative's Warrants.
The Warrants are not transferable (except to members of the syndicate and their
affiliates). The exercise price and the number of shares issuable upon exercise
may, under certain circumstances, be subject to adjustment pursuant to
antidillution provisions.
The Company has agreed to allow the Underwriters a discount equal to eight
percent of the proceeds from the sale of the Firm Shares and has agreed to pay
to the Representative a management fee equal to two percent of the proceeds from
the sale of shares in the Direct Offering. Additionally, the Company will pay
the Representatives, following the closing of this Offering, a non-accountable
expense allowance equal to three percent of the aggregate proceeds from the sale
of the Firm Shares, and will pay the Representative a non-accountable expense
allowance equal to two percent of the aggregate proceeds from the sale of shares
in the Direct Offering, less any applicable deposits.
The Company has further agreed to indemnify the Underwriters against
certain liabilities, losses and expenses, including liabilities under the
Securities Act, or to contribute to payments that the Underwriters may be
required to make in respect thereof. The Company also has agreed to reimburse
the Underwriters for certain out-of-pocket expenses incurred in connection with
the Offering.
The Underwriter has advised us that it does not intend to make sales to
discretionary accounts.
The Company's officers and directors who in the aggregate beneficially own
942,250 shares of Common Stock have agreed not to, directly or indirectly, sell,
offer, contract to sell, make any short sale, pledge or otherwise dispose of
such shares for a period of twelve months after the date of the closing of this
Offering.
47
<PAGE> 54
Prior to this offering, there has not been a public market for the Common
Stock. The public offering price of the Common Stock has been determined by
arms-length negotiation between the Company and the Representative. There is no
direct relation between the offering price of the Common Stock and the assets,
book value or net worth of the Company. Among the factors considered by the
Company and the Representative in pricing the Common Stock were the results of
operations, the current financial condition and future prospects of the Company,
the experience of management, the amount of ownership to be retained by present
shareholders, the general condition of the economy and the securities markets,
and the demand for similar securities of companies considered comparable to the
Company.
DIRECT OFFERING
Of the 1,733,334 shares offered hereby, the Company is offering up to
shares of Common Stock directly to the directors, officers, employees
and affiliates of the Company and their respective business contacts and
associates, at the Price to Public. The obligations of the investors to purchase
shares in the Direct Offering is contingent on the purchase of shares by the
Underwriters. There is no minimum number of shares to be purchased in the Direct
Offering. Any proceeds from the sale of shares in the Direct Offering will be
held in escrow until the closing of the underwritten offering and will be
refunded to the investors if the Underwriters do not purchase shares in the
underwritten offering. The Company has agreed to pay to the Representative a
management fee and a non-accountable expense allowance (less any applicable
deposits) in connection with the Direct Offering. See "Underwriting."
LEGAL MATTERS
The validity of the Securities offered hereby and certain tax matters will
be passed on by Jeffers, Wilson, Shaff & Falk, LLP, Irvine, California. Certain
legal matters will be passed upon for the Underwriters by Arter & Hadden LLP,
Los Angeles, California.
EXPERTS
The financial statements of the Company included in this Prospectus have
been audited by McGladrey and Pullen, LLP, independent auditors, as stated in
their report appearing in this Prospectus. Such financial statements have been
included in reliance upon the report of McGladrey & Pullen, LLP, and upon the
authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission, Washington, D.C. 20549, a
Registration Statement (the "Registration Statement") under the Securities Act,
with respect to the Common Stock offered hereby. This Prospectus, filed as part
of the Registration Statement, omits certain information contained in the
Registration Statement in accordance with the rules and regulations of the
Commission. Copies of the Registration Statement and the exhibits thereto are on
file at the offices of the Commission in Washington, D.C. and may be obtained at
rates prescribed by the Commission upon request to the Commission and inspected,
without charge, at the offices of the Commission. For further information,
reference is hereby made to the Registration Statement. Statements contained
herein concerning the provisions of any document are not necessarily complete
and in each instance, reference is made to the copy of such document filed as an
exhibit to the Registration Statement or otherwise filed with the Commission.
Each such statement is qualified in its entirety by such reference.
The Company has previously filed with the Commission, a registration
statement on Form 10-SB under the Exchange Act, which was declared effective on
March 2, 1998. As of the effective date of the Company's registration statement
on Form 10-SB, the Company became a "reporting company" under the Exchange Act.
The Company is a "small business issuer" and has filed reports pursuant to the
Exchange Act or forms applicable to small business issues.
48
<PAGE> 55
Such reports and other information can be inspected and copied at the
public reference facilities maintained by the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the Commission's regional offices at
Northwestern Atrium Center, 500 West Madison Street (Suite 1400), Chicago,
Illinois 60661 and 7 World Trade Center, New York, New York 10048. Copies of
such material can also be obtained from the Commission at prescribed rates
through its Public Reference Section at 450 Fifth Street, N.W., Washington, D.C.
20549. The Commission maintains a Web site that contains reports, proxy,
information statements and other information regarding registrants that file
electronically with the Commission. The Web site is located at
http://www.sec.gov. Statements contained in this Prospectus as to the contents
of any contract or any contract or other document referred to are not
necessarily complete, and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respect by such reference.
49
<PAGE> 56
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditor's Report................................ F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Stockholders' Equity............. F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Financial Statements............................... F-7 to F-12
JAMES BUCHANAN REA, INC.
Independent Auditor's Report................................ F-13
Balance Sheets as of December 31, 1997 and 1996............. F-14
Statements of Operations For the Years Ended December 31,
1997 and 1996............................................. F-15
Statements of Changes in Stockholders' Equity for the Years
ended December 31, 1997 and 1996.......................... F-16
Statements of Cash Flows For the Years Ended December 31,
1997 and 1996............................................. F-17
Notes to Financial Statements............................... F-18 to F-20
</TABLE>
F-1
<PAGE> 57
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
American Diversified Holdings, Inc.
Los Angeles, California
We have audited the accompanying consolidated balance sheets of American
Diversified Holdings, Inc. and subsidiaries as of August 31, 1998 and 1997, and
the related consolidated statements of operations, stockholders' equity and cash
flows for the year ended August 31, 1998 and the periods from February 5, 1997
(inception) to August 31, 1997 and 1998. 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 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, 1998 and 1997, and
the result of their operations and their cash flows for the periods indicated in
conformity with generally accepted accounting principles.
McGLADREY & PULLEN, LLP
New York, New York
October 16, 1998, except for
Note 10 as to which the date
is October 30, 1998
F-2
<PAGE> 58
AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
AUGUST 31, AUGUST 31,
1998 1997
----------- ----------
<S> <C> <C>
Cash and cash equivalents................................... $ 309,053 $ 2,264
Cash held in escrow (Note 2)................................ 11,621,493 --
Fees receivable............................................. 9,682 --
Capital stock subscriptions receivable (Note 6)............. -- 117,000
Marketable equity securities (cost $308,282)................ 281,117 --
VAT receivable (Note 9)..................................... 350,358 --
Prepaid expenses and other.................................. 139,378 4,220
Deferred offering costs..................................... 72,847 --
Other....................................................... 60,243 --
Goodwill, net of accumulated amortization of $21,636........ 351,143 --
Equipment, net of accumulated depreciation of $88,004 1998;
1997 -0-.................................................. 249,292 14,320
----------- ---------
$13,444,606 $ 137,804
=========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses..................... $ 975,220 $ 63,577
Note payable (Note 3)..................................... 387,597 --
Other..................................................... 86,439 --
----------- ---------
Total liabilities................................. 1,449,256 63,577
----------- ---------
Stockholders' Equity (Note 6 and 7):
Preferred stock, 10,000,000 shares authorized:
Series A 9% convertible redeemable cumulative preferred
stock, $1.00 par value; 5,000,000 shares designated:
Issued and outstanding, 5,000,000 and no shares,
respectively; preference in liquidation $5,000,000.... 4,725,766 --
Subscribed for but not paid for and not issued, 162,495
shares................................................ -- 150,545
Common stock, no par value; 20,000,000 shares authorized;
issued and outstanding 5,151,350 and 10,000,000 shares,
respectively (1997 prior to reverse stock splits)...... 12,236,710 96,754
Unpaid subscriptions as of December 22, 1997.............. -- (33,545)
Deficit accumulated during the development stage.......... (4,883,516) (139,527)
Accumulated other comprehensive income (loss)............. (83,610) --
----------- ---------
Total stockholders' equity........................ 11,995,350 74,227
----------- ---------
$13,444,606 $ 137,804
=========== =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE> 59
AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
FEBRUARY 5, FEBRUARY 5,
1997 1997
(INCEPTION) (INCEPTION)
TO YEAR ENDED TO
AUGUST 31, AUGUST 31, AUGUST 31,
1998 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Revenue.................................................. $ 45,585 $ 45,585 $ --
----------- ----------- ---------
Expenses (Note 3):
Advertising and promotion.............................. 1,981,264 1,974,044 7,220
Employee compensation and benefits..................... 1,031,054 1,010,213 20,841
Administrative......................................... 749,702 727,196 22,506
Professional fees...................................... 700,451 633,977 66,474
Travel and entertainment............................... 142,708 120,222 22,486
Depreciation........................................... 88,004 88,004 --
Rent................................................... 70,284 70,284 --
Amortization........................................... 21,636 21,636 --
Interest............................................... 19,789 19,789 --
Other.................................................. 19,037 19,037 --
Communication.......................................... 19,761 19,761 --
----------- ----------- ---------
4,843,690 4,704,163 139,527
----------- ----------- ---------
Operating (loss).................................... (4,798,105) (4,658,578) (139,527)
----------- ----------- ---------
Nonoperating income (loss):
Realized (loss) on sale of equity securities........... (12,583) (12,583) --
Gain on foreign currency transactions.................. 148,149 148,149 --
Interest income........................................ 4,023 4,023 --
----------- ----------- ---------
(Loss) before income taxes..................... (4,658,516) (4,518,989) (139,527)
Income taxes (Note 7).................................... -- -- --
----------- ----------- ---------
Net (loss)..................................... $(4,658,516) $(4,518,989) $(139,527)
=========== =========== =========
Average common shares outstanding........................ 3,421,170 5,085,838 500,000
=========== =========== =========
Basic and diluted (loss) per common share................ $ (1.43) $ (0.93) $ (0.28)
=========== =========== =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE> 60
AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
PERIOD FROM FEBRUARY 5, 1997 (INCEPTION) TO AUGUST 31, 1997 AND YEAR ENDED
AUGUST 31, 1998
<TABLE>
<CAPTION>
SERIES A 9%
CONVERTIBLE CUMULATIVE
PREFERRED STOCK (DEFICIT)
---------------------- COMMON STOCK ACCUMULATED ACCUMULATED
NUMBER ------------------------ OTHER DURING THE
OF NUMBER OF COMPREHENSIVE DEVELOPMENT UNPAID
SHARES AMOUNT SHARES AMOUNT INCOME STAGE SUBSCRIPTIONS
--------- ---------- ---------- ----------- ------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance February 5, 1997, date
of inception.................. $ -- $ -- $ $ -- $ --
Comprehensive income (loss):
Net loss...................... (139,527)
Stock Issued:
Common Stock:
For cash at $.01/share........ 4,750,000 47,795
For legal and other services
at $.01/share............... 5,250,000 48,959
Preferred Stock:
For cash at $1.00 share paid
by December 22, 1997........ 126,287 117,000
Unpaid for at December 22,
1997........................ 36,208 33,545 (33,545)
--------- ---------- ---------- ----------- -------- ----------- --------
Balance, August 31, 1997........ 162,495 150,545 10,000,000 96,754 (139,527) (33,545)
Comprehensive income (loss):
Translation (loss)............ (56,445)
Unrealized (loss) on
securities.................. (27,165)
Net (loss).................... (4,518,989)
Common Stock:
1 for 10 reverse stock
split....................... (9,000,000)
1 for 2 reverse stock split... (500,000)
Stock Issued:
For cash at $2.19/share..... 7,100 15,550
In exchange for note
receivable from affiliate
at $2.17/share............ 4,500,000 9,773,260
Interest on note
receivable................ 165,446
Sale of note receivable..... 1,517,100
For legal and other services
at $2.20/share............ 25,500 56,100
In exchange for shares of
JBRI...................... 118,750 237,500
Stock option compensation..... 375,000
Preferred stock:
For cash and securities at
$1.00/share, net of offering
cost of $262,284............ 4,837,505.. 4,575,221 33,545
Dividends paid $.045/share.... (225,000)
--------- ---------- ---------- ----------- -------- ----------- --------
Balance, August 31, 1998........ 5,000,000.. $4,725,766 5,151,350 $12,236,710 $(83,610) $(4,883,516) $ --
========= ========== ========== =========== ======== =========== ========
<CAPTION>
TOTAL
NOTES COMPRE-
RECEIVABLE HENSIVE
FROM INCOME
STOCKHOLDER (LOSS) TOTAL
----------- ------------- -----------
<S> <C> <C> <C>
Balance February 5, 1997, date
of inception.................. $ -- $ -- $ --
Comprehensive income (loss):
Net loss...................... $ (139,527) (139,527)
===========
Stock Issued:
Common Stock:
For cash at $.01/share........ 47,795
For legal and other services
at $.01/share............... 48,959
Preferred Stock:
For cash at $1.00 share paid
by December 22, 1997........
Unpaid for at December 22,
1997........................ 117,000
----------- -----------
Balance, August 31, 1997........ -- 74,227
Comprehensive income (loss):
Translation (loss)............ $ (56,445) (56,445)
Unrealized (loss) on
securities.................. (27,165) (27,165)
Net (loss).................... (4,518,989) (4,518,989)
-----------
$(4,602,599)
===========
Common Stock:
1 for 10 reverse stock
split.......................
1 for 2 reverse stock split...
Stock Issued:
For cash at $2.19/share..... 15,550
In exchange for note
receivable from affiliate
at $2.17/share............ (9,773,260)
Interest on note
receivable................ (165,446)
Sale of note receivable..... 9,938,706 11,455,806
For legal and other services
at $2.20/share............ 56,100
In exchange for shares of
JBRI...................... 237,500
Stock option compensation..... 375,000
Preferred stock:
For cash and securities at
$1.00/share, net of offering
cost of $262,284............ 4,608,766
Dividends paid $.045/share.... (225,000)
----------- -----------
Balance, August 31, 1998........ $ -- $11,995,350
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE> 61
AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
FEBRUARY 5, FEBRUARY 5,
1997 1997
(INCEPTION) TO YEAR ENDED (INCEPTION) TO
AUGUST 31, AUGUST 31, AUGUST 31,
1998 1998 1997
-------------- ----------- --------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net (loss).............................................. $(4,658,516) $(4,518,989) $(139,527)
Adjustments to reconcile net (loss) to net cash (used
in) operating activities:
Noncash expense, professional fees............... 105,059 56,100 48,959
Stock option compensation........................ 375,000 375,000 --
Loss on sale of securities....................... 12,583 12,583 --
(Gain) on foreign currency translation........... (148,149) (148,149) --
Depreciation and amortization.................... 110,528 110,528 --
Effect of changes in foreign currency............ (56,445) (56,445) --
Change in assets and liabilities:
Increase in receivables.......................... (377,578) (377,578) --
Increase in prepaid expenses and other........... (267,422) (263,202) (4,220)
Increase in accounts payable, accrued expenses
and other..................................... 1,038,708 975,131 63,577
----------- ----------- ---------
Net cash (used in) operating activities................. (3,866,232) (3,835,021) (31,211)
----------- ----------- ---------
Cash Flows from Investing Activities
Purchase of equipment................................. (338,184) (323,864) (14,320)
Purchase of J.B. Rea, Inc., net of cash acquired...... (146,973) (146,973) --
Purchase of marketable equity securities.............. (500,865) (500,865) --
Proceeds from sales of marketable equity securities... 180,000 180,000 --
----------- ----------- ---------
Net cash (used in) investing activities................. (806,022) (791,702) (14,320)
----------- ----------- ---------
Cash Flows from Financing Activities
Proceeds from issuance of preferred stock............. 4,725,766 4,725,766 --
Dividends paid on preferred stock..................... (195,401) (195,401) --
Proceeds from issuance of common stock................ 63,345 15,550 47,795
Increase in note payable.............................. 387,597 387,597 --
----------- ----------- ---------
Net cash provided by financing activities............... 4,981,307 4,933,512 47,795
----------- ----------- ---------
Increase in cash and cash equivalents................... 309,053 306,789 2,264
Cash and cash equivalents
Beginning............................................. -- 2,264 --
----------- ----------- ---------
Ending................................................ $ 309,053 $ 309,053 $ 2,264
=========== =========== =========
Supplemental schedule of noncash financing activities
Issuance of 288,000, 25,500 and 262,500 common shares
in exchange for services rendered.................. $ 105,059 $ 56,100 $ 48,959
=========== =========== =========
Issuance of 4,500,000 common shares in exchange for
notes receivable................................... $ 9,938,706 $ 9,938,706 $ --
=========== =========== =========
Issuance of 118,750 common shares in connection with
the acquisition of JB Rea, Inc..................... $ 237,500 $ 237,500 $ --
=========== =========== =========
Capital contribution associated with sale of note
receivable to unrelated investors.................. $ 1,517,100 $ 1,517,000 $ --
=========== =========== =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE> 62
AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF THE BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of business: American Diversified Holdings, Inc. (the "Company") was
organized on February 5, 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, through its subsidiaries, plans
to provide financial services and distribute financial service products to
individual and institutional investors in the United States, Germany and the
European Union countries. The Company's fiscal year ends on the last day of each
August.
The Company has established four wholly-owned subsidiaries:
<TABLE>
<CAPTION>
PLANNED OPERATION
-----------------
<S> <C>
American Diversified AG ("ADAG") Provider of financial services in Germany
American Diversified Asset Management, Inc. Investment adviser/distributor to planned
("ADAM") mutual funds
American Diversified Publications GmbH Will report on technological and financial
("AMDIV") developments
American Diversified Emissionsberatungs GmbH Will provide consulting support for
("AMEG") enterprises considering a public offering
valued in the U.S. or German marketplace
</TABLE>
Effective March 31, 1998, ADAM merged with and into James Buchanan Rea
Inc.("JBRI"), the investment advisor and distributor of the Rea-Graham Balanced
Fund(the "Fund"), subsequently renamed American Diversified Global Value Fund.
The merger was recorded as a purchase transaction which resulted in the exchange
of 118,750 shares of the Company's common stock valued at $237,500 and cash of
$160,875 for the common stock of JBRI. Goodwill of $372,779 was recorded upon
completion of the acquisition, which represents the excess of the purchase price
over the fair value of the net assets acquired. The pro forma effects on
operations as though the transaction occurred on February 5, 1997 (inception)
are not presented herein as the effects are immaterial.
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 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.
Goodwill: Goodwill is being amortized over seven years. Management
periodically evaluates the recoverability of goodwill, which would be adjusted
for a permanent decline in value, if any, as measured by the recoverability from
projected future cash flows from the acquired business.
Equipment: Equipment is recorded at cost and includes expenditures for
major improvements. Depreciation is determined using accelerated methods based
on five to ten year estimated useful lives. The equipment was placed in service
during fiscal 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 Company's functional currency is the U.S. dollar.
ADAG's functional currency is the Deutschmark (DM). Assets and liabilities of
the Company's foreign subsidiary are translated at exchange rates in effect at
the balance sheet date and the resulting adjustments are recorded as a
translation adjustment in stockholders' equity. The results
F-7
<PAGE> 63
AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
of operations of the Company's foreign subsidiary are translated using the
average exchange rates during the period.
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 and credit risk: The fair value of cash
and cash equivalents, cash held in escrow and capital stock subscriptions
receivable approximates carrying amounts because of the short term nature of
those instruments. The fair value of marketable equity securities is based on
quoted market prices. The carrying amount of the Company's debt approximates
fair value based on the short-term nature of the debt and rates available for
similar borrowings. A portion of the Company's cash and all of its cash held in
escrow is held in DM in German banks. The Company is exposed to the risk of
foreign exchange rate fluctuations and credit risk. The Company manages its
credit risk by limiting its deposits to banks with the highest credit ratings.
Marketable equity securities: Marketable equity securities consist of an
investment in the Fund, an open-end mutual fund, and is considered
available-for-sale. Such securities are carried at their current net asset value
with any unrealized gains or losses reported as other comprehensive income in
stockholders' equity. Realized gains and losses are recorded on the identified
cost method.
Advertising: The Company expenses the costs of advertising as incurred.
Loss per common share: The basic loss per common share is computed in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 128,
Earning Per Share, and 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).
Information about the computation of the basic loss per share follows:
<TABLE>
<CAPTION>
WEIGHTED
INCOME AVERAGE (LOSS)
(LOSS) SHARES PER SHARE
----------- --------- ---------
<S> <C> <C> <C>
1998
Net (loss)............................................... $(4,518,989)
Less: preferred stock dividends.......................... (225,000)
----------- --------- ------
$(4,743,989) 5,085,838 $(0.93)
=========== ========= ======
1997
Net (loss)............................................... $ (139,527) 500,000 $(0.28)
=========== ========= ======
From inception through 1998
Net (loss)............................................... $(4,658,516)
Less: preferred stock dividends.......................... (225,000)
----------- --------- ------
$(4,883,516) 3,421,170 $(1.43)
=========== ========= ======
</TABLE>
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
F-8
<PAGE> 64
AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
Recent accounting pronouncements: In June 1997, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 130, Reporting Comprehensive Income.
This statement requires companies to classify items of other comprehensive
income, such as unrealized gains and losses on available-for-sale securities, by
their nature in a financial statement and display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial position. The
Company adopted this statement in its fiscal year ended August 31, 1998.
In June 1997, the FASB also issued SFAS No. 131, Disclosures About Segments
of an Enterprise and Related Information. SFAS No. 131 established standards for
reporting information about operating and geographic segments and is effective
for financial statements issued for fiscal years beginning after December 15,
1997. The Company has determined that there will be no significant changes to
the Company's disclosures pursuant to the adoption of SFAS No 131.
NOTE 2. CASH HELD IN ESCROW
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, Germany. The 4% note, with a face amount 17.5
million Deutschmarks (DM), was due on December 31, 1999. For U.S. accounting
purposes the capital contribution (valued at $9,773,260) and the accumulated
interest thereon were reported as common stock issued and the note receivable
from stockholders was reflected as a reduction of stockholders' equity until
such time the note and accumulated interest are converted to cash.
On May 29, 1998, the note was sold, on a non-recourse basis, to a group of
unrelated investors for DM 20.2 million resulting in an economic gain of
$1,517,000. For U.S. accounting purposes the gain was reported as an adjustment
to the issuance price of share capital. The transaction was handled through
escrow agents in Berlin. On October 12, 1998 all of the cash held in escrow (DM
20,366,667) was released and transferred to the Company's German bank account.
NOTE 3. LINE OF CREDIT
ADAG has an unsecured line of credit of DM 300,000 which bears interest at
8.75%. During August 1998, ADAG's bank permitted a level of short-term
borrowings of DM 686,000, more than 100% above the contractually established
limit of DM 300,000, with the portion above the limit bearing interest at
12.75%. Subsequent to August 31, 1998, ADAG reduced its outstanding line of
credit within contractual limits. Interest paid on short-term borrowings during
the year ended August 31, 1998 was approximately $20,000.
NOTE 4. RELATED PARTY TRANSACTIONS
Legal and other services provided by the Company's stockholders and
reported as operating expenses in the accompanying financial statements totaled
$56,100 during the year ended August 31, 1998 and $48,959 in the period ended
August 31, 1997.
ADAM is the investment advisor to the Fund. Under the investment advisory
agreement, ADAM 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. ADAM also receives 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.
F-9
<PAGE> 65
AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ADAM has agreed to reimburse the Fund's expenses, including waiving its
fees to the extent the Fund's expenses exceed, on an annual basis, 1.88% of the
Fund's average daily net assets. In connection with this undertaking the Company
waived fees of $18,608 during the period ended August 31, 1998.
NOTE 5. LEASE COMMITMENT
During fiscal 1998, the Company and its subsidiaries operated in facilities
primarily under short-term lease arrangements. The Company's current long-term
lease requires monthly payments of approximately $3,700, plus utilities and VAT
and expires in 2002. Future minimum lease commitments are as follows:
<TABLE>
<S> <C>
1999...................................................... $ 44,000
2000...................................................... 44,000
2001...................................................... 44,000
2002...................................................... 15,000
--------
$147,000
========
</TABLE>
Subsequent to August 31, 1998, the Company entered into a long-term lease
for additional space in Los Angeles, California. The lease requires annual
minimum payments of approximately $103,000 through December 2001. The Company is
currently in negotiating the terms of a long-term lease for larger office
facilities in Berlin.
NOTE 6. PREFERRED STOCK
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 accrue daily and are payable semi-annually, when and as
declared, at an annual rate of $.09 per share commencing January 1, 1998. No
dividends can be paid on the common stock until any accrued, but not yet
declared dividends on the preferred stock have been paid.
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 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 (see Note 10).
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.
During 1998, the Company completed its sale of preferred stock in Germany
under Regulation S, guidelines established under the Securities Act of 1933 for
Securities offerings made outside of the United States. The Offering was
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. As of
July 31, 1998, all preferred stock subscriptions were collected.
NOTE 7. COMMON STOCK
In September 1997, the Company issued 4,500,000 shares (giving effect to
all stock splits and reverse stock splits, see below) of its common stock in
exchange for a note receivable (see Note 2) from an affiliate of one of the
Company's stockholders.
F-10
<PAGE> 66
AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, and increased issued and outstanding shares to 10 million
at August 31, 1997.
On May 26, 1998, the Board of Directors approved a one-for-ten reverse
stock split which decreased the number of the outstanding shares. On this date
the Company also amended their articles of incorporation to change the number of
authorized common stock to 20,000,000 and preferred shares to 10,000,000. On
August 20, 1998, the Board approved a second reverse stock split of one-for-two.
All fiscal 1998 transactions in the Company's common stock and the loss per
common share for all the periods presented have been adjusted to give effect to
the stock split and reverse stock splits.
The total common stock on the balance sheet as of August 31, 1998 and 1997,
respectively, includes $2,057,546 and $-0- of additional paid-in capital
resulting from transactions not directly related to issuances of common stock.
On September 25, 1998, the Company signed a letter of intent with
Millennium Financial Group, Inc. (the "Managing Underwriter") which outlines
plans for the Company's Initial Public Offering. Subject to terms and certain
conditions set forth in an underwriting agreement with the Company, the Managing
Underwriter will form a syndicate of underwriters to sell the Company's common
shares on a firm commitment basis for resale to the public. The letter of intent
anticipates that the Managing Underwriter will sell approximately one-half of
the 1,733,334 shares of common stock expected to be sold. The Company expects to
sell the balance of the shares in a direct offering in Europe. In addition to a
selling commission of 8% on the shares sold by the Managing Underwriter and an
expense allowance, the letter of intent provides for the Managing Underwriter to
receive warrants, exercisable for 5 years, to purchase up to 10% of the number
of shares of common stock sold in the offering at an exercise price of 150% of
the issue price per share.
NOTE 8. STOCK OPTION PLAN
On May 26, 1998 the Board of Directors approved the 1998 Stock Option and
Incentive Plan (the "Plan") which authorizes the granting of options to
employees and directors to purchase an aggregate of up to 1,000,000 shares, but
not more than 5% of the outstanding shares of the Company's common stock. The
Plan authorizes the Board of Directors, or a committee of the Board of
Directors, to grant Incentive Stock Options ("ISOs") as defined under section
422 of the Internal Revenue Code of 1986, as amended, options not so qualified
("NQSOs"), Dividend Equivalent Rights ("DERs"), Stock Appreciation Rights
("SARs"), and Phantom Stock Rights ("PSRs").
Options become exercisable six months after the date granted and expire ten
years after the date granted. During the year ended August 31, 1998, there were
100,000 options granted to buy common shares at an average exercise price of
$3.00. These are the only options outstanding as of August 31, 1998 and none of
the options are exercisable until December 17, 1998.
F-11
<PAGE> 67
AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Accordingly, only the intrinsic value of options granted has been
recognized as compensation cost. Had compensation cost for the Company's stock
option plan been determined based on the fair value at the grant date for awards
in 1998 consistent with the provisions of SFAS No. 123, the Company's net loss
and loss per share would have been reduced to the pro forma amounts indicated in
the table below. The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model:
<TABLE>
<CAPTION>
PERIOD
FROM INCEPTION
THROUGH YEAR ENDED
AUGUST 31, AUGUST 31,
1998 1998
-------------- -----------
<S> <C> <C>
Net (loss) -- as reported................................... $(4,658,516) $(4,518,989)
Net (loss) -- pro forma..................................... (4,711,016) (4,571,489)
Basic and diluted (loss) per share -- as reported........... (1.29) (0.93)
Basic and diluted (loss) per share -- pro forma............. (1.30) (0.94)
Assumptions:
Dividend yield............................................ --% --%
Expected volatility....................................... --% --%
Risk-free interest rate................................... 5.50% 5.50%
Expected lives............................................ 7 years 7 years
</TABLE>
The fair value of options granted during 1998 was $10.26 per share
NOTE 9. INCOME AND VALUE ADDED TAXES
The Company has approximately $4,000,000 of federal and state operating
loss carryforwards, which may be utilized to offset future taxable income. The
federal operating loss carryforwards expire in 2018 and the state operating loss
carryforwards expire in 2003. The tax benefit recognized for the net operating
losses have 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 and no income tax expense or benefit has
been allocated to the components of comprehensive income or loss.
The Company's operations in Germany have not yet generated taxable income
and therefore are not yet subject to income taxes. The Company's German
subsidiaries are subject to value added taxes ("VAT")on certain services,
supplies and equipment. The Company also will collect VAT on certain services
that it performs, e.g. consulting services. At August 31,1998 the Company had
refundable VAT of $350,358.
NOTE 10. SUBSEQUENT EVENTS
As of October 30, 1998 substantially all holders of the Company's preferred
stockholders had elected to convert their shares of preferred stock into common
stock at the stated rate of three preferred shares for one share of common
stock. The conversion had the effect of increasing the Company's outstanding
shares of common stock to approximately 6,818,000 shares.
F-12
<PAGE> 68
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.
By: /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-13
<PAGE> 69
JAMES BUCHANAN REA, INC.
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
ASSETS
<TABLE>
<CAPTION>
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-14
<PAGE> 70
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-15
<PAGE> 71
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-16
<PAGE> 72
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-17
<PAGE> 73
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 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:
<TABLE>
<CAPTION>
LIFE
IN YEARS
--------
<S> <C>
Automobiles................................................. 5
Capital improvements to executive office.................... 5 - 31
Furniture and equipment..................................... 5 - 7
</TABLE>
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.
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>
F-18
<PAGE> 74
JAMES BUCHANAN REA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 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 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.
NOTE 6. NET CAPITAL
The Company is subject to the net capital rule of the 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
F-19
<PAGE> 75
JAMES BUCHANAN REA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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-20
<PAGE> 76
================================================================================
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 1
Risk Factors.......................... 5
The Company........................... 13
Use of Proceeds....................... 14
Dilution.............................. 15
Dividend Policy....................... 16
Capitalization........................ 17
Description of Business............... 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operation........................ 34
Description of Property............... 36
Directors, Executive Officers and
Significant Employees............... 36
Remuneration of Directors and
Officers............................ 40
Security Ownership of Management and
Certain Securityholders............. 43
Interest of Management and Others in
Certain Transactions................ 44
Description of Securities............. 44
Shares Eligible for Future Sale....... 46
Underwriting.......................... 47
Direct Offering....................... 48
Legal Matters......................... 48
Experts............................... 48
Additional Information................ 48
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
------------------------
NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION AND REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO ITS DATE. THIS PROSPECTUS DOSE NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE
REGISTERED SECURITIES TO WHICH IT RELATES. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY
CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
================================================================================
================================================================================
1,733,334 SHARES
COMMON STOCK (NO PAR VALUE)
LOGO
AMERICAN DIVERSIFIED
HOLDINGS, INC.
------------------------
PROSPECTUS
------------------------
MILLENNIUM FINANCIAL
GROUP, INC.
November , 1998
================================================================================
<PAGE> 77
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. 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.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses in connection with this
Registration Statement. All of such expenses are estimates, other than the
filing fees payable to the Commission.
<TABLE>
<S> <C>
Filing Fee -- Securities and Exchange Commission............ $ 15,061.00
Exchange Listing Fee........................................ 70,000.00
Fees and Expenses of Accountants............................ 45,000.00
Fees and Expenses of Counsel................................ 100,000.00
Printing and Engraving Expenses............................. 50,000.00
Blue Sky Fees and Expenses..................................
Transfer Agent Fees......................................... 4,000.00
Miscellaneous Expenses...................................... 20,000.00
-----------
Total............................................. $
===========
</TABLE>
ITEM 26. 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 "Description of Security -- Preferred Stock," for a discussion of the
5,000,000 private placement of Series A Preferred Stock to approximately 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. The 2,375,000 shares issued to Mr. Hartmann have been converted into
118,750 shares of Common Stock following a 1:10 reverse stock split of the
Common Stock, effective May 26, 1998, and a 1:2 reverse stock split of the
Common Stock, effective August 20, 1998. See "Description of
Securities -- Common Stock" and "Security Ownership of Management and Certain
Securityholders."
II-1
<PAGE> 78
ITEM 27. EXHIBITS
(a) The following exhibits to this Registration Statement are filed
herewith:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S> <C>
1.1 -- Form of Underwriting Agreement+
1.2 -- Form of Warrant Agreement (filed as part of Exhibit 1.1)+
2.1 -- Plan and Agreement of Merger and Reorganization among JBRI,
ADAM, the Company and certain shareholders of JBRI*
3.1 -- Articles of Incorporation*
3.1.1 -- Amendment to Articles of Incorporation dated April 1, 1997**
3.1.2 -- Amendment to Articles of Incorporation dated November 20,
1997**
3.1.3 -- Amendment to Articles of Incorporation dated January 12,
1998**
3.1.4 -- Certificate of Designation re: Series A Preferred Stock,
dated February 5, 1998**
3.2 -- Bylaws of the registrant*
4.1 -- Specimen of Common Stock of Registrant*
4.2 -- Specimen of Series A Preferred Stock of Registrant**
5.1 -- Opinion of Jeffers, Wilson, Shaff & Falk, LLP+
10.1 -- Form of Investment Advisory Agreement of ADAM with
Rea-Graham Balanced Fund, Inc.**
10.2 -- Form of Investment Sub-Advisory Agreement of ADAM with Ladas
& Hulings, Inc.**
10.3 -- Employment Agreement among Registrant, ADAM and James B.
Rea, Jr.**
10.4 -- Employment Agreement between Registrant and Roland
Kuettner**
10.5 -- Employment Agreement between Registrant and Peter
Hartmann***
21.1 -- Subsidiaries***
23.1 -- Consent of McGladrey & Pullen, LLP+
23.2 -- Consent of Jeffers, Wilson, Shaff & Falk, LLP (filed as part
of Exhibit 5)+
24.1 -- Power of Attorney (included in the signature page)+
27.1 -- Financial Data Schedules***
</TABLE>
- ---------------
* Previously filed with the Company's Registration Statement on Form 10-SB,
which was filed with the Commission on January 14, 1998.
** Previously filed with Amendment No. 1 to the Company's Registration
Statement on Form 10-SB, which was filed with the Commission on May 11,
1998.
*** Previously filed with the Company's Registration Statement on Form SB-2
(File No. 333-62489), which was filed with the Commission on August 31,
1998.
+ Being filed with this Registration Statement.
(b) All financial statement schedules that might otherwise be required to
be filed as a party of this Registration Statement have been omitted because the
required information is shown in the financial statements or notes thereto, the
amounts involved are not significant, or the schedules are not applicable.
ITEM 28. UNDERTAKINGS
The undersigned small business issues hereby undertakes:
(1) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed in
the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any
action,
II-2
<PAGE> 79
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Company
will, unless in the opinion of the Company's counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(2) The undersigned registrant hereby undertakes that:
(i) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430(A) and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of
this registration statement as of the time it was declared effective.
(ii) For the purpose of determining any liability under the Act,
treat each post-effective amendment that contains a form of prospectus
as a new registration statement for the securities offered in
registration statement and that the Offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 80
SIGNATURES
In accordance with the requirements of the Securities Act, the registrant
certifies that is has reasonable grounds to believe that it meets all of the
requirements of filing on Form SB-2 and authorized this Registration Statement
to be signed on its behalf by the undersigned, in the City of Los Angeles, State
of California, on November 9, 1998.
AMERICAN DIVERSIFIED HOLDINGS, INC.
By: /s/ JAMES BUCHANAN REA, JR.
James Buchanan Rea, Jr.,
President and Chief Executive
Officer
In accordance with the requirements of the Securities Act of 1933, this
Amendment to the Registration Statement has been signed below by the following
persons in the capacities and on the dates stated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
/s/ PETER HARTMANN Chairman of the Board November 9, 1998
-------------------------------------------------------- and Vice President of
Peter Hartmann International
Development
/s/ JAMES BUCHANAN REA, JR. Director, President November 9, 1998
-------------------------------------------------------- and Chief Executive
James Buchanan Rea, Jr. Officer
* Chief Financial November 9, 1998
-------------------------------------------------------- Officer and Treasurer
Roland Kuettner
* Director November 9, 1998
--------------------------------------------------------
Thomas Corcovelos
* Director November 9, 1998
--------------------------------------------------------
Thomas H. Fitzgerald, Jr.
*By: /s/ JAMES BUCHANAN REA, JR.
James Buchanan Rea, Jr.
As Attorney-in-fact
</TABLE>
II-4
<PAGE> 81
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C> <C>
1.1 -- Form of Underwriting Agreement+
1.2 -- Form of Warrant Agreement (filed as part of Exhibit 1.1)+
2.1 -- Plan and Agreement of Merger and Reorganization among JBRI,
ADAM, the Company and certain shareholders of JBRI*
3.1 -- Articles of Incorporation*
3.1.1 -- Amendment to Articles of Incorporation dated April 1, 1997**
3.1.2 -- Amendment to Articles of Incorporation dated November 20,
1997**
3.1.3 -- Amendment to Articles of Incorporation dated January 12,
1998**
3.1.4 -- Certificate of Designation re: Series A Preferred Stock,
dated February 5, 1998**
3.2 -- Bylaws of the registrant*
4.1 -- Specimen of Common Stock of Registrant*
4.2 -- Specimen of Series A Preferred Stock of Registrant**
5.1 -- Opinion of Jeffers, Wilson, Shaff & Falk, LLP+
10.1 -- Form of Investment Advisory Agreement of ADAM with
Rea-Graham Balanced Fund, Inc.**
10.2 -- Form of Investment Sub-Advisory Agreement of ADAM with Ladas
& Hulings, Inc.**
10.3 -- Employment Agreement among Registrant, ADAM and James B.
Rea, Jr.**
10.4 -- Employment Agreement between Registrant and Roland
Kuettner**
10.5 -- Employment Agreement between Registrant and Peter
Hartmann***
21.1 -- Subsidiaries***
23.1 -- Consent of McGladrey & Pullen, LLP+
23.2 -- Consent of Jeffers, Wilson, Shaff & Falk, LLP (filed as part
of Exhibit 5)+
24.1 -- Power of Attorney (included in the signature page)+
27.1 -- Financial Data Schedules***
</TABLE>
- ---------------
* Previously filed with the Company's Registration Statement on Form 10-SB,
which was filed with the Commission on January 14, 1998.
** Previously filed with Amendment No. 1 to the Company's Registration
Statement on Form 10-SB, which was filed with the Commission on May 11,
1998.
*** Previously filed with the Company's Registration Statement on Form SB-2
(File No. 333-62489), which was filed with the Commission on August 31,
1998.
+ Being filed with this Registration Statement.
<PAGE> 1
EXHIBIT 1.1
[Form of Underwriting Agreement - Subject to Additional Review]
1,733,334 SHARES OF COMMON STOCK
AMERICAN DIVERSIFIED HOLDINGS, INC.
UNDERWRITING AGREEMENT
New York, New York
, 1998
MILLENNIUM FINANCIAL GROUP, INC.
As Representative of the
Several Underwriters listed on Schedule A hereto
235 West 56th Street, Suite 37E
New York, New York 10019
Ladies and Gentlemen:
American Diversified Holdings, Inc., a Nevada corporation (the
"Company"), confirms its agreement with Millennium Financial Group, Inc.
("Millennium"), and each of the underwriters named in Schedule A hereto
(collectively, the "Underwriters," which term shall also include any underwriter
substituted as hereinafter provided in Section 11), for whom Millennium is
acting as representative (in such capacity, Millennium shall hereinafter
sometimes be referred to as "you" or the "Representative"), with respect to the
sale by the Company and the purchase by the Underwriters, acting severally and
not jointly, of the respective numbers of shares of the Company's common stock,
no par value ("Common Stock") set forth in Schedule A hereto. The aggregate
[________] shares of Common Stock set forth on Schedule A are hereinafter
referred to as the "Firm Securities." In addition, the Company has informed the
Representative that the Company will place (the "Direct Offering") an estimated
[______] shares of the Company's Common Stock (the "Direct Securities") directly
to investors located primarily in Europe. The Firm Securities and the Direct
Securities are hereinafter collectively referred to as the "Offered Securities."
Upon your request, as provided in Section 2(b) of this Agreement, the
Company shall also issue and sell to the Underwriters, acting severally and not
jointly, their proportionate share, based upon the ratio that the Firm
Securities bears to the Offered Securities, of an additional [_______] shares of
Common Stock for the purpose of covering over-allotments, if any. The remainder
of the [_______] shares of Common Stock shall be available to the Company to
cover over-allotments, if any, in connection with the Direct Offering. The
[_______] shares of Common Stock are hereinafter referred to as the "Option
Securities." The Company also proposes to issue and sell to the Representative
warrants (the "Representative's Warrants") pursuant to the Representative's
Warrant Agreement (the "Representative's Warrant Agreement") for the purchase of
a number of shares of Common Stock equal to ten percent (10%) of the Firm
Securities. The Shares of Common Stock issuable upon exercise of the
Representative's Warrants are hereinafter referred to as the "Representative's
Securities." The Offered Securities, the Option Securities, the Representative's
Warrants and the Representative's Securities (collectively, hereinafter referred
to as the "Securities") are more fully described in the Registration Statement
and the Prospectus referred to below.
The Company has 5,000,000 shares of Series A Preferred Stock issued and
outstanding, which are held by approximately 320 shareholders (the "Converting
Shareholders") and are convertible into 1,666,667 shares of Common Stock (the
"Converted Securities"). All of the shares of Series A Preferred Stock not
converted by the Converting Shareholders prior to the offering will be
automatically converted upon the completion of the offering. The Converted
Securities are not being registered for resale under the offering.
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents
and warrants to, and agrees with, each of the Underwriters as of the date
hereof, and as of the Closing Date (as hereinafter defined) and each Option
Closing Date (as hereinafter defined), if any, as follows:
1
<PAGE> 2
(a) The Company has prepared and filed with the Securities and
Exchange Commission (the "Commission") a registration statement, and an
amendment or amendments thereto, on Form SB-2 (No. 333-62489), including any
related preliminary prospectus ("Preliminary Prospectus"), for the registration
of the Offered Securities and the Option Securities under the Securities Act of
1933, as amended (the "Act"), which registration statement and amendment or
amendments have been prepared by the Company in conformity with the requirements
of the Act, and the rules and regulations (the "Regulations") of the Commission
under the Act. The Company will promptly file a further amendment to said
registration statement in the form heretofore delivered to the Underwriters and
will not file any other amendment thereto to which the Underwriters shall have
objected in writing after having been furnished with a copy thereof. Except as
the context may otherwise require, such registration statement, as amended, on
file with the Commission at the time the registration statement becomes
effective (including the prospectus, financial statements, schedules, exhibits
and all other documents filed as a part thereof or incorporated therein
(including, but not limited to those documents or information incorporated by
reference therein) and all information deemed to be a part thereof as of such
time pursuant to paragraph (b) of Rule 430(A) of the Regulations)), is
hereinafter called the "Registration Statement", and the form of prospectus in
the form first filed with the Commission pursuant to Rule 424(b) of the
Regulations, is hereinafter called the "Prospectus." For purposes hereof, "Rules
and Regulations" mean the rules and regulations adopted by the Commission under
either the Act or the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), as applicable.
(b) Neither the Commission nor any state regulatory authority has
issued any order preventing or suspending the use of any Preliminary Prospectus,
the Registration Statement or Prospectus or any part thereof and no proceedings
for a stop order suspending the effectiveness of the Registration Statement or
any of the Company's securities have been instituted or are pending or
threatened. Each of the Preliminary Prospectus, the Registration Statement and
Prospectus at the time of filing thereof conformed with the requirements of the
Act and the Rules and Regulations, and none of the Preliminary Prospectus, the
Registration Statement or Prospectus at the time of filing thereof contained an
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading, except that this
representation and warranty does not apply to statements made in reliance upon
and in conformity with written information furnished to the Company with respect
to the Underwriters by or on behalf of the Underwriters expressly for use in
such Preliminary Prospectus, Registration Statement or Prospectus or any
amendment thereof or supplement thereto.
(c) When the Registration Statement becomes effective and at all
times subsequent thereto up to the Closing Date (as defined herein) and each
Option Closing Date (as defined herein), if any, and during such longer period
as the Prospectus may be required to be delivered in connection with sales by
the Underwriters or a dealer, the Registration Statement and the Prospectus will
contain all statements which are required to be stated therein in accordance
with the Act and the Rules and Regulations, and will conform to the requirements
of the Act and the Rules and Regulations; neither the Registration Statement nor
the Prospectus, nor any amendment or supplement thereto, will contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, provided, however,
that this representation and warranty does not apply to statements made or
statements omitted in reliance upon and in conformity with information furnished
to the Company in writing by or on behalf of any Underwriter expressly for use
in the Preliminary Prospectus, Registration Statement or Prospectus or any
amendment thereof or supplement thereto.
(d) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the state of its incorporation.
Except as set forth in the Prospectus, the Company does not own an interest in
any corporation, partnership, trust, joint venture or other business entity. The
Company is duly qualified and licensed and in good standing as a foreign
corporation in each jurisdiction in which its ownership or leasing of any
properties or the character of its operations requires such qualification or
licensing. The Company has all requisite power, and has obtained any and all
necessary authorizations, approvals, orders, licenses, certificates, franchises
and permits of and from all governmental or regulatory officials and bodies
(including, without limitation, those having jurisdiction over environmental or
similar matters), to own or lease its properties and conduct its business
2
<PAGE> 3
income and other taxes in such financial statements are sufficient for the
payment of all accrued and unpaid federal, state, local and foreign income
taxes, interest, penalties, assessments or deficiencies applicable to the
Company, whether disputed or not, for the applicable period then ended and
periods prior thereto; adequate allowance for doubtful accounts has been
provided for unindemnified losses due to the operations of the Company; and the
statements of income do not contain any items of special or nonrecurring income
not earned in the ordinary course of business, except as specified in the notes
thereto.
(g) The Company (i) has paid all federal, state, local, and foreign
taxes for which it is liable, or has established adequate reserves for such
taxes, (ii) has furnished all information returns it is required to furnish
pursuant to the Internal Revenue Code of 1986, as amended (the "Code"), (iii)
has established adequate reserves for such taxes which are not due and payable,
and (iv) does not have any tax deficiency or claims outstanding, proposed or
assessed against it, other than as described in the Registration Statement.
(h) No transfer tax, stamp duty or other similar tax is payable by or
on behalf of the Underwriters in connection with (i) the issuance by the Company
of the Securities, (ii) the purchase by the Underwriters of the Firm Securities
and the Option Securities from the Company and the purchase by the
Representative of the Representative's Warrants from the Company, (iii) the
consummation by the Company of any of its obligations under this Agreement, or
(iv) resales of the Firm Securities and the Option Securities in connection with
the distribution contemplated hereby.
(i) The Company maintains insurance policies, including, but not
limited to, general liability, malpractice and property insurance, which insures
the Company, and its employees, against such losses and risks generally insured
against by comparable businesses. The Company (A) has not failed to give notice
or present any insurance claim with respect to any matter, including but not
limited to the Company 's business, property or employees, under any insurance
policy or surety bond in a due and timely manner, (B) does not have any disputes
or claims against any underwriter of such insurance policies or surety bonds or
has failed to pay any premiums due and payable thereunder, or (C) has failed to
comply with all conditions contained in such insurance policies and surety
bonds. There are no facts or circumstances under any such insurance policy or
surety bond which would relieve any insurer of its obligation to satisfy in full
any valid claim of the Company.
(j) There is no action, suit, proceeding, inquiry, arbitration,
investigation, litigation or governmental proceeding (including, without
limitation, those having jurisdiction over environmental or similar matters),
domestic or foreign, pending or, to the best of the Company's knowledge,
threatened against (or circumstances that may give rise to the same), or
involving the properties or business of, the Company which (i) questions the
validity of the capital stock of the Company, this Agreement, or the
Representative's Warrant Agreement, or of any action taken or to be taken by the
Company pursuant to or in connection with this Agreement or the Representative's
Warrant Agreement, (ii) is required to be disclosed in the Registration
Statement which is not so disclosed (and such proceedings as are summarized in
the Registration Statement are accurately summarized in all material respects),
or (iii) might materially and adversely affect the condition, financial or
otherwise, or the earnings, position, prospects, stockholders' equity, value,
operation, properties, business or results of operations of the Company.
(k) The Company has full legal right, power and authority to
authorize, issue, deliver and sell the Securities, enter into this Agreement and
the Representative's Warrant Agreement and to consummate the transactions
provided for in this Agreement and the Representative's Warrant Agreement; and
this Agreement and the Representative's Warrant Agreement have each been duly
and properly authorized, executed and delivered by the Company. Each of this
Agreement and the Representative's Warrant Agreement constitutes a legal, valid
and binding agreement of the Company enforceable against the Company in
accordance with its terms, and none of the Company's issue and sale of the
Securities, execution or delivery of this Agreement or the Representative's
Warrant Agreement, its performance hereunder and thereunder, its consummation of
the transactions contemplated herein and therein, or the conduct of its business
as described in the Registration Statement, the Prospectus, and any amendments
or supplements thereto, conflicts with or will conflict with or results or will
result in any breach or violation of any of the terms or provisions of, or
constitutes or will constitute a default under, or result in the creation or
imposition of any lien, charge, claim, encumbrance, pledge, security interest,
defect or other restriction or equity of any kind whatsoever upon, any
4
<PAGE> 4
property or assets (tangible or intangible) of the Company pursuant to the terms
of (i) the articles of incorporation or by-laws of the Company, (ii) any
license, contract, collective bargaining agreement, indenture, mortgage, deed of
trust, lease, voting trust agreement, stockholders agreement, note, loan or
credit agreement or any other agreement or instrument to which the Company is a
party or by which the Company is or may be bound or to which its or assets
(tangible or intangible) is or may be subject, or any indebtedness, or (iii) any
statute, judgment, decree, order, rule or regulation applicable to the Company
of any arbitrator, court, regulatory body or administrative agency or other
governmental agency or body (including, without limitation, those having
jurisdiction over environmental or similar matters), domestic or foreign, having
jurisdiction over the Company or any of its activities or properties.
(l) No consent, approval, authorization or order of, and no filing
with, any court, regulatory body, government agency or other body, domestic or
foreign, is required for the issuance of the Securities pursuant to the
Prospectus and the Registration Statement, the performance of this Agreement and
the Representative's Warrant Agreement and the transactions contemplated hereby
and thereby, including without limitation, any waiver of any preemptive, first
refusal or other rights that any entity or person may have for the issue and/or
sale of any of the Securities, except such as have been or may be obtained under
the Act or may be required under state securities or Blue Sky laws in connection
with the Underwriters' purchase and distribution of the Firm Securities and the
Option Securities, and the Representative's Warrants to be sold by the Company
hereunder.
(m) All executed agreements, contracts or other documents or copies
of executed agreements, contracts or other documents filed as exhibits to the
Registration Statement to which the Company is a party or by which it or they
may be bound or to which its assets, properties or business may be subject have
been duly and validly authorized, executed and delivered by the Company and
constitute the legal, valid and binding agreements of the Company, as the case
may be, enforceable against it in accordance with its terms. The descriptions in
the Registration Statement of agreements, contracts and other documents are
accurate and fairly present the information required to be shown with respect
thereto by Form SB-2, and there are no contracts or other documents which are
required by the Act to be described in the Registration Statement or filed as
exhibits to the Registration Statement which are not described or filed as
required, and the exhibits which have been filed are complete and correct copies
of the documents of which they purport to be copies.
(n) Subsequent to the respective dates as of which information is set
forth in the Registration Statement and Prospectus, and except as may otherwise
be indicated or contemplated herein or therein, the Company has not (i) issued
any securities or incurred any liability or obligation, direct or contingent,
for borrowed money, (ii) entered into any transaction other than in the ordinary
course of business, or (iii) declared or paid any dividend or made any other
distribution on or in respect of its capital stock of any class, and there has
not been any change in the capital stock, or any change in the debt (long or
short term) or liabilities or material adverse change in or affecting the
general affairs, management, financial operations, stockholders' equity or
results of operations of the Company.
(o) Except as may be set forth in the Registration Statement, no
default exists in the due performance and observance of any term, covenant or
condition of any license, contract, collective bargaining agreement, indenture,
mortgage, installment sale agreement, lease, deed of trust, voting trust
agreement, stockholders agreement, partnership agreement, note, loan or credit
agreement, purchase order, or any other agreement or instrument evidencing an
obligation for borrowed money, or any other material agreement or instrument to
which the Company is a party or by which the Company may be bound or to which
the property or assets (tangible or intangible) of the Company is subject or
affected.
(p) To the best of the Company's knowledge it has generally enjoyed a
satisfactory employer-employee relationship with its employees and is in
compliance with all federal, state, local, and foreign laws and regulations
respecting employment and employment practices, terms and conditions of
employment and wages and hours. There are no pending investigations involving
the Company by the U.S. Department of Labor, or any other governmental agency
responsible for the enforcement of such federal, state, local, or foreign laws
and regulations. There is no unfair labor practice charge or complaint against
the Company pending before the National Labor Relations Board or any lockout,
strike, picketing, boycott, dispute, slowdown or stoppage pending or threatened
against or
5
<PAGE> 5
involving the Company, or any predecessor entity, and none has ever occurred. No
representation question exists respecting the employees of the Company, and no
collective bargaining agreement or modification thereof is currently being
negotiated by the Company. No grievance or arbitration proceeding is pending
under any expired or existing collective bargaining agreements of the Company.
No labor dispute with the employees of the Company exists, or, is imminent.
(q) Except as may be set forth in the Registration Statement, the
Company does not maintain, sponsor or contribute to any program or arrangement
that is an "employee pension benefit plan," an "employee welfare benefit plan,"
or a "multi-employer plan" as such terms are defined in Sections 3(2), 3(1) and
3(37), respectively, of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA") ("ERISA Plans"). Except as may be set forth in the
Registration Statement, the Company does not maintain or contribute, now or at
any time previously, to a defined benefit plan, as defined in Section 3(35) of
ERISA. No ERISA Plan (or any trust created thereunder) has engaged in a
"prohibited transaction" within the meaning of Section 406 of ERISA or Section
4975 of the Code, which could subject the Company to any tax penalty on
prohibited transactions and which has not adequately been corrected. Each ERISA
Plan is in compliance with all reporting, disclosure and other requirements of
the Code and ERISA as they relate to any such ERISA Plan. Determination letters
have been received from the Internal Revenue Service with respect to each ERISA
Plan which is intended to comply with Code Section 401(a), stating that such
ERISA Plan and the attendant trust are qualified thereunder. The Company has
never completely or partially withdrawn from a "multi-employer plan."
(r) Neither the Company, nor any of its employees, directors,
stockholders, partners, or affiliates (within the meaning of the Rules and
Regulations) has taken or will take, directly or indirectly, any action designed
to or which has constituted or which might be expected to cause or result in,
under the Exchange Act, or otherwise, stabilization or manipulation of the price
of any security of the Company to facilitate the sale or resale of the
Securities or otherwise.
(s) Except as otherwise disclosed in the Prospectus, none of the
patents, patent applications, trademarks, service marks, trade names and
copyrights, and licenses and rights to the foregoing presently owned or held by
the Company, are in dispute so far as known by the Company or are in any
conflict with the right of any other person or entity. Except as otherwise
disclosed in the Prospectus, the Company (i) owns or has the right to use, free
and clear of all liens, charges, claims, encumbrances, pledges, security
interests, defects or other restrictions or equities of any kind whatsoever, all
patents, trademarks, service marks, trade names and copyrights, technology and
licenses and rights with respect to the foregoing, used in the conduct of its
business as now conducted or proposed to be conducted without infringing upon or
otherwise acting adversely to the right or claimed right of any person,
corporation or other entity under or with respect to any of the foregoing and
(ii) is not obligated or under any liability whatsoever to make any payment by
way of royalties, fees or otherwise to any owner or licensee of, or other
claimant to, any patent, trademark, service mark, trade name, copyright,
know-how, technology or other intangible asset, with respect to the use thereof
or in connection with the conduct of its business or otherwise.
(t) The Company has good and marketable title to, or valid and
enforceable leasehold estates in, all items of real and personal property stated
in the Prospectus to be owned or leased by it, free and clear of all liens,
charges, claims, encumbrances, pledges, security interests, defects, or other
restrictions or equities of any kind whatsoever, other than those referred to in
the Prospectus and liens for taxes not yet due and payable.
(u) McGladrey & Pullen, LLP, whose report is filed with the
Commission as a part of the Registration Statement, are independent certified
public accountants as required by the Act and the Rules and Regulations.
(v) The Company has agreed to cause to be duly executed agreements
pursuant to which each of the Company's executive officers, directors, and
certain shareholders have agreed not to, directly or indirectly, sell, assign,
transfer, or otherwise dispose of any shares of Common Stock or securities
convertible into, exercisable or exchangeable for or evidencing any right to
purchase or subscribe for any shares of Common Stock for a period of
6
<PAGE> 6
twelve (12) months following the effective date of the Registration Statement.
The Company will cause the Transfer Agent (as hereinafter defined) to mark an
appropriate legend on the face of stock certificates representing all of such
securities and to place "stop transfer" orders on the Company's stock ledgers.
(w) There are no claims, payments, issuances, arrangements or
understandings, whether oral or written, for services in the nature of a
finder's or origination fee with respect to the sale of the Securities hereunder
or any other arrangements, agreements, understandings, payments or issuance with
respect to the Company, or any of its officers, directors, stockholders,
partners, employees or affiliates, that may affect the Underwriters'
compensation, as determined by the National Association of Securities Dealers,
Inc. ("NASD").
(x) The Offered Securities and Option Securities have been approved
for quotation on [the National Association of Securities Dealers Automated
Quotation System].
(y) Neither the Company, nor any of its officers, employees, agents
or any other person acting on behalf of the Company has, directly or indirectly,
given or agreed to give any money, gift or similar benefit (other than legal
price concessions to customers in the ordinary course of business) to any
customer, supplier, employee or agent of a customer or supplier, or official or
employee of any governmental agency (domestic or foreign) or instrumentality of
any government (domestic or foreign) or any political party or candidate for
office (domestic or foreign) or other person who was, is, or may be in a
position to help or hinder the business of the Company (or assist the Company in
connection with any actual or proposed transaction) which (a) might subject the
Company, or any other such person to any damage or penalty in any civil,
criminal or governmental litigation or proceeding (domestic or foreign), (b) if
not given in the past, might have had a material adverse effect on the assets,
business or operations of the Company, or (c) if not continued in the future,
might adversely affect the assets, business, condition, financial or otherwise,
earnings, position, properties, value, operations or prospects of the Company.
The Company's internal accounting controls are sufficient to cause the Company
to comply with the Foreign Corrupt Practices Act of 1977, as amended.
(z) Except as set forth in the Prospectus, no officer, director,
stockholder or partner of the Company, or any "affiliate" or "associate" (as
these terms are defined in Rule 405 promulgated under the Rules and Regulations)
of any of the foregoing persons or entities has or has had, either directly or
indirectly, (i) an interest in any person or entity which (A) furnishes or sells
services or products which are furnished or sold or are proposed to be furnished
or sold by the Company, or (B) purchases from or sells or furnishes to the
Company any goods or services, or (ii) a beneficiary interest in any contract or
agreement to which the Company is a party or by which it may be bound or
affected. Except as set forth in the Prospectus under "Certain Transactions,"
there are no existing agreements, arrangements, understandings or transactions,
or proposed agreements, arrangements, understandings or transactions, between or
among the Company, and any officer, director, or 5% or greater security holder
of the Company, or any partner, affiliate or associate of any of the foregoing
persons or entities.
(aa) Any certificate signed by any officer of the Company, and
delivered to the Underwriters or to Underwriters' Counsel (as defined herein)
shall be deemed a representation and warranty by the Company to the Underwriters
as to the matters covered thereby.
(bb) The minute books of the Company have been made available to the
Underwriters and contain a complete summary of all meetings and actions of the
directors (including committees thereof) and stockholders of each of the
Company, since the time of its incorporation, and reflect all transactions
referred to in such minutes accurately in all material respects.
(cc) Except and to the extent described in the Prospectus, no holders
of any securities of the Company or of any options, warrants or other
convertible or exchangeable securities of the Company have the right to include
any securities issued by the Company in the Registration Statement or any
registration statement to be filed by the Company or to require the Company to
file a registration statement under the Act and no person or entity holds any
anti-dilution rights with respect to any securities of the Company.
7
<PAGE> 7
(dd) The Company has as of the effective date of the Registration
Statement entered into employment agreements with James Buchanan Rea, Jr.,
Roland Kuettner and Peter Hartmann in the forms filed as Exhibits 10.3, 10.4 and
10.5, respectively, to the Registration Statement.
(ee) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurance that (i) transactions are executed in
accordance with management's general or specific authorizations; (ii)
transactions are recorded as necessary to permit preparations of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorizations; and (iv) the
recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
2. PURCHASE, SALE AND DELIVERY OF THE SECURITIES: DIRECT OFFERING.
(a) On the basis of the representations, warranties, covenants and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company agrees to sell to each Underwriter, and each Underwriter,
severally and not jointly, agrees to purchase from the Company at a price of
$___ [92% of the public offering price] per share of Common Stock, that number
of Firm Securities set forth in Schedule A opposite the name of such
Underwriter, subject to such adjustment as the Representative in its discretion
shall make to eliminate any sales or purchases of fractional shares, plus any
additional number of Firm Securities which such Underwriter may become obligated
to purchase pursuant to the provisions of Section 11 hereof. The parties
acknowledge and agree that the difference between the public offering price per
share of Common Stock and the per share purchase price payable by the
Underwriters for the Firm Securities (and, if applicable, the Option Securities)
represents an eight percent (8%) fee comprised of the following: (i) a four
percent (4%) selling commission, (ii) a two percent (2%) underwriting fee, and
(iii) a two percent (2%) management fee.
(b) In addition, on the basis of the representations, warranties,
covenants and agreements herein contained, but subject to the terms and
conditions herein set forth, the Company hereby grants an option to the
Underwriters, severally and not jointly, to purchase all or any part of their
proportionate share of the Option Securities, based upon the ratio that the Firm
Securities bears to the Offered Securities, at a price of $___ [92% of the
public offering price] per share of Common Stock. The option granted hereby will
expire forty-five (45) days after (i) the date the Registration Statement
becomes effective, if the Company has elected not to rely on Rule 430A under the
Rules and Regulations, or (ii) the date of this Agreement if the Company has
elected to rely upon Rule 430A under the Rules and Regulations, and may be
exercised in whole or in part from time to time only for the purpose of covering
over-allotments which may be made in connection with the offering and
distribution of the Firm Securities upon notice by the Representative to the
Company setting forth the number of Option Securities as to which the several
Underwriters are then exercising the option and the time and date of payment and
delivery for any such Option Securities. Any such time and date of delivery (an
"Option Closing Date") shall be determined by the Representative, but shall not
be later than three (3) full business days after the exercise of said option,
nor in any event prior to the Closing Date, as hereinafter defined, unless
otherwise agreed upon by the Representative and the Company. Nothing herein
contained shall obligate the Underwriters to make any over-allotments. No Option
Securities shall be delivered unless the Firm Securities shall be simultaneously
delivered or shall theretofore have been delivered as herein provided.
(c) Payment of the purchase price for, and delivery of certificates
for, the Firm Securities shall be made at the offices of the Representative at
235 West 56th Street, Suite 37E, New York, New York 10019, or at such other
place as shall be agreed upon by the Representative and the Company. Such
delivery and payment shall be made at 10:00 a.m. (New York City time) on , 1998
or at such other time and date as shall be agreed upon by the Representative and
the Company, but not less than three (3) nor more than five (5) full business
days after the effective date of the Registration Statement (such time and date
of payment and delivery being herein called the "Closing Date"). In addition, in
the event that any or all of the Option Securities are purchased by the
Underwriters, payment of the purchase price for, and delivery of certificates
for, such Option Securities shall be made at the above-mentioned office of the
Representative or at such other place as shall be agreed upon by the
Representative and the Company on each
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Option Closing Date as specified in the notice from the Representative to the
Company. Delivery of the certificates for the Firm Securities and the Option
Securities, if any, shall be made to the Underwriters against payment by the
Underwriters, severally and not jointly, of the purchase price for the Firm
Securities and the Option Securities, if any, to the order of the Company for
the Firm Securities and the Option Securities, if any, by New York Clearing
House funds. In the event such option is exercised, the Underwriters, acting
severally and not jointly, shall purchase that proportion of the total number of
Option Securities then being purchased which the number of Firm Securities set
forth in Schedule A hereto opposite the name of such Underwriter bears to the
total number of Firm Securities, subject in each case to such adjustments as the
Representative in its discretion shall make to eliminate any sales or purchases
of fractional shares. Certificates for the Firm Securities and the Option
Securities, if any, shall be in definitive, fully registered form, shall bear no
restrictive legends and shall be in such denominations and registered in such
names as the Underwriters may request in writing at least two (2) business days
prior to the Closing Date or the relevant Option Closing Date, as the case may
be. The certificates for the Firm Securities and the Option Securities, if any,
shall be made available to the Representative at such office or such other place
as the Representative may designate for inspection, checking and packaging no
later than 9:30 a.m. on the last business day prior to the Closing Date or the
relevant Option Closing Date, as the case may be.
(d) On the Closing Date, the Company shall issue and sell to the
Representative the Representative's Warrants at a purchase price of $.001 per
warrant, which Representative's Warrants shall entitle the Representative to
purchase an aggregate number of shares of Common Stock equal to ten percent
(10%) of the Firm Securities. The Representative's Warrants shall be exercisable
for a period of five (5) years commencing from the effective date of the
Registration Statement at a price equaling one hundred fifty percent (150%) of
the initial public offering price of the shares of Common Stock. The
Representative's Warrant Agreement and form of Warrant Certificate shall be
substantially in the form attached hereto as Exhibit A. Payment for the
Representative's Warrants shall be made on the Closing Date.
(e) With respect to the Company's offer and sale of the Direct
Securities pursuant to the Direct Offering, the Company agrees to pay to the
Representative an amount equal to two percent (2%) of the gross proceeds
received by the Company from the Direct Offering as an additional component of
the management fee (referenced in subsection (a) above with respect to the Firm
Securities) payable to the Representative for managing the entire offering (the
"Management Fee"). The Management Fee shall be paid to the Representative on the
closing date of the Direct Offering.
3. PUBLIC OFFERING OF THE SHARES OF COMMON STOCK. As soon after the
Registration Statement becomes effective as the Representative deems advisable,
the Underwriters shall make a public offering of the shares of Common Stock
(other than to residents of or in any jurisdiction in which qualification of the
shares of Common Stock is required and has not become effective) at the price
and upon the other terms set forth in the Prospectus. The Representative may
from time to time increase or decrease the public offering price after
distribution of the shares of Common Stock has been completed to such extent as
the Representative, in its discretion deems advisable. The Underwriters may
enter into one or more agreements as the Underwriters, in their sole discretion,
deem advisable with one or more broker-dealers who shall act as dealers in
connection with such public offering.
4. COVENANTS AND AGREEMENTS OF THE COMPANY. The Company covenants and
agrees with the Underwriters as follows:
(a) The Company shall use its best efforts to cause the Registration
Statement and any amendments thereto to become effective as promptly as
practicable and will not at any time, whether before or after the effective date
of the Registration Statement, file any amendment to the Registration Statement
or supplement to the Prospectus or file any document under the Act or Exchange
Act before termination of the offering of the shares of Common Stock by the
Underwriters of which the Representative shall not previously have been advised
and furnished with a copy, or to which the Representative shall have objected or
which is not in compliance with the Act, the Exchange Act or the Rules and
Regulations.
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(b) As soon as the Company is advised or obtains knowledge thereof,
the Company will advise the Representative and confirm the notice in writing (i)
when the Registration Statement, as amended, becomes effective, if the
provisions of Rule 430A promulgated under the Act will be relied upon, when the
Prospectus has been filed in accordance with said Rule 430A and when any
post-effective amendment to the Registration Statement becomes effective; (ii)
of the issuance by the Commission of any stop order or of the initiation, or the
threatening, of any proceeding suspending the effectiveness of the Registration
Statement or any order preventing or suspending the use of the Preliminary
Prospectus or the Prospectus, or any amendment or supplement thereto, or the
institution of proceedings for that purpose; (iii) of the issuance by the
Commission or by any state securities commission of any proceedings for the
suspension of the qualification of any of the Securities for offering or sale in
any jurisdiction or of the initiation, or the threatening, of any proceeding for
that purpose; (iv) of the receipt of any comments from the Commission; and (v)
of any request by the Commission for any amendment to the Registration Statement
or any amendment or supplement to the Prospectus or for additional information.
If the Commission or any state securities commission shall enter a stop order or
suspend such qualification at any time, the Company will make every effort to
obtain promptly the lifting of such order.
(c) The Company shall file the Prospectus (in form and substance
satisfactory to the Representative) or transmit the Prospectus by a means
reasonably calculated to result in filing with the Commission pursuant to Rule
424(b)(1) (or, if applicable and if consented to by the Representative, pursuant
to Rule 424(b)(4)) not later than the Commission's close of business on the
earlier of (i) the second business day following the execution and delivery of
this Agreement and (ii) the fifth business day after the effective date of the
Registration Statement.
(d) The Company will give the Representative notice of its intention
to file or prepare any amendment to the Registration Statement (including any
post-effective amendment) or any amendment or supplement to the Prospectus
(including any revised prospectus which the Company proposes for use by the
Underwriters in connection with the offering of the Securities which differs
from the corresponding prospectus on file at the Commission at the time the
Registration Statement becomes effective, whether or not such revised prospectus
is required to be filed pursuant to Rule 424(b) of the Rules and Regulations),
and will furnish the Representative with copies of any such amendment or
supplement a reasonable amount of time prior to such proposed filing or use, as
the case may be, and will not file any such prospectus to which the
Representative or Arter & Hadden LLP ("Underwriters' Counsel") shall object.
(e) The Company shall endeavor in good faith, in cooperation with the
Representative, at or prior to the time the Registration Statement becomes
effective, to qualify the Securities for offering and sale under the securities
laws of such jurisdictions as the Representative may designate to permit the
continuance of sales and dealings therein for as long as may be necessary to
complete the distribution, and shall make such applications, file such documents
and furnish such information as may be required for such purpose; provided,
however, the Company shall not be required to qualify as a foreign corporation
or file a general or limited consent to service of process in any such
jurisdiction. In each jurisdiction where such qualification shall be effected,
the Company will, unless the Representative agrees that such action is not at
the time necessary or advisable, use all reasonable efforts to file and make
such statements or reports at such times as are or may reasonably be required by
the laws of such jurisdiction to continue such qualification.
(f) During the time when a prospectus is required to be delivered
under the Act, the Company shall use all reasonable efforts to comply with all
requirements imposed upon it by the Act and the Exchange Act, as now and
hereafter amended and by the Rules and Regulations, as from time to time in
force, so far as necessary to permit the continuance of sales of or dealings in
the Securities in accordance with the provisions hereof and the Prospectus, or
any amendments or supplements thereto. If at any time when a prospectus relating
to the Securities is required to be delivered under the Act, any event shall
have occurred as a result of which, in the opinion of counsel for the Company or
Underwriters' Counsel, the Prospectus, as then amended or supplemented, includes
an untrue statement of a material fact or omits to state any material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading, or if
it is necessary at any time to amend the Prospectus to comply with the Act, the
Company will notify the Representative promptly and prepare and file with the
Commission an appropriate amendment or supplement in accordance with Section 10
of the Act, each such amendment or supplement to be satisfactory to
Underwriters' Counsel, and the Company will furnish to the Underwriters copies
of such amendment or supplement as soon as available and in such quantities as
the Underwriters may request.
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(g) As soon as practicable, but in any event not later than
forty-five (45) days after the end of the 12-month period beginning on the day
after the end of the fiscal quarter of the Company during which the effective
date of the Registration Statement occurs (ninety (90) days in the event that
the end of such fiscal quarter is the end of the Company 's fiscal year), the
Company shall make generally available to its security holders, in the manner
specified in Rule 158(b) of the Rules and Regulations, and to the
Representative, an earnings statement which will be in the detail required by,
and will otherwise comply with, the provisions of Section 11(a) of the Act and
Rule 158(a) of the Rules and Regulations, which statement need not be audited
unless required by the Act, covering a period of at least twelve (12)
consecutive months after the effective date of the Registration Statement.
(h) During a period of five (5) years after the date hereof, the
Company will furnish to its stockholders, as soon as practicable, annual reports
(including financial statements audited by independent public accountants) and
unaudited quarterly reports of earnings, and will deliver to the Representative:
(i) concurrently with furnishing such quarterly reports to its
stockholders, statements of income of the Company for each quarter in the form
furnished to the Company's stockholders and certified by the Company's principal
financial or accounting officer;
(ii) concurrently with furnishing such annual reports to its
stockholders, a balance sheet of the Company as at the end of the preceding
fiscal year, together with statements of operations, stockholders' equity, and
cash flows of the Company for such fiscal year, accompanied by a copy of the
certificate thereon of independent certified public accountants;
(iii) as soon as they are available, copies of all reports
(financial or other) mailed to stockholders;
(iv) as soon as they are available, copies of all reports and
financial statements furnished to or filed with the Commission, the NASD or any
securities exchange;
(v) very press release and every material news item or article of
interest to the financial community in respect of the Company, or its affairs,
which was released or prepared by or on behalf of the Company; and
(vi) any additional information of a public nature concerning the
Company (and any future subsidiary) or its businesses which the Representative
may reasonably request.
During such five-year period, if the Company has an active subsidiary,
the foregoing financial statements will be on a consolidated basis to the extent
that the accounts of the Company and its subsidiary(ies) are consolidated, and
will be accompanied by similar financial statements for any significant
subsidiary which is not so consolidated.
(i) The Company will maintain a transfer agent ("Transfer Agent")
and, if necessary under the jurisdiction of incorporation of the Company, a
Registrar (which may be the same entity as the Transfer Agent) for its Common
Stock.
(j) The Company will furnish to the Representative or on the
Representative's order, without charge, at such place as the Representative may
designate, copies of each Preliminary Prospectus, the Registration Statement and
any pre-effective or post-effective amendments thereto (two of which copies will
be signed and will include all financial statements and exhibits), the
Prospectus, and all amendments and supplements thereto, including any prospectus
prepared after the effective date of the Registration Statement, in each case as
soon as available and in such quantities as the Representative may request.
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(k) On or before the effective date of the Registration Statement,
the Company shall provide the Representative with true original copies of duly
executed, legally binding and enforceable agreements pursuant to which, for a
period of twelve (12) months from the effective date of the Registration
Statement, the Company's executive officers, directors and 5% shareholders agree
that it or he or she will not, directly or indirectly, issue, offer to sell,
sell, grant an option for the sale or purchase of, assign, transfer, pledge,
hypothecate or otherwise encumber or dispose of any shares of Common Stock or
securities convertible into, exercisable or exchangeable for or evidencing any
right to purchase or subscribe for any shares of Common Stock (either pursuant
to Rule 144 of the Rules and Regulations or otherwise) or dispose of any
beneficial interest therein without the prior consent of the Representative
(collectively, the "Lock-up Agreements"). During the twelve (12) month period
commencing on the effective date of the Registration Statement, the Company
shall not, without the prior written consent of the Representative, sell,
contract or offer to sell, issue, transfer, assign, pledge, distribute, or
otherwise dispose of, directly or indirectly, any shares of Common Stock or any
options, rights or warrants with respect to any shares of Common Stock. On or
before the Closing Date, the Company shall deliver instructions to the Transfer
Agent authorizing it to place appropriate legends on the certificates
representing the securities subject to the Lock-up Agreements and to place
appropriate stop transfer orders on the Company's ledgers. The Company further
covenants that it will not file a registration statement with the Commission
during the twelve (12) month period commencing on the effective date of the
Registration Statement without the prior written consent of the Representative.
(l) Neither the Company, nor any of its officers, directors,
stockholders, nor any of their affiliates (within the meaning of the Rules and
Regulations) will take, directly or indirectly, any action designed to, or which
might in the future reasonably be expected to cause or result in, stabilization
or manipulation of the price of any securities of the Company.
(m) Except for cumulative changes of less than $500,000 in each
specific item set forth in the "Use of Proceeds" section in the Prospectus,
which will be mutually acceptable for the Company and the Representative, the
Company will not change the manner in which it uses the proceeds from the sale
of the Securities from that which is set forth in the "Use of Proceeds" without
giving written notice of such change to the Representative at least ten (10)
business days prior to any such use.
(n) The Company shall timely file all such reports, forms or other
documents as may be required (including, but not limited to, a Form SR as may be
required pursuant to Rule 463 under the Act) from time to time, under the Act,
the Exchange Act, and the Rules and Regulations, and all such reports, forms and
documents filed will comply as to form and substance with the applicable
requirements under the Act, the Exchange Act, and the Rules and Regulations.
(o) The Company shall furnish to the Representative as early as
practicable prior to the date hereof, the Closing Date and each Option Closing
Date, if any, but no later than two (2) full business days prior thereto, a copy
of the latest available unaudited interim financial statements of the Company
(which in no event shall be as of a date more than thirty (30) days prior to the
date of the Registration Statement) which has been read by the Company's
independent public accountants, as stated in their letters to be furnished
pursuant to Sections 6(l) and 6(m) hereof.
(p) The Company shall cause the Common Stock to be listed on NASDAQ
and, for a period of five (5) years from the date hereof, use its best efforts
to maintain the NASDAQ listing of the Common Stock to the extent outstanding.
(q) For a period of five (5) years from the Closing Date, the Company
shall furnish to the Representative at reasonable request and the Company's sole
expense, (i) daily consolidated transfer sheets relating to the Common Stock
(ii) the list of holders of all of the Company's securities and (iii) a Blue Sky
"Trading Survey" for secondary sales of the Company's securities prepared by
counsel to the Company.
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(r) As soon as practicable, (i) but in no event more than five (5)
business days before the effective date of the Registration Statement, file a
Form 8-A with the Commission providing for the registration under the Exchange
Act of the Securities and (ii) but in no event more than thirty (30) days after
the effective date of the Registration Statement, take all necessary and
appropriate actions to be included in Standard and Poor's Corporation
Descriptions and Moody's OTC Manual and to continue such inclusion for a period
of not less than five (5) years.
(s) The Company hereby agrees that, except as set forth above in
Section 4(k) and the 1,000,000 shares issued or reserved for future issuance
under the Company's 1998 Stock Option and Incentive Plan ("Stock Option Plan"),
it will not, for a period of twelve (12) months from the effective date of the
Registration Statement, adopt, propose to adopt or otherwise permit to exist any
employee, officer, director, consultant or compensation plan or similar
arrangement, permitting (i) the grant, issue, sale or entry into any agreement
to grant, issue or sell any option, warrant or other contract right (x) at an
exercise price that is less than the greater of the public offering prices of
the Common Stock set forth herein and the fair market value on the date of grant
or sale or (y) to any of its executive officers or directors or to any holder of
5% or more of the Common Stock; (ii) the maximum number of shares of Common
Stock or other securities of the Company purchasable at any time pursuant to
options or warrants issued by the Company to exceed such 1,000,000 shares
reserved for future issuance under the Company's Stock Option Plan; (iii) the
payment for such securities with any form of consideration other than cash; or
(iv) the existence of stock appreciation rights, phantom options or similar
arrangements. Furthermore, the Company agrees that for a period of twelve (12)
months from the effective date of the Registration Statement, the Company will
not amend any material employment agreement or option agreement or other
agreement providing compensation to any executive officer, director or other
principal stockholder, without the prior written consent of the Representative.
(t) Until the completion of the distribution of the Securities, the
Company shall not, without the prior written consent of the Representative and
Underwriters' Counsel, issue, directly or indirectly, any press release or other
communication or hold any press conference with respect to the Company or its
activities or the offering contemplated hereby, other than trade releases issued
in the ordinary course of the Company's business consistent with past practices
with respect to the Company's operations.
(u) For a period equal to the lesser of (i) five (5) years from the
date hereof, or (ii) the sale to the public of the Representative's Securities,
the Company will not take any action or actions which may prevent or disqualify
the Company's use of Form SB-2 (or other appropriate form) for the registration
under the Act of the Representative's Securities.
(v) The Company shall maintain an active Board of Directors following
the completion of the offering which will consist of a minimum of two (2)
outside and independent directors. The Board of Directors shall also have both
an audit and compensation committees each consisting of no more than three (3)
members, at least one of which shall be an independent director.
(w) The Company agrees to offer the Representative a right of first
refusal to act as the managing underwriter in connection with any future public
offerings and private placements, or a merger or other corporate transaction
involving the Company, occurring within two (2) years following the effective
date of the Offering.
(x) The Company agrees that, except for those shares of Common Stock
to be sold pursuant to the Direct Offering, the Company shall direct all
inquires regarding the offering to the Representative.
5. PAYMENT OF EXPENSES.
(a) The Company hereby agrees to pay on the Closing Date, and each
Option Closing Date, if any, all expenses and fees (other than fees of
Underwriters' Counsel, except as provided in (iv) below) incident to the
performance of the obligations of the Company under this Agreement and the
Representative's Warrant Agreement, including, without limitation, (i) the fees
and expenses of accountants and counsel for the Company, (ii) all costs and
expenses incurred in connection with the preparation, duplication, printing
(including mailing and handling charges), filing, delivery and mailing
(including the payment of postage with respect thereto) of the Registration
Statement and the Prospectus and any amendments and supplements thereto and the
printing, mailing (including the payment of
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postage with respect thereto) and delivery of this Agreement, the
Representative's Warrant Agreement, [the Agreement Among Underwriters], the
Selected Dealer Agreements, and related documents, including the cost of all
copies thereof and of the Preliminary Prospectuses and of the Prospectus and any
amendments thereof or supplements thereto supplied to the Underwriters and such
dealers as the Underwriters may request, in quantities as hereinabove stated,
(iii) the printing, engraving, issuance and delivery of the Securities
including, but not limited to, (x) the purchase by the Underwriters of the Firm
Securities and the Option Securities and the purchase by the Representative of
the Representative's Warrants from the Company, (y) the consummation by the
Company of any of its obligations under this Agreement and the Representative's
Warrant Agreement, and (z) resale of the Firm Securities and the Option
Securities by the Underwriters in connection with the distribution contemplated
hereby, (iv) the qualification of the Securities under state or foreign
securities or "Blue Sky" laws and determination of the status of such securities
under legal investment laws, including the costs of printing and mailing the
"Preliminary Blue Sky Memorandum", th "Supplemental Blue Sky Memorandum" and
"Legal Investments Survey," if any, and disbursements and fees of counsel in
connection therewith, (v) advertising costs and expenses, including but not
limited to costs and expenses in connection with the "road show", information
meetings and presentations, bound volumes and prospectus memorabilia and
"tombstone" advertisement expenses, (vi) costs and expenses in connection with
due diligence investigations, including but not limited to the fees of any
independent counsel, expert or consultant retained, (vii) fees and expenses of
the Transfer Agent and registrar and all issue and transfer taxes, if any,
(viii) applications for assignment of a rating of the Securities by qualified
rating agencies, (ix) the fees payable to the Commission and the NASD, and (x)
the fees and expenses incurred in connection with the quotation of the Offered
Securities and the Option Securities on the NASDAQ and any other exchange.
(b) If this Agreement is terminated by the Underwriters in accordance
with the provisions of Section 6 (except Sections 6(c), 6(j) and 6(n)) or
Section 12, the Company shall indemnify the Underwriters for all of their actual
accountable out-of-pocket expenses, including the Representative's staff time at
agreed rates and the reasonable fees and disbursements of counsel for the
Underwriters and all Blue Sky counsel fees (excluding filing fees) and
disbursements (less amounts previously paid pursuant to Section 5(c) hereof).
(c) The Company further agrees that, in addition to the expenses
payable pursuant to subsection (a) of this Section 5, it will pay to the
Representative on the Closing Date by certified or bank cashier's check or, at
the election of the Representative, by deduction from the applicable proceeds,
(i) a non-accountable expense allowance equal to three percent (3.0%) of the
gross proceeds received by the Company from the sale of the Firm Securities,
$25,000 of which has been paid to date, and (ii) a non-accountable expense
allowance equal to two percent (2.0%) of the gross proceeds received by the
Company from the sale of the Direct Securities. In the event the Representative
elects to exercise the overallotment option described in Section 2(b) hereof,
the Company further agrees to pay to the Representative on each Option Closing
Date, by certified or bank cashier's check, or at the Representative's election,
by deduction from the proceeds of the Option Securities purchased on such Option
Closing Date, a non-accountable expense allowance equal to 3% of the gross
proceeds received by the Company from the Underwriters' sale of their
proportionate share of the Option Securities.
6. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS. The obligations of the
Underwriters hereunder shall be subject to the continuing accuracy of the
representations and warranties of the Company herein as of the date hereof and
as of the Closing Date and each Option Closing Date, if any, as if they had been
made on and as of the Closing Date or each Option Closing Date, as the case may
be; the accuracy on and as of the Closing Date or Option Closing Date, if any,
of the statements of the officers of the Company made pursuant to the provisions
hereof; and the performance by the Company on and as of the Closing Date and
each Option Closing Date, if any, of its covenants and obligations hereunder and
to the following further conditions:
(a) The Registration Statement shall have become effective not later
than 9:30 a.m., New York time, on or such later date and time as shall be
consented to in writing by the Representative, and, at the Closing Date and each
Option Closing Date, if any, no stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for that
purpose shall have been instituted or shall be pending or contemplated by the
Commission and any request on the part of the Commission for additional
information shall have been complied
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with to the reasonable satisfaction of Underwriters' Counsel. If the Company has
elected to rely upon Rule 430A of the Rules and Regulations, the price of the
Common Stock and any price-related information previously omitted from the
effective Registration Statement pursuant to such Rule 430A shall have been
transmitted to the Commission for filing pursuant to Rule 424(b) of the Rules
and Regulations within the prescribed time period and, prior to the Closing
Date, the Company shall have provided evidence satisfactory to the
Representative of such timely filing, or a post-effective amendment providing
such information shall have been promptly filed and declared effective in
accordance with the requirements of Rule 430A of the Rules and Regulations.
(b) The Representative shall not have advised the Company that the
Registration Statement, or any amendment thereto, contains an untrue statement
of fact which, in the Representative's opinion, is material, or omits to state a
fact which, in the Representative's opinion, is material and is required to be
stated therein or is necessary to make the statements therein not misleading, or
that the Prospectus, or any supplement thereto, contains an untrue statement of
fact which, in the Representative's opinion, is material, or omits to state a
fact which, in the Representative's opinion, is material and is required to be
stated therein or is necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(c) On or prior to the Closing Date and each Option Closing Date, if
any, the Representative shall have received from Underwriters' Counsel, such
opinion or opinions with respect to the organization of the Company, the
validity of the Securities, the Registration Statement, the Prospectus and other
related matters as the Representative may reasonably request and Underwriters'
Counsel shall have received such papers and information as they reasonably
request to enable them to pass upon such matters.
(d) At the Closing Date, the Underwriters shall have received the
favorable opinion of Jeffers, Wilson, Shaff & Falk, LLP, counsel to the Company,
dated the Closing Date, addressed to the Underwriters and in form and substance
satisfactory to Underwriters' Counsel, to the effect that:
(i) the Company (A) has been duly organized and is validly
existing as a corporation in good standing under the laws of its jurisdiction,
(B) is duly qualified and licensed and in good standing as a foreign corporation
in each jurisdiction in which its ownership or leasing of any properties or the
character of its operations requires such qualification or licensing, and (C)
has all requisite corporate power and authority, and has obtained any and all
necessary authorizations, approvals, orders, licenses, certificates, franchises
and permits of and from all governmental or regulatory officials and bodies
(including, without limitation, those having jurisdiction over environmental or
similar matters), to own or lease its properties and conduct its business as
described in the Prospectus; the Company is and has been doing business in
compliance with all such authorizations, approvals, orders, licenses,
certificates, franchises and permits and all federal, state and local laws,
rules and regulations; and, the Company has not received any notice of
proceedings relating to the revocation or modification of any such
authorization, approval, order, license, certificate, franchise, or permit
which, singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, would materially adversely affect the business, operations,
condition, financial or otherwise, or the earnings, business affairs, position,
prospects, value, operation, properties, business or results of operations of
the Company. The disclosures in the Registration Statement concerning the
effects of federal, state and local laws, rules and regulations on the Company's
business as currently conducted and as contemplated are correct in all material
respects and do not omit to state a fact required to be stated therein or
necessary to make the statements contained therein not misleading in light of
the circumstances in which they were made;
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(ii) except as described in the Prospectus, the Company does not
own an interest in any other corporation, partnership, joint venture, trust or
other business entity;
(iii) the Company has a duly authorized, issued and outstanding
capitalization as set forth in the Prospectus, and any amendment or supplement
thereto, under "CAPITALIZATION", and the Company is not a party to or bound by
any instrument, agreement or other arrangement providing for it to issue, sell,
transfer, purchase or redeem any capital stock, rights, warrants, options or
other securities, except for this Agreement and the Representative's Warrant
Agreement and as described in the Prospectus. The Securities and all other
securities issued or issuable by the Company conform in all material respects to
all statements with respect thereto contained in the Registration Statement and
the Prospectus. All issued and outstanding securities of the Company have been
duly authorized and validly issued and are fully paid and non-assessable; the
holders thereof have no rights of rescission with respect thereto, and are not
subject to personal liability by reason of being such holders; and none of such
securities were issued in violation of the preemptive rights of any holders of
any security of the Company or any similar rights granted by the Company. The
Securities to be sold by the Company hereunder and under the Representative's
Warrant Agreement are not and will not be subject to any preemptive or other
similar rights of any stockholder, have been duly authorized and, when issued,
paid for and delivered in accordance with the terms hereof, will be validly
issued, fully paid and non-assessable and conform to the description thereof
contained in the Prospectus; the holders thereof will not be subject to any
liability solely as such holders; all corporate action required to be taken for
the authorization, issue and sale of the Securities has been duly and validly
taken; and the certificates representing the Securities are in due and proper
form. The Representative's Warrants constitute valid and binding obligations of
the Company to issue and sell, upon exercise thereof and payment therefor, the
number and type of securities of the Company called for thereby. Upon the
issuance and delivery pursuant to this Agreement of the Firm Securities and the
Option Securities and the Representative's Warrants to be sold by the Company,
the Underwriters and the Representative, will acquire good and marketable title
to the Firm Securities and the Option Securities and the Representative's
Warrants free and clear of any pledge, lien, charge, claim, encumbrance, pledge,
security interest, or other restriction or equity of any kind whatsoever. No
transfer tax is payable by or on behalf of the Underwriters in connection with
(A) the issuance by the Company of the Securities, (B) the purchase by the
Underwriters of the Firm Securities and the Option Securities from the Company,
and the purchase by the Representative of the Representative's Warrants from the
Company (C) the consummation by the Company of any of its obligations under this
Agreement or the Representative's Warrant Agreement, or (D) resales of the Firm
Securities and the Option Securities in connection with the distribution
contemplated hereby.
(iv) based on oral and/or written advice from the staff of the
Commission, the Registration Statement has become effective under the Act, and,
if applicable, filing of all pricing information has been timely made in the
appropriate form under Rule 430A, and to the knowledge of such counsel, no stop
order suspending the use of the Preliminary Prospectus, the Registration
Statement or Prospectus or any part of any thereof or suspending the
effectiveness of the Registration Statement has been issued and no proceedings
for that purpose have been instituted or are pending or threatened or
contemplated under the Act;
(v) the Preliminary Prospectus, the Registration Statement, and
the Prospectus and any amendments or supplements thereto (other than the
financial statements and other financial and statistical data included therein,
as to which no opinion need be rendered) comply as to form in all material
respects with the requirements of the Act and the Rules and Regulations.
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<PAGE> 16
(vi) to the best of such counsel's knowledge, (A) there are no
agreements, contracts or other documents required by the Act to be described in
the Registration Statement and the Prospectus and filed as exhibits to the
Registration Statement other than those described in the Registration Statement
(or required to be filed under the Exchange Act if upon such filing they would
be incorporated, in whole or in part, by reference therein) and the Prospectus
and filed as exhibits thereto, and the exhibits which have been filed are
correct copies of the documents of which they purport to be copies; (B) the
descriptions in the Registration Statement and the Prospectus and any supplement
or amendment thereto of contracts and other documents to which the Company is a
party or by which it is bound, including any document to which the Company is a
party or by which it is bound, incorporated by reference into the Prospectus and
any supplement or amendment thereto, are accurate and fairly represent the
information required to be shown by Form SB-2; (C) there is not pending or
threatened against the Company any action, arbitration, suit, proceeding,
inquiry, investigation, litigation, governmental or other proceeding (including,
without limitation, those having jurisdiction over environmental or similar
matters), domestic or foreign, pending or threatened against (or circumstances
that may give rise to the same), or involving the properties or business of the
Company which (x) is required to be disclosed in the Registration Statement
which is not so disclosed (and such proceedings as are summarized in the
Registration Statement are accurately summarized in all respects), (y) questions
the validity of the capital stock of the Company or this Agreement or the
Representative's Warrant Agreement, or of any action taken or to be taken by the
Company pursuant to or in connection with any of the foregoing; (D) no statute
or regulation or legal or governmental proceeding required to be described in
the Prospectus is not described as required; and (E) there is no action, suit or
proceeding pending, or threatened, against or affecting the Company before any
court or arbitrator or governmental body, agency or official (or any basis
thereof known to such counsel) in which there is a reasonable possibility of a
decision which may result in a material adverse change in the condition,
financial or otherwise, or the earnings, position, prospects, stockholders'
equity, value, operation, properties, business or results of operations of the
Company, which could adversely affect the present or prospective ability of the
Company to perform its obligations under this Agreement or the Representative's
Warrant Agreement or which in any manner draws into question the validity or
enforceability of this Agreement or the Representative's Warrant Agreement;
(vii) the Company has full legal right, power and authority to
enter into this Agreement and the Representative's Warrant Agreement, and to
consummate the transactions provided for therein; and this Agreement and the
Representative's Warrant Agreement has been duly authorized, executed and
delivered by the Company. Each of this Agreement and the Representative's
Warrant Agreement, assuming due authorization, execution and delivery by each
other party thereto, constitutes a legal, valid and binding agreement of the
Company enforceable against the Company in accordance with its terms (except as
such enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application relating to or
affecting enforcement of creditors' rights and the application of equitable
principles in any action, legal or equitable, and except as rights to indemnity
or contribution may be limited by applicable law), and none of the Company's
execution or delivery of this Agreement and the Representative's Warrant
Agreement, its performance hereunder or thereunder, its consummation of the
transactions contemplated herein or therein, or the conduct of its business as
described in the Registration Statement, the Prospectus, and any amendments or
supplements thereto, conflicts with or will conflict with or results or will
result in any breach or violation of any of the terms or provisions of, or
constitutes or will constitute a default under, or result in the creation or
imposition of any lien, charge, claim, encumbrance, pledge, security interest,
defect or other restriction or equity of any kind whatsoever upon, any property
or assets (tangible or intangible) of the Company pursuant to the terms of, (A)
the articles of incorporation or by-laws of the Company, (B) any license,
contract, collective bargaining agreement, indenture, mortgage, deed of trust,
lease, voting trust agreement, stockholders agreement, note, loan or credit
agreement or any other agreement or instrument to which the Company is a party
or by which it is or may be bound or to which any of its properties or assets
(tangible or intangible) is or may be subject, or any indebtedness, or (C) any
statute, judgment, decree, order, rule or regulation applicable to the Company
of any arbitrator, court, regulatory body or administrative agency or other
governmental agency or body (including, without limitation, those having
jurisdiction over environmental or similar matters), domestic or foreign, having
jurisdiction over the Company or any of its respective activities or properties.
(viii) no consent, approval, authorization or order, and no
filing with, any court, regulatory body, government agency or other body (other
than registration under the Act or qualification under state or foreign
securities law or approval by the NASD) is required in connection with the
issuance of the Firm Securities and the Option Securities pursuant to the
Prospectus and the Registration Statement, the issuance of the Representative's
Warrants, the performance of this Agreement and the Representative's Warrant
Agreement, and the transactions contemplated hereby and thereby;
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<PAGE> 17
(ix) the properties and business of the Company conform in all
material respects to the description thereof contained in the Registration
Statement and the Prospectus; and the Company has good and marketable title to,
or valid and enforceable leasehold estates in, all items of real and personal
property stated in the Prospectus to be owned or leased by it, in each case free
and clear of all liens, charges, claims, encumbrances, pledges, security
interests, defects or other restrictions or equities of any kind whatsoever,
other than those referred to in the Prospectus and liens for taxes not yet due
and payable;
(x) to such counsel's knowledge, the Company is not in breach of,
or in default under, any term or provision of any license, contract, collective
bargaining agreement, indenture, mortgage, installment sale agreement, deed of
trust, lease, voting trust agreement, stockholders' agreement, partnership
agreement, note, loan or credit agreement or any other agreement or instrument
evidencing an obligation for borrowed money, or any other agreement or
instrument to which the Company is a party or by which the Company may be bound
or to which the properties or assets (tangible or intangible) of the Company is
subject or affected; and the Company is not in violation of any term or
provision of its articles of incorporation or by-laws or in violation of any
franchise, license, permit, judgment, decree, order, statute, rule or
regulation;
(xi) the statements in the Prospectus under "RISK FACTORS," "THE
COMPANY," "BUSINESS," "MANAGEMENT," "SECURITY OWNERSHIP OF MANAGEMENT AND
CERTAIN SECURITY HOLDERS," "CERTAIN TRANSACTIONS," "DESCRIPTION OF SECURITIES,"
and "SHARES ELIGIBLE FOR FUTURE SALE" have been reviewed by such counsel, and
insofar as they refer to statements of law, descriptions of statutes, licenses,
rules or regulations or legal conclusions, are correct in all material respects;
(xii) the Offered Securities and Option Securities have been
accepted for quotation on the NASDAQ;
(xiii) the persons listed under the caption "SECURITY OWNERSHIP
OF MANAGEMENT AND CERTAIN SECURITY HOLDERS" in the Prospectus are the respective
"beneficial owners" (as such phrase is defined in regulation 13d-3 under the
Exchange Act) of the securities set forth opposite their respective names
thereunder as and to the extent set forth therein;
(xiv) to such counsel's knowledge, neither the Company nor any of
its officers, stockholders, employees or agents, nor any other person acting on
behalf of the Company has, directly or indirectly, given or agreed to give any
money, gift or similar benefit (other than legal price concessions to customers
in the ordinary course of business) to any customer, supplier, employee or agent
of a customer or supplier, or official or employee of any governmental agency or
instrumentality of any government (domestic or foreign) or any political party
or candidate for office (domestic or foreign) or other person who is or may be
in a position to help or hinder the business of the Company (or assist it in
connection with any actual or proposed transaction) which (A) might subject the
Company to any damage or penalty in any civil, criminal or governmental
litigation proceeding, (B) if not given in the past, might have had an adverse
effect on the assets, business or operations of the Company, as reflected in any
of the financial statements contained in the Registration Statement, or (C) if
not continued in the future, might adversely affect the assets, business,
operations or prospects of the Company;
(xv) except as may be disclosed therein, no person, corporation,
trust, partnership, association or other entity has the right to include and/or
register any securities of the Company in the Registration Statement, require
the Company to file any registration statement or, if filed, to include any
security in such registration statement;
(xvi) except as described in the Prospectus, there are no claims,
payments, issuances, arrangements or understandings for services in the nature
of a finder's or origination fee with respect to the sale of the Securities
hereunder or financial consulting arrangements or any other arrangements,
agreements, understandings, payments or issuances that may affect the
Underwriters' compensation, as determined by the NASD;
(xvii) assuming due execution by the parties thereto other than
the Company, the Lock-up Agreements are legal, valid and binding obligations of
the parties thereto, enforceable against the party and any subsequent holder of
the securities subject thereto in accordance with its terms (except as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application relating to or
affecting enforcement of creditors' rights and the application of equitable
principles in any action, legal or equitable, and except as rights to indemnity
or contribution may be limited by applicable law);
(xviii) except as described in the Prospectus, the Company does
not (A) maintain, sponsor or contribute to any ERISA Plans, (B) maintain or
contribute, now or at any time previously, to a defined benefit plan, as defined
in Section 3(35) of ERISA, and (C) has never completely or partially withdrawn
from a "multi-employer plan";
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<PAGE> 18
(xix) the minute books of the Company have been made available to
the Underwriters and to such counsel's knowledge contain a complete summary of
all meetings and actions of the directors and stockholders of the Company since
the time of its incorporation and reflect all transactions referred to in such
minutes accurately in all material respects;
(xx) except as set forth in the Prospectus and to the best
knowledge of such counsel, no officer, director or stockholder of the Company,
or any "affiliate" or "associate" (as these terms are defined in Rule 405
promulgated under the Rules and Regulations) of any of the foregoing persons or
entities has or has had, either directly or indirectly, (A) an interest in any
person or entity which (x) furnishes or sells services or products which are
furnished or sold or are proposed to be furnished or sold by the Company, or (y)
purchases from or sells or furnishes to the Company any goods or services, or
(B) a beneficial interest in any contract or agreement to which the Company is a
party or by which it may be bound or affected. Except as set forth in the
Prospectus under "CERTAIN TRANSACTIONS," there are no existing agreements,
arrangements, understandings or transactions, or proposed agreements,
arrangements, understandings or transactions, between or among the Company, and
any officer, director, or 5% or greater securityholder of the Company, or any
affiliate or associate of any such person or entity;
(xxi) to the best of such counsel's knowledge, after due inquiry,
there is no action, suit, proceeding, inquiry, investigation, litigation or
governmental proceeding, domestic or foreign, pending or threatened (or
circumstances that may give rise to the same) involving the Company's
production, use, testing, manufacturing or marketing of any products or
services, which (i) questions the authority of the Company to produce, use,
test, manufacture or market any products or services as described in the
Prospectus, (ii) questions the completeness or accuracy of data generated by any
trials, tests or studies being conducted by or on behalf of the Company, (iii)
is required to be disclosed in the Prospectus which is not so disclosed, or (iv)
might materially and adversely affect the condition, financial or otherwise, or
the earnings, prospects, value, operations or business of the Company.
Such counsel shall state that such counsel has participated in
conferences with officers and other representatives of the Company, and
representatives of the independent public accountants for the Company, at which
conferences such counsel made inquiries of such officers, representatives and
accountants and discussed the contents of the Preliminary Prospectus, the
Registration Statement, the Prospectus, and related matters and, although such
counsel is not passing upon and does not assume any responsibility for the
accuracy, completeness or fairness of the statements contained in the
Preliminary Prospectus, the Registration Statement and Prospectus, on the basis
of the foregoing, no facts have come to the attention of such counsel which lead
them to believe that either the Registration Statement or any amendment thereto,
at the time such Registration Statement or amendment became effective or the
Preliminary Prospectus or Prospectus or amendment or supplement thereto as of
the date of such opinion contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein not misleading (it being understood that such
counsel need express no opinion with respect to the financial statements and
schedules and other financial and statistical data included in the Preliminary
Prospectus, the Registration Statement or the Prospectus). Such counsel shall
further state that its opinions may be relied upon by Underwriters' Counsel in
rendering its opinion to the Underwriters.
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws other than the laws of the United States and
jurisdictions in which they are admitted, to the extent such counsel deems
proper and to the extent specified in such opinion, if at all, upon an opinion
or opinions (in form and substance satisfactory to Underwriters' Counsel) of
other counsel acceptable to Underwriters' Counsel, familiar with the applicable
laws; (B) as to matters of fact, to the extent they deem proper, on certificates
and written statements of responsible officers of the Company and certificates
or other written statements of officers of departments of various jurisdictions
having custody of documents respecting the corporate existence or good standing
of the Company, provided that copies of any such statements or certificates
shall be delivered to Underwriters' Counsel if requested. The opinion of such
counsel for the Company shall state that the opinion of any such other counsel
is in form satisfactory to such counsel and that the Representative,
Underwriters' Counsel and they are each justified in relying thereon.
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<PAGE> 19
(e) At each Option Closing Date, if any, the Underwriters shall have
received the favorable opinion of Jeffers, Wilson, Shaff & Falk LLP, counsel to
the Company, dated on such Option Closing Date, addressed to the Underwriters
and in form and substance satisfactory to Underwriters' Counsel confirming as of
such Option Closing Date the statements made by Jeffers, Wilson, Shaff & Falk
LLP in its opinions delivered on the Closing Date.
(f) On or prior to the Closing Date and each Option Closing Date, if
any, Underwriters' Counsel shall have been furnished such documents,
certificates and opinions as they may reasonably require for the purpose of
enabling them to review or pass upon the matters referred to in subsection (c)
of this Section 6, or in order to evidence the accuracy, completeness or
satisfaction of any of the representations, warranties or conditions of the
Company, or herein contained.
(g) Prior to the Closing Date and each Option Closing Date, if any,
(i) there shall have been no material adverse change nor development involving a
prospective change in the condition, financial or otherwise, earnings, position,
value, properties, results of operations, prospects, stockholders' equity or the
business activities of the Company, whether or not in the ordinary course of
business, from the latest dates as of which such condition is set forth in the
Registration Statement and Prospectus; (ii) there shall have been no
transaction, not in the ordinary course of business, entered into by the
Company, from the latest date as of which the financial condition of the Company
is set forth in the Registration Statement and Prospectus which is materially
adverse to the Company or; (iii) the Company nor shall not be in material
default under any provision of any instrument relating to any outstanding
indebtedness; (iv) the Company shall not have issued any securities (other than
the Securities) or declared or paid any dividend or made any distribution in
respect of its capital stock of any class and there has not been any change in
the capital stock or any material change in the debt (long or short term) or
liabilities or obligations of the Company (contingent or otherwise); (v) no
material amount of the assets of the Company shall have been pledged or
mortgaged, except as set forth in the Registration Statement and Prospectus;
(vi) no action, suit or proceeding, at law or in equity, shall have been pending
or threatened (or circumstances giving rise to same) against the Company, or
affecting any of its properties or businesses before or by any court or federal,
state or foreign commission, board or other administrative agency wherein an
unfavorable decision, ruling or finding may materially adversely affect the
business, operations, earnings, position, value, properties, results of
operations, prospects or financial condition or income of the Company; and (vii)
no stop order shall have been issued under the Act nd no proceedings therefor
shall have been initiated, threatened or contemplated by the Commission.
(h) At the Closing Date and each Option Closing Date, if any, the
Underwriters shall have received a certificate of the Company signed by the
principal executive officer and by the chief financial or chief accounting
officer of the Company, dated the Closing Date or Option Closing Date, as the
case may be, to the effect that such persons has carefully examined the
Registration Statement, the Prospectus, and this Agreement, and that:
(i) The representations and warranties of the Company in this
Agreement are true and correct, as if made on and as of the Closing Date or the
Option Closing Date, as the case may be, and the Company has complied with all
agreements and covenants and satisfied all conditions contained in this
Agreement on its part to be performed or satisfied at or prior to such Closing
Date or Option Closing Date, as the case may be;
(ii) No stop order suspending the effectiveness of the
Registration Statement or any part thereof has been issued, and no proceedings
for that purpose have been instituted or are pending or, to the best of each of
such person's knowledge, are contemplated or threatened under the Act;
(iii) The Registration Statement and the Prospectus and, if any,
each amendment and each supplement thereto, contain all statements and
information required to be included therein, and none of the Registration
Statement, the Prospectus nor any amendment or supplement thereto includes any
untrue statement of a material fact or omits to state any material fact required
to be stated therein or necessary to make the statements therein not misleading
and neither the Preliminary Prospectus or any supplement thereto included any
untrue statement of a material fact or omitted to state any material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading; and
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<PAGE> 20
(iv) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus, (a) the Company has
not incurred up to and including the Closing Date or the Option Closing Date, as
the case may be, other than in the ordinary course of its business, any material
liabilities or obligations, direct or contingent; (b) the Company has not paid
or declared any dividends or other distributions on its capital stock; (c) the
Company has not entered into any material transactions not in the ordinary
course of business; (d) there has not been any change in the capital stock or
long-term debt or any increase in the short-term borrowings (other than any
increase in the short-term borrowings in the ordinary course of business) of the
Company; (e) the Company has not sustained any material loss or damage to its
properties or assets, whether or not insured; (f) there is no litigation which
is pending or threatened (or circumstances giving rise to same) against the
Company or any affiliated party which is required to be set forth in an amended
or supplemented Prospectus which has not been set forth; and (g) there has
occurred no event required to be set forth in an amended or supplemented
Prospectus which has not been set forth.
References to the Registration Statement and the Prospectus in this
subsection (h) are to such documents as amended and supplemented at the date of
such certificate.
(i) By the Closing Date, the Underwriters will have received
clearance from the NASD as to the amount of compensation allowable or payable to
the Underwriters, as described in the Registration Statement.
(j) At the time this Agreement is executed, the Underwriters shall
have received a letter, dated such date, addressed to the Underwriters in form
and substance satisfactory (including the non-material nature of the changes or
decreases, if any, referred to in clause (iii) below) in all respects to the
Underwriters and Underwriters' Counsel, from McGladrey & Pullen, LLP:
(i) confirming that they are independent certified public
accountants with respect to the Company within the meaning of the Act and the
applicable Rules and Regulations;
(ii) stating that it is their opinion that the financial
statements and supporting schedules of the Company included in the Registration
Statement comply as to form in all material respects with the applicable
accounting requirements of the Act and the Rules and Regulations thereunder and
that the Representative may rely upon the opinion of McGladrey & Pullen, LLP
with respect to the financial statements and supporting schedules included in
the Registration Statement;
(iii) stating that, on the basis of a limited review which
included a reading of the latest available unaudited interim financial
statements of the Company, a reading of the latest available minutes of the
stockholders and board of directors and the various committees of the board of
directors of the Company, consultations with officers and other employees of the
Company responsible for financial and accounting matters and other specified
procedures and inquiries, nothing has come to their attention which would lead
them to believe that (A) the unaudited financial statements and supporting
schedules of the Company included in the Registration Statement do not comply as
to form in all material respects with the applicable accounting requirements of
the Act and the Rules and Regulations or are not fairly presented in conformity
with generally accepted accounting principles applied on a basis substantially
consistent with that of the audited financial statements of the Company included
in the Registration Statement, or (B) at a specified date not more than five (5)
days prior to the effective date of the Registration Statement, there has been
any change in the capital stock or long-term debt of the Company, or any
decrease in the stockholders' equity or net current assets or net assets of the
Company as compared with amounts shown in the ________ balance sheet included in
the Registration Statement, other than as set forth in or contemplated by the
Registration Statement, or, if there was any change or decrease, setting forth
the amount of such change or decrease, and (C) during the period from _________
to a specified date not more than five (5) days prior to the effective date of
the Registration Statement, there was any decrease in net revenues, net earnings
or increase in net earnings per common share of the Company or the Subsidiaries,
in each case as compared with the corresponding period beginning _________,
other than as set forth in or contemplated by the Registration Statement, or, if
there was any such decrease, setting forth the amount of such decrease;
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<PAGE> 21
(iv) setting forth, at a date not later than five (5) days prior
to the date of the Registration Statement, the amount of liabilities of the
Company taken as a whole (including a break-down of commercial paper and notes
payable to banks);
(v) stating that they have compared specific dollar amounts,
numbers of shares, percentages of revenues and earnings, statements and other
financial information pertaining to the Company set forth in the Prospectus in
each case to the extent that such amounts, numbers, percentages, statements and
information may be derived from the general accounting records, including work
sheets, of the Company and excluding any questions requiring an interpretation
by legal counsel, with the results obtained from the application of specified
readings, inquiries and other appropriate procedures (which procedures do not
constitute an examination in accordance with generally accepted auditing
standards) set forth in the letter and found them to be in agreement;
(vi) statements as to such other matters incident to the
transaction contemplated hereby as the Representative may reasonably request.
(k) At the Closing Date and each Option Closing Date, if any, the
Underwriters shall have received from McGladrey & Pullen, LLP a letter, dated as
of the Closing Date or the Option Closing Date, as the case may be, to the
effect that they reaffirm that statements made in the letter furnished pursuant
to subsection (j) of this Section, except that the specified date referred to
shall be a date not more than five (5) days prior to the Closing Date or the
Option Closing Date, as the case may be, and, if the Company has elected to rely
on Rule 430A of the Rules and Regulations, to the further effect that they have
carried out procedures as specified in clause (v) of subsection (j) of this
Section with respect to certain amounts, percentages and financial information
as specified by the Representative and deemed to be a part of the Registration
Statement pursuant to Rule 430A(b) and have found such amounts, percentages and
financial information to be in agreement with the records specified in such
clause (v).
(l) On the Closing Date and each Option Closing Date, if any, there
shall have been duly tendered to the Representative for the several
Underwriters' accounts the appropriate number of Firm Securities or Option
Securities, as the case may be.
(m) No order suspending the sale of the Securities in any
jurisdiction designated by the Representative pursuant to subsection (e) of
Section 4 hereof shall have been issued on either the Closing Date or the Option
Closing Date, if any, and no proceedings for that purpose shall have been
instituted or shall be contemplated.
(n) On or before the Closing Date, the Company shall have executed
and delivered to the Representative (i) the Representative's Warrant Agreement
substantially in the form filed as Exhibit 4.2 to the Registration Statement, in
final form and substance satisfactory to the Representative, and (ii) the
Representative's Warrants in such denominations and to such designees as shall
have been provided to the Company by the Representative.
(o) On or before the Closing Date, the Offered Securities and Option
Securities shall have been duly approved for listing on NASDAQ, subject to
official notice of issuance.
(p) On or before the Closing Date, there shall have been delivered to
the Representative all of the Lock-up Agreements, in form and substance
satisfactory to Underwriters' Counsel.
If any condition to the Underwriters' obligations hereunder to be
fulfilled prior to or at the Closing Date or the relevant Option Closing Date,
as the case may be, is not so fulfilled, the Representative may terminate this
Agreement or, if the Representative so elects, it may waive any such conditions
which have not been fulfilled or extend the time for their fulfillment.
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<PAGE> 22
7. INDEMNIFICATION.
(a) The Company agrees to indemnify and hold harmless the
Underwriters (for purposes of this Section 7 "Underwriter" shall include the
officers, directors, partners, employees, agents and counsel of the Underwriter,
including specifically each person who may be substituted for an Underwriter as
provided in Section 11 hereof), and each person, if any, who controls the
Underwriter ("controlling person") within the meaning of Section 15 of the Act
or Section 20(a) of the Exchange Act, from and against any and all losses,
claims, damages, expenses or liabilities, joint or several (and actions,
proceedings, investigations, inquiries, suits and litigation in respect
thereof), whatsoever (including but not limited to any and all expenses
whatsoever reasonably incurred in investigating, preparing or defending against
any such claim, action, proceeding, investigation, inquiry, suit or litigation,
commenced or threatened, or any claim whatsoever), as such are incurred, to
which the Underwriter or such controlling person may become subject under the
Act, the Exchange Act or any other statute or at common law or otherwise or
under the laws of foreign countries, arising out of or based upon (A) any untrue
statement or alleged untrue statement of a material fact contained (i) in any
Preliminary Prospectus, the Registration Statement or the Prospectus (as from
time to time amended and supplemented); (ii) in any post-effective amendment or
amendments or any new registration statement and prospectus in which is included
securities of the Company issued or issuable upon exercise of the Securities; or
(iii) in any application or other document or written communication (in this
Section 7 collectively called "application") executed by the Company or based
upon written information furnished by the Company in any jurisdiction in order
to qualify the Securities under the securities laws thereof or filed with the
Commission, any state securities commission or agency, NASDAQ or any other
securities exchange; (B) the omission or alleged omission therefrom of a
material fact required to be stated therein or necessary to make the statements
therein not misleading (in the case of the Prospectus, in the light of the
circumstances under which they were made), or (C) any breach of any
representation, warranty, covenant or agreement of the Company contained herein
or in any certificate by or on behalf of the Company or any of its officers
delivered pursuant hereto, unless, in the case of clause (A) or (B) above, such
statement or omission was made in reliance upon and in conformity with written
information furnished to the Company with respect to any Underwriter by or on
behalf of such Underwriter expressly for use in any Preliminary Prospectus, the
Registration Statement or Prospectus, or any amendment thereof or supplement
thereto, or in any application, as the case may be. The indemnity agreement in
this subsection (a) shall be in addition to any liability which the Company may
have at common law or otherwise.
The foregoing indemnity with respect to any untrue statement
contained in or omission from a Preliminary Prospectus shall not inure to the
benefit of any Underwriter (or any person controlling such Underwriter) from
whom the person asserting any such loss, liability, claim, damage or expense
purchased any of the Securities which are the subject thereof if (1) the Company
or shall sustain the burden of proving that such asserting person did not
receive a copy of the Prospectus (or the Prospectus as amended or supplemented)
at or prior to the written confirmation of the sale of such Securities to such
person and the untrue statement contained in or omitted from such Preliminary
Prospectus was corrected in the Prospectus (or the Prospectus as amended or
supplemented); and (2) the Company shall have complied with its covenant
pursuant to Section 4(f) of this Agreement.
(b) the Underwriters agree severally, but not jointly, to indemnify
and hold harmless the Company, its directors and officers who have signed the
Registration Statement, and each other person, if any, who controls the Company
within the meaning of the Act, to the same extent as the foregoing indemnity
from the Company to the Underwriters but only with respect to statements or
omissions, if any, made in any Preliminary Prospectus, the Registration
Statement or Prospectus or any amendment thereof or supplement thereto or in any
application made in reliance upon, and in strict conformity with, written
information furnished to the Company with respect to any Underwriter by such
Underwriter expressly for use in such Preliminary Prospectus, the Registration
Statement or Prospectus or any amendment thereof or supplement thereto or in any
such application, provided that such written information or omissions only
pertain to disclosures in the Preliminary Prospectus, the Registration Statement
or Prospectus directly relating to the transactions effected by the Underwriters
in connection with this Offering. The Company acknowledges that the statements
with respect to the public offering of the Firm Securities and the Option
Securities set forth under the heading "Underwriting" and the stabilization
legend in the Prospectus have been furnished by the Underwriters expressly for
use therein and constitute the only information furnished in writing by or on
behalf of the Underwriters for inclusion in the Prospectus.
23
<PAGE> 23
(c) Promptly after receipt by an indemnified party under this Section
7 of notice of the commencement of any claim, action, suit, investigation,
inquiry, proceeding or litigation, such indemnified party shall, if a claim in
respect thereof is to be made against one or more indemnifying parties under
this Section 7, notify each party against whom indemnification is to be sought
in writing of the commencement thereof (but the failure so to notify an
indemnifying party shall not relieve it from any liability which it may have
under this Section 7 except to the extent that it has been prejudiced in any
material respect by such failure or from any liability which it may have
otherwise). In case any such claim, action, suit, investigation, inquiry,
proceeding or litigation is brought against any indemnified party, and it
notifies an indemnifying party or parties of the commencement thereof, the
indemnifying party or parties will be entitled to participate therein, and to
the extent it may elect by written notice delivered to the indemnified party
promptly after receiving the aforesaid notice from such indemnified party, to
assume the defense thereof with counsel reasonably satisfactory to such
indemnified party. Notwithstanding the foregoing, the indemnified party or
parties shall have the right to employ its or their own counsel in any such case
but the fees and expenses of such counsel shall be at the expense of such
indemnified party or parties unless (i) the employment of such counsel shall
have been authorized in writing by the indemnifying parties in connection with
the defense of thereof at the expense of the indemnifying party, (ii) the
indemnifying parties shall not have employed counsel reasonably satisfactory to
such indemnified party to have charge of the defense thereof within a reasonable
time after notice of commencement thereof, or (iii) such indemnified party or
parties shall have reasonably concluded that there may be defenses available to
it or them which are different from or additional to those availble to one or
all of the indemnifying parties (in which case the indemnifying parties shall
not have the right to direct the defense thereof on behalf of the indemnified
party or parties), in any of which events such fees and expenses of one
additional counsel shall be borne by the indemnifying parties. In no event shall
the indemnifying parties be liable for fees and expenses of more than one
counsel (in addition to any local counsel) separate from their own counsel for
all indemnified parties in connection with any one claim, action, suit,
investigation, inquiry, proceeding or litigation or separate but similar or
related claims, actions, suits, investigations, inquiries, proceedings or
litigation in the same jurisdiction arising out of the same general allegations
or circumstances. Anything in this Section 7 to the contrary notwithstanding, an
indemnifying party shall not be liable for any settlement of any claim, action,
suit, investigation, inquiry, proceeding or litigation effected without its
written consent; provided, however, that such consent was not unreasonably
withheld. An indemnifying party will not, without the prior written consent of
the indemnified parties, settle, compromise or consent to the entry of any
judgment with respect to any pending or threatened claim, action, suit,
investigation, inquiry, proceeding or litigation in respect of which
indemnification or contribution may be sought hereunder (whether or not the
indemnified parties are actual or potential parties to such claim, action, suit,
investigation, inquiry, proceeding or litigation), unless such settlement,
compromise or consent (i) includes an unconditional release of each indemnified
party from all liability arising out of such claim, action, suit, investigation,
inquiry, proceeding or litigation and (ii) does not include a statement as to or
an admission of fault, culpability or a failure to act by or on behalf of any
indemnified party.
(d) In order to provide for just and equitable contribution in any
case in which (i) an indemnified party makes claim for indemnification pursuant
to this Section 7, but it is judicially determined (by the entry of a final
judgment or decree by a court of competent jurisdiction and the expiration of
time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case notwithstanding the fact that
the express provisions of this Section 7 provide for indemnification in such
case, or (ii) contribution under the Act may be required on the part of any
indemnified party, then each indemnifying party shall contribute to the amount
paid as a result of such losses, claims, damages, expenses or liabilities (or
actions in respect thereof) (A) in such proportion as is appropriate to reflect
the relative benefits received by the contributing parties, on the one hand, and
the party to be indemnified on the other hand, from the offering of the Firm
Securities and the Option Securities or (B) if the allocation provided by clause
(A) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the contributing parties, on the one hand,
and the party to be indemnified on the other hand in connection with the
statements or omissions that resulted in such losses, claims, damages, expenses
or liabilities, as well as any other relevant equitable considerations. In any
case where the Company is the contributing party and the Underwriters are the
indemnified party, the relative benefits received by the Company on the one
hand, and the Underwriters, on the other, shall be deemed to be in the same
proportion as the total net proceeds from the offering of the Firm Securities
and the Option Securities (before deducting expenses) bear to the total
underwriting discounts received by the Underwriters hereunder, in each case as
set forth in the table on the Cover
24
<PAGE> 24
Page of the Prosectus. Relative fault shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by the Company, or by the Underwriters, and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such untrue statement or omission. The amount paid or payable by an
indemnified party as a result of the losses, claims, damages, expenses or
liabilities (or actions in respect thereof) referred to above in this subsection
(d) shall be deemed to include any legal or other expenses reasonably incurred
by such indemnified party in connection with investigating or defending any such
action or claim. Notwithstanding the provisions of this subsection (d), the
Underwriters shall not be required to contribute any amount in excess of the
underwriting discount applicable to the Firm Securities and the Option
Securities purchased by the Underwriters hereunder. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. For purposes of this Section 7, each person, if
any, who controls the Company or the Underwriter within the meaning of the Act,
each officer of the Company who has signed the Registration Statement, and each
director of the Company shall have the same rights to contribution as the
Company or the Underwriter, as the case may be, subject in each case to this
subsection (d). Any party entitled to contribution will, promptly after receipt
of notice of commencement of any action, suit or proceeding against such party
in respect to which a claim for contribution may be made against another party
or parties under this subsection (d), notify such party or parties from whom
contribution may be sought, but the omission so to notify such party or parties
shall not relieve the party or parties frm whom contribution may be sought from
any obligation it or they may have hereunder or otherwise than under this
subsection (d), or to the extent that such party or parties were not adversely
affected by such omission. The contribution agreement set forth above shall be
in addition to any liabilities which any indemnifying party may have at common
law or otherwise.
8. REPRESENTATIONS AND AGREEMENTS TO SURVIVE DELIVERY. All
representations, warranties and agreements contained in this Agreement or
contained in certificates of officers of the Company submitted pursuant hereto,
shall be deemed to be representations, warranties and agreements at the Closing
Date and the Option Closing Date, as the case may be, and such representations,
warranties and agreements of the Company and the indemnity agreements contained
in Section 7 hereof, shall remain operative and in full force and effect
regardless of any investigation made by or on behalf of any Underwriter, the
Company, any controlling person of any Underwriter or the Company, and shall
survive termination of this Agreement or the issuance and delivery of the
Securities to the Underwriters and the Representative, as the case may be.
9. EFFECTIVE DATE. This Agreement shall become effective at 10:00 a.m.,
New York City time, on the next full business day following the date hereof, or
at such earlier time after the Registration Statement becomes effective as the
Representative, in its discretion, shall release the Securities for sale to the
public; provided, however, that the provisions of Sections 5, 7 and 10 of this
Agreement shall at all times be effective. For purposes of this Section 9, the
Securities to be purchased hereunder shall be deemed to have been so released
upon the earlier of dispatch by the Representative of telegrams to securities
dealers releasing such securities for offering or the release by the
Representative for publication of the first newspaper advertisement which is
subsequently published relating to the Securities.
10. TERMINATION.
(a) Subject to subsection (b) of this Section 10, the Representative
shall have the right to terminate this Agreement, (i) if any domestic or
international event or act or occurrence has materially adversely disrupted, or
in the Representative's opinion will in the immediate future materially
adversely disrupt, the financial markets; (ii) if any material adverse change in
the financial markets shall have occurred; (iii) if trading generally shall have
been suspended or materially limited on or by, as the case may be, any of the
New York Stock Exchange, the American Stock Exchange, the NASD, the Commission
or any governmental authority having jurisdiction over such matters; (iv) if
trading of any of the securities of the Company shall have been suspended by a
state securities administrator or the Commission; (v) if the United States shall
have become involved in a war or major hostilities, or if there shall have been
an escalation in an existing war or major hostilities or a national emergency
shall have been declared in the United States; or (vi) if a banking moratorium
has been declared by a state or federal authority; (vii) if
25
<PAGE> 25
a moratorium in foreign exchange trading has been declared; (viii) if the
Company shall have sustained a loss material or substantial to the Company or by
fire, flood, accident, hurricane, earthquake, theft, sabotage or other calamity
or malicious act which, whether or not such loss shall have been insured, will,
in the Representative's opinion, make it inadvisable to proceed with the
offering, sale and/or delivery of the Securities; (ix) if there shall have been
such a material adverse change in the conditions or prospects of the Company or
such material adverse change in the general market, political or economic
conditions, in the United States or elsewhere, that, in each case, in the
Representative's judgment, would make it inadvisable to proceed with the
offering, sale and/or delivery of the Firm Securities, or (x) if James Buchanan
Rea, Jr. shall no longer serve the Company in his presen capacity.
(b) If this Agreement is terminated by the Representative in
accordance with the provisions of Section 10(a) the Company shall promptly
reimburse and indemnify the Representative for all of its actual out-of-pocket
expenses, including the fees and disbursements of counsel for the Underwriters
and all Blue Sky counsel fees (excluding filing fees) and disbursements (less
amounts previously paid pursuant to Section 5(c) above). In addition, the
Company shall remain liable for all Blue Sky counsel fees and disbursements,
expenses and filing fees. Notwithstanding any contrary provision contained in
this Agreement, if this Agreement shall not be carried out within the time
specified herein, or any extension thereof granted to the Representative, by
reason of any failure on the part of the Company to perform any undertaking or
satisfy any condition of this Agreement by it to be performed or satisfied
(including, without limitation, pursuant to Section 6 (except if this Agreement
is terminated pursuant to Sections 6(c), 6(j) or 6(o)) or Section 12) then, the
Company shall promptly reimburse and indemnify the Representative for all of
their actual accountable out-of-pocket expenses, including the reasonable fees
and disbursements of counsel for the Underwriters (less amounts previously paid
pursuant to Section 5(c) above). In addition, the Company shall remain liable
for all Blue Sky counsel fees and disbursements, expenses and filing fees.
Notwithstanding any contrary provision contained in this Agreement, any election
hereunder or any termination of this Agreement (including, without limitation,
pursuant to Sections 6, 10, 11 and 12 hereof), and whether or not this Agreement
is otherwise carried out, the provisions of Section 5 and Section 7 shall not be
in any way affected by such election or termination or failure to carry out the
terms of this Agreement or any part hereof.
11. SUBSTITUTION OF THE UNDERWRITERS. If one or more of the Underwriters
shall fail (otherwise than for a reason sufficient to justify the termination of
this Agreement under the provisions of Section 6, Section 10 or Section 12
hereof) to purchase Firm Securities which it or they are obligated to purchase
on such date under this Agreement (the "Defaulted Securities"), the
Representative shall have the right, within 24 hours thereafter, to make
arrangement for one or more of the non-defaulting Underwriters, or any other
underwriters, to purchase all, but not less than all, of the Defaulted
Securities in such amounts as may be agreed upon and upon the terms herein set
forth; if, however, the Representative shall not have completed such
arrangements within such 24-hour period, then:
(a) if the number of Defaulted Securities does not exceed 10% of the
total number of Firm Securities to be purchased on such date, the non-defaulting
Underwriters shall be obligated to purchase the full amount thereof in the
proportions that underwriting obligations hereunder bear to the underwriting
obligations of all non-defaulting Underwriters, or
(b) if the number of Defaulted Securities exceeds 10% of the total
number of Firm Securities, this Agreement shall terminate without liability on
the part of any non-defaulting Underwriters (or, if such default shall occur
with respect to any Option Securities to be purchased on an Option Closing Date,
the Underwriters may at the Representatives' option, by notice from the
Representative to the Company, terminate the Underwriters' obligation to
purchase Option Securities from the Company on such date).
No action taken pursuant to this Section 11 shall relieve any
defaulting Underwriter from liability in respect of any default by such
Underwriter under this Agreement.
In the event of any such default which does not result in a
termination of this Agreement, the Representative shall have the right to
postpone the Closing Date for a period not exceeding seven (7) days in order to
effect any required changes in the Registration Statement or Prospectus or in
any other documents or arrangements.
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<PAGE> 26
12. DEFAULT BY THE COMPANY. If the Company shall fail at the Closing
Date or at any Option Closing Date, as applicable, to sell and deliver the
number of Firm Securities which it is obligated to sell hereunder on such date,
then this Agreement shall terminate (or, if such default shall occur with
respect to any Option Securities to be purchased on an Option Closing Date, the
Underwriters may at the Representatives' option, by notice from the
Representative to the Company, terminate the Underwriters' obligation to
purchase Option Securities from the Company on such date) without any liability
on the part of any non-defaulting party other than pursuant to Section 5,
Section 7 and Section 10 hereof. No action taken pursuant to this Section 12
shall relieve the Company from liability, if any, in respect of such default;
provided, however, that the Company's liability shall be limited to the
reimbursement of these items specified in the first sentence of Section 10(b)
plus an amount equal to the unused portion, if any, of the $25,000 retainer and
pursuant to Section 5(c).
13. NOTICES. All notices and communications hereunder, except as herein
otherwise specifically provided, shall be in writing and shall be deemed to have
been duly given if mailed or transmitted by any standard form of
telecommunication. Notices to the Underwriters shall be directed to the
Representative, Millennium Financial Group, Inc., 235 West 56th Street, Suite
37E, New York, New York 10019, Attention: Michael Roy Fugler, Managing Director,
with a copy to Arter & Hadden LLP, 725 South Figueroa Street, 34th Floor, Los
Angeles, California 90017, Attention: Ronald Warner, Esq. Notices to the Company
shall be directed to the Company at 12100 Wilshire Boulevard, Suite 680, Los
Angeles, California 90025, Attention: Peter Hartmann, Chairman, with a copy to:
Jeffers, Wilson, Shaff & Falk LLP, 18881 Von Karman Avenue, Suite 1400 Irvine,
California 92612, Attention:
Michael B. Jeffers, Esq.
14. PARTIES. This Agreement shall inure solely to the benefit of and
shall be binding upon, the Underwriters, the Company and the controlling
persons, directors and officers referred to in Section 7 hereof, and successors,
legal representatives and assigns, and no other person shall have or be
construed to have any legal or equitable right, remedy or claim under or in
respect of or by virtue of this Agreement or any provisions herein contained. No
purchaser of Firm Securities or Option Securities from any Underwriter shall be
deemed to be a successor by reason merely of such purchase.
15. CONSTRUCTION. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of New York without giving
effect to the choice of law or conflict of laws principles. The prevailing party
in any dispute hereunder shall be entitled to an award of its reasonable legal
fees for resolving such dispute.
16. ARBITRATION. The parties agree that in the event of any dispute with
respect to this Agreement or their respective obligations hereunder, such
dispute shall be settled by arbitration in Los Angeles, California, or such
other jurisdiction as the parties may agree, in accordance with the rules of the
National Association of Securities Dealers, Inc. Any award rendered by the
arbitrators shall be final and judgment may be entered upon him or it by any
court of competent jurisdiction.
17. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, and all of which
taken together shall be deemed to be one and the same instrument.
18. ENTIRE AGREEMENT; AMENDMENTS. This Agreement and the
Representative's Warrant Agreement constitute the entire agreement of the
parties hereto and supersede all prior written or oral agreements,
understandings and negotiations with respect to the subject matter hereof. This
Agreement may not be amended except in a writing, signed by the Representative
and the Company.
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<PAGE> 27
If the foregoing correctly sets forth the understanding between the
Underwriters and the Company, please so indicate in the space provided below for
that purpose, whereupon this letter shall constitute a binding agreement among
us.
Very truly yours,
AMERICAN DIVERSIFIED HOLDINGS, INC.
By:
----------------------------------
James Buchanan Rea, Jr., President
and Chief Executive Officer
Confirmed and accepted as of
the date first above written.
MILLENNIUM FINANCIAL GROUP, INC.
For itself and as Representative
of the several Underwriters named in
Schedule A hereto.
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
28
<PAGE> 28
SCHEDULE A
FIRM SECURITIES
<TABLE>
<CAPTION>
Number of Shares
of Common Stock
Underwriters to be Purchased
- ------------ ------------------
<S> <C>
Millennium Financial Group, Inc...................
Total............................................. [_________]
</TABLE>
30
<PAGE> 29
EXHIBIT A
FORM OF REPRESENTATIVE'S WARRANT AGREEMENT
- --------------------------------------------------------------------------------
AMERICAN DIVERSIFIED HOLDINGS, INC.
AND
MILLENNIUM FINANCIAL GROUP, INC.
---------------------
REPRESENTATIVE'S WARRANT AGREEMENT
DATED AS OF ________, 1998
- --------------------------------------------------------------------------------
<PAGE> 30
THIS REPRESENTATIVE'S WARRANT AGREEMENT dated as of _______, 1998
between AMERICAN DIVERSIFIED HOLDINGS, INC., a Nevada corporation (the
"Company"), and MILLENNIUM FINANCIAL GROUP, INC. (hereinafter referred to
variously as the "Holder", "Millennium", or "Representative").
W I T N E S S E T H:
WHEREAS, the Company has prepared and filed with the Securities and
Exchange Commission a registration statement on Form SB-2 (No. 333-62489) for
the registration of 1,733,334 shares of the common stock, no par value, of the
Company (the "Common Stock"), an estimated _________ shares of which the Company
will place directly to investors located primarily in Europe (the "Direct
Shares");
WHEREAS, Millennium has agreed pursuant to an underwriting agreement
(the "Underwriting Agreement") dated as of the date hereof among Millennium
Financial Group, Inc. as the Representative of the several Underwriters listed
therein, and the Company to act as a Representative in connection with the
Company's proposed public offering of the remaining ________ shares of Common
Stock (the "Firm Shares") at a public offering price of $14.00 per share; and
WHEREAS, the Company proposes to issue to Millennium warrants
("Warrants") to purchase a number of shares of Common Stock, no par value
("Common Stock"), of the Company equal to ten percent (10%) of the Firm Shares
placed by Millennium (up to a maximum of ________ shares), in connection with
the Company's proposed public offering; and
WHEREAS, the Warrants to be issued pursuant to this Agreement will be
issued on the Closing Date (as such term is defined in the Underwriting
Agreement) by the Company to Millennium or its designees in consideration for,
and as part of Millennium's compensation in connection with, its acting as the
Representative pursuant to the Underwriting Agreement.
NOW, THEREFORE, in consideration of the premises, the payment by
Millennium to the Company of an aggregate _________ dollars ($_________), the
agreements herein set forth and other good and valuable consideration, hereby
acknowledged, the parties hereto agree as follows:
1. GRANT. Millennium (or its designees) is hereby granted the right to
purchase, at any time from the effective date of the Registration Statement,
until 5:30 P.M., New York time, on __________, 2003, up to an aggregate number
of shares of Common Stock equal to ten percent (10%) of the Firm Share placed by
Millennium, (up to a maximum of ________ shares) in connection with the
Company's public offering, subject to the terms and conditions of this
Agreement. Except as set forth herein, the shares of Common Stock are in all
respects identical to the shares of Common Stock being purchased by the
Underwriters for resale to the public pursuant to the terms and provisions of
the Underwriting Agreement. The shares of Common Stock are sometimes hereinafter
referred to as the "Securities."
2. WARRANT CERTIFICATE. The warrant certificate (the "Warrant
Certificate") delivered and to be delivered pursuant to this Agreement shall be
in the form set forth in Exhibit 1, attached hereto and made a part hereof, with
such appropriate insertions, omissions, substitutions, and other variations as
required or permitted by this Agreement.
3. EXERCISE OF WARRANT.
3.1. METHOD OF EXERCISE. The Warrants initially are exercisable at an
aggregate initial exercise price (subject to adjustment as provided in Section 8
hereof) per share of Common Stock set forth in Section 6 hereof payable by
certified or official bank check in New York Clearing House funds, subject to
adjustment as provided in Section 8 hereof. Upon surrender of a Warrant
Certificate with the annexed Form of Election to Purchase duly executed,
together with payment of the Exercise Price (as hereinafter defined) for the
shares of Common Stock purchased at the Company's principal executive offices in
California (presently located at 12100 Wilshire Boulevard, Suite 680, Los
Angeles, California 90025) the registered holder of a Warrant Certificate
("Holder" or "Holders") shall be entitled to receive a certificate or
certificates for the shares of Common Stock so purchased. The purchase rights
represented by
A-1
<PAGE> 31
the Warrant Certificate are exercisable at the option of the Holder thereof, in
whole or in part (but not as to fractional shares of the Common Stock underlying
the Warrant). The Warrant may be exercised to purchase all or part of the shares
of Common Stock. In the case of the purchase of less than all the shares of
Common Stock purchasable under the Warrant Certificate, the Company shall cancel
said Warrant Certificate upon the surrender thereof and shall execute and
deliver a new Warrant Certificate of like tenor for the balance of the shares of
Common Stock purchasable thereunder.
3.2. EXERCISE BY SURRENDER OF WARRANT. In addition to the method of
payment set forth in Section 3.1 and in lieu of any cash payment required
thereunder, the Holder(s) of the Warrant shall have the right at any time and
from time to time to exercise the Warrant in full or in part by surrendering the
Warrant Certificate in the manner specified in Section 3.1 hereof. The number of
shares of Common Stock to be issued pursuant to this Section 3.2 shall be equal
to the difference between (a) the number of shares of Common Stock in respect of
which the Warrant is exercised and (b) a fraction, the numerator of which shall
be the number of shares of Common Stock in respect of which the Warrant is
exercised multiplied by the Exercise Price and the denominator of which shall be
the Market Price (as defined in Section 3.3 hereof) of the Common Stock. Solely
for the purposes of this paragraph, Market Price shall be calculated either (i)
on the date on which the form of election attached hereto is deemed to have been
sent to the Company pursuant to Section 13 hereof ("Notice Date") or (ii) as the
average of the Market Prices for each of the five trading days preceding the
Notice Date, whichever of (i) or (ii) is greater.
3.3 DEFINITION OF MARKET PRICE. As used herein, the phrase "Market
Price" at any date shall be deemed to be the last reported sale price of the
Common Stock, or, in the case no such reported sale takes place on such day, the
average of the last reported sale prices for the last three (3) trading days, in
either case as officially reported by the principal securities exchange on which
the Common Stock is listed or admitted for trading or by the Nasdaq SmallCap
Market ("Nasdaq SmallCap") or by the National Association of Securities Dealers
Automated Quotation System ("Nasdaq"), or, if the Common Stock is not listed or
admitted for trading on any national securities exchange or quoted by Nasdaq,
the average closing bid price as furnished by the National Association of
Securities Dealers, Inc. ("NASD") through Nasdaq or similar organization if
Nasdaq is no longer reporting such information, or if the Common Stock is not
quoted on Nasdaq, as determined in good faith (using customary valuation
methods) by resolution of the members of the Board of Directors of the Company,
based on the best information available to it.
4. ISSUANCE OF CERTIFICATES. Upon the exercise of the Warrant, the
issuance of certificates for shares of Common Stock and/or other securities,
properties or rights underlying such Warrant shall be made forthwith (and in any
event within five (5) business days thereafter) without charge to the Holder
thereof including, without limitation, any tax which may be payable in respect
of the issuance thereof, and such certificates shall (subject to the provisions
of Sections 5 and 7 hereof) be issued in the name of, or in such names as may be
directed by, the Holder thereof; provided, however, that the Company shall not
be required to pay any tax which may be payable in respect of any transfer
involved in the issuance and delivery of any such certificates in a name other
than that of the Holder, and the Company shall not be required to issue or
deliver such certificates unless or until the person or persons requesting the
issuance thereof shall have paid to the Company the amount of such tax or shall
have established to the satisfaction of the Company that such tax has been paid.
The Warrant Certificates and the certificates representing the shares of
Common Stock underlying the Warrant (and/or other securities, property or rights
issuable upon the exercise of the Warrant) shall be executed on behalf of the
Company by the manual or facsimile signature of the then Chairman or Vice
Chairman of the Board of Directors or President or Vice President of the
Company. The Warrant Certificate shall be dated the date of execution by the
Company upon initial issuance, division, exchange, substitution or transfer.
Certificates representing the shares of Common Stock (and/or other securities,
property or rights issuable upon exercise of the Warrant) shall be dated as of
the Notice Date (regardless of when executed or delivered) and dividend bearing
securities so issued shall accrue dividends from the Notice Date.
5. RESTRICTION ON TRANSFER OF WARRANT. The Holder of a Warrant
Certificate, by its acceptance thereof, covenants and agrees that the Warrant is
being acquired as an investment and not with a view to the distribution thereof;
that the Warrant may not be sold, transferred, assigned, hypothecated or
otherwise disposed of, in whole or in part, for a period of one (1) year from
the date hereof, except to officers of the Representative.
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6. EXERCISE PRICE.
6.1 INITIAL AND ADJUSTED EXERCISE PRICE. Except as otherwise provided
in Section 8 hereof, the initial exercise price of the Warrant shall be $____
[150% of the initial public offering price] per share of Common Stock. The
adjusted exercise price shall be the price which shall result from time to time
from any and all adjustments of the initial exercise price in accordance with
the provisions of Section 8 hereof. Any transfer of the Warrant shall constitute
an automatic transfer and assignment of the registration rights set forth in
Section 7 hereof with respect to the Securities or other securities, properties
or rights underlying the Warrant.
6.2 EXERCISE PRICE. The term "Exercise Price" herein shall mean the
initial exercise price or the adjusted exercise price, depending upon the
context or unless otherwise specified.
7. REGISTRATION RIGHTS.
7.1 REGISTRATION UNDER THE SECURITIES ACT OF 1933. The Warrant, the
shares of Common Stock or other securities issuable upon exercise of the
Warrant, (collectively, the "Warrant Securities") have not been registered under
the Securities Act of 1933, as amended (the "Act") pursuant to the Company's
Registration Statement on Form SB- 2 (Registration No. 333-62489) (the
"Registration Statement"). The certificates representing the Warrant Securities
shall bear the following legend:
The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended ("Act"),
and may not be offered or sold except pursuant to (i) an
effective registration statement under the Act, (ii) to the
extent applicable, Rule 144 under the Act (or any similar rule
under such Act relating to the disposition of securities), or
(iii) an opinion of counsel, if such opinion shall be reasonably
satisfactory to counsel to the issuer, that an exemption from
registration under such Act is available.
7.2 PIGGYBACK REGISTRATION. If, at any time commencing after the date
hereof and expiring five (5) years thereafter, the Company proposes to register
any of its securities under the Act (other than pursuant to Form S-4, Form S-8
or a comparable registration statement) it will give written notice by
registered mail, at least thirty (30) days prior to the filing of each such
registration statement, to Millennium and to all other Holders of the Warrant
and/or the Warrant Securities of its intention to do so. If Millennium or other
Holders of the Warrant and/or Warrant Securities notify the Company within
twenty (20) business days after receipt of any such notice of its or their
desire to include any such securities in such proposed registration statement,
the Company shall afford Millennium and such Holders of the Warrant and/or
Warrant Securities the opportunity to have any such Warrant Securities
registered under such registration statement.
Notwithstanding the provisions of this Section 7.2, the Company shall
have the right at any time after it shall have given written notice pursuant to
this Section 7.2 (irrespective of whether a written request for inclusion of any
such securities shall have been made) to elect not to file any such proposed
registration statement, or to withdraw the same after the filing but prior to
the effective date thereof.
7.3 DEMAND REGISTRATION.
(a) At any time commencing after the date hereof and expiring
five (5) years thereafter, the Holder of the Warrant and/or Warrant
Securities representing a "Majority" (as hereinafter defined) of such
securities (assuming the exercise of all of the Warrant) shall have
the one-time right (which right is in addition to the registration
rights under Section 7.2 hereof), exercisable by written notice to
the Company, to have the Company prepare and file with the Securities
and Exchange Commission (the "Commission") a registration statement
and such other documents, including a prospectus, as may
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be necessary in the opinion of both counsel for the Company and
counsel for Millennium and Holders, in order to comply with the
provisions of the Act, so as to permit a public offering and sale
of their respective Warrant Securities for six (6) consecutive
months by such Holders and any other Holder of the Warrant and/or
Warrant Securities who notify the Company within ten (10) days
after receiving notice from the Company of such request.
(b) The Company covenants and agrees to give written notice of
any registration request under this Section 7.3 by any Holder or
Holders to all other registered Holders of the Warrant and the
Warrant Securities within ten (10) days from the date of the receipt
of any such registration request.
(c) Notwithstanding anything to the contrary contained herein, if
the Company shall not have filed a registration statement for the
Warrant Securities within the time period specified in Section 7.4(a)
hereof pursuant to the written notice specified in Section 7.3(a) of
a Majority of the Holders of the Warrant and/or Warrant Securities,
the Company may, at its option, upon the written notice of election
of a Majority of the Holders of the Warrant and/or Warrant Securities
requesting such registration, repurchase (i) any and all Warrant
Securities of such Holders at the higher of the Market Price per
share of Common Stock on (x) the date of the notice sent pursuant to
Section 7.3(a) or (y) the expiration of the period specified in
Section 7.4(a) and (ii) any and all Warrant of such Holders at such
Market Price less the Exercise Price of such Warrant. Such repurchase
shall be in immediately available funds and shall close within two
(2) days after the later of (i) the expiration of the period
specified in Section 7.4(a) or (ii) the delivery of the written
notice of election specified in this Section 7.3(c).
(d) If all of the Holders are able to sell the Warrant Securities
pursuant to Rule 144 under the Securities Act of 1933, as amended,
and without regard to the volume limitations thereunder, the Holders'
rights under Section 7.2 and 7.3(a) shall terminate.
7.4 COVENANTS OF THE COMPANY WITH RESPECT TO REGISTRATION. In
connection with any registration under Section 7.2 or 7.3 hereof, the Company
covenants and agrees as follows:
(a) The Company shall use its best efforts to file a registration
statement within thirty (30) days of receipt of any demand therefor,
shall use its best efforts to have any registration statements
declared effective at the earliest possible time, and shall furnish
each Holder desiring to sell Warrant Securities such number of
prospectuses as shall reasonably be requested.
(b) The Company shall pay all costs (excluding fees and expenses
of Holder(s)' counsel and any underwriting or selling commissions),
fees and expenses in connection with all registration statements
filed pursuant to Sections 7.2 and 7.3(a) hereof including, without
limitation, the Company's legal and accounting fees, printing
expenses, blue sky fees and expenses.
(c) The Company will take all necessary action which may be
required in qualifying or registering the Warrant Securities included
in a registration statement for offering and sale under the
securities or blue sky laws of such states as reasonably are
requested by the Holder(s), provided that the Company shall not be
obligated to execute or file any general consent to service of
process or to qualify as a foreign corporation to do business under
the laws of any such jurisdiction.
(d) The Company shall indemnify the Holder(s) of the Warrant
Securities to be sold pursuant to any registration statement and each
person, if any, who controls such Holders within the meaning of
Section 15 of the Act or Section 20(a) of the Securities Exchange Act
of 1934, as amended ("Exchange Act"), against all loss, claim,
damage, expense or liability (including all expenses reasonably
incurred in investigating, preparing or defending against any claim
whatsoever) to which any of them may become subject under the Act,
the Exchange Act or otherwise, arising from such registration
statement but only to the same extent and with the same effect as the
provisions pursuant to which the Company has agreed to indemnify each
of the Underwriters contained in Section 7 of the Underwriting
Agreement.
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(e) The Holder(s) of the Warrant Securities to be sold pursuant
to a registration statement, and their successors and assigns, shall
severally, and not jointly, indemnify the Company, its officers and
directors and each person, if any, who controls the Company within
the meaning of Section 15 of the Act or Section 20(a) of the Exchange
Act, against all loss, claim, damage, expense or liability (including
all expenses reasonably incurred in investigating, preparing or
defending against any claim whatsoever) to which they may become
subject under the Act, the Exchange Act or otherwise, arising from
information furnished by or on behalf of such Holders, or their
successors or assigns, for specific inclusion in such registration
statement to the same extent and with the same effect as the
provisions contained in Section 7 of the Underwriting Agreement
pursuant to which the Underwriters have agreed to indemnify the
Company.
(f) Nothing contained in this Agreement shall be construed as
requiring the Holder(s) to exercise their Warrant prior to the
initial filing of any registration statement or the effectiveness
thereof.
(g) The Company shall not permit the inclusion of any securities
other than the Warrant Securities to be included in any registration
statement filed pursuant to Section 7.3 hereof, or permit any other
registration statement to be or remain effective during the
effectiveness of a registration statement filed pursuant to Section
7.3 hereof (other than (i) shelf registrations effective prior
thereto and (ii) registrations on Form S-4 or S-8), without the prior
written consent of the Holders of the Warrant and Warrant Securities
representing a Majority of such securities.
(h) The Company shall furnish to each Holder participating in the
offering and to each underwriter, if any, a signed counterpart,
addressed to such Holder or underwriter, of (i) an opinion of counsel
to the Company, dated the effective date of such registration
statement (and, if such registration includes an underwritten public
offering, an opinion dated the date of the closing under the
underwriting agreement), and (ii) a "cold comfort" letter dated the
effective date of such registration statement (and, if such
registration includes an underwritten public offering, a letter dated
the date of the closing under the underwriting agreement) signed by
the independent public accountants who have issued a report on the
Company's financial statements included in such registration
statement, in each case covering substantially the same matters with
respect to such registration statement (and the prospectus included
therein) and, in the case of such accountants' letter, with respect
to events subsequent to the date of such financial statements, as are
customarily covered in opinions of issuer's counsel and in
accountants' letters delivered to underwriters in underwritten public
offerings of securities.
(i) The Company shall as soon as practicable after the effective
date of the registration statement, and in any event within 15 months
thereafter, make "generally available to its security holders"
(within the meaning of Rule 158 under the Act) an earnings statement
(which need not be audited) complying with Section 11(a) of the Act
and covering a period of at least 12 consecutive months beginning
after the effective date of the registration statement.
(j) The Company shall deliver promptly to each Holder
participating in the offering requesting the correspondence and
memoranda described below and to the managing underwriters, copies of
all correspondence between the Commission and the Company, its
counsel or auditors and all memoranda relating to discussions with
the Commission or its staff with respect to the registration
statement and permit each Holder and underwriter to do such
investigation, upon reasonable advance notice, with respect to
information contained in or omitted from the registration statement
as it deems reasonably necessary to comply with applicable securities
laws or rules of the NASD. Such investigation shall include access to
books, records and properties and opportunities to discuss the
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business of the Company with its officers and independent auditors,
all to such reasonable extent and at such reasonable times and as
often as any such Holder or underwriter shall reasonably request.
(k) The Company shall enter into an underwriting agreement with
the managing underwriters selected for such underwriting by Holders
holding a Majority of the Warrant Securities requested pursuant to
Section 7.3(a) to be included in such underwriting, which may be
Millennium. Such agreement shall be satisfactory in form and
substance to the Company, each Holder and such managing
underwriter(s), and shall contain such representations, warranties
and covenants by the Company and such other terms as are customarily
contained in agreements of that type used by the managing
underwriter(s). The Holders shall be parties to any underwriting
agreement relating to an underwritten sale of their Warrant
Securities whether pursuant to Section 7.2 or Section 7.3(a) and may,
at their option, require that any or all of the representations,
warranties and covenants of each of the Company and the Subsidiary to
or for the benefit of such underwriter(s) shall also be made to and
for the benefit of such Holders. Such Holders shall not be required
to make any representations or warranties to or agreements with the
Company or the underwriter(s) except as they may relate to such
Holders and their intended methods of distribution.
(l) For purposes of this Agreement, the term "Majority" in
reference to the Holders of Warrant or Warrant Securities, shall mean
in excess of fifty percent (50%) of the then outstanding Warrant or
Warrant Securities that (i) are not held by the Company, an
affiliate, officer, creditor, employee or agent thereof or any of
their respective affiliates, members of their family, persons acting
as nominees or in conjunction therewith and (ii) have not been resold
to the public pursuant to a registration statement filed with the
Commission under the Act.
8. ADJUSTMENTS TO EXERCISE PRICE AND NUMBER OF SECURITIES.
8.1. SUBDIVISION AND COMBINATION. In case the Company shall at any
time subdivide or combine the outstanding shares of Common Stock, the Exercise
Price shall forthwith be proportionately decreased in the case of subdivision or
increased in the case of combination.
8.2. STOCK DIVIDENDS AND DISTRIBUTIONS. In case the Company shall pay
a dividend in, or make a distribution of, shares of Common Stock, the Exercise
Price shall forthwith be proportionately decreased. An adjustment made pursuant
to this Section 8.2 shall be made as of the record date for the subject stock
dividend or distribution.
8.3. ADJUSTMENT IN NUMBER OF SECURITIES. Upon each adjustment of the
Exercise Price pursuant to the provisions of this Section 8, the number of
Warrant Securities issuable upon the exercise at the adjusted exercise price of
each Warrant shall be adjusted to the nearest full amount by multiplying a
number equal to the Exercise Price in effect immediately prior to such
adjustment by the number of Warrant Securities issuable upon exercise of the
Warrant immediately prior to such adjustment and dividing the product so
obtained by the adjusted Exercise Price.
8.4. DEFINITION OF COMMON STOCK. For the purpose of this Agreement,
the term "Common Stock" shall mean (i) the class of stock designated as Common
Stock in the Certificate of Incorporation of the Company as may be amended as of
the date hereof, or (ii) any other class of stock resulting from successive
changes or reclassifications of such Common Stock consisting solely of changes
in par value, or from par value to no par value, or from no par value to par
value.
8.5. MERGER OR CONSOLIDATION. In case of any consolidation of the
Company with, or merger of the Company with, or merger of the Company into,
another corporation (other than a consolidation or merger which does not result
in any reclassification or change of the outstanding Common Stock), the
corporation formed by such consolidation or merger shall execute and deliver to
the Holder a supplemental warrant agreement providing that the holder of each
Warrant then outstanding or to be outstanding shall have the right thereafter
(until the expiration of such Warrant) to receive, upon exercise of such
Warrant, the kind and amount of shares of stock and other securities and
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property receivable upon such consolidation or merger, by a holder of the number
of securities of the Company for which such Warrant might have been exercised
immediately prior to such consolidation, merger, sale or transfer. Such
supplemental warrant agreement shall provide for adjustments which shall be
identical to the adjustments provided in Section 8. The above provision of this
subsection shall similarly apply to successive consolidations or mergers.
8.6. NO ADJUSTMENT OF EXERCISE PRICE IN CERTAIN CASES. No adjustment
of the Exercise Price shall be made if the amount of said adjustment shall be
less than two cents ($0.02) per Warrant Security, provided, however, that in
such case any adjustment that would otherwise be required then to be made shall
be carried forward and shall be made at the time of and together with the next
subsequent adjustment which, together with any adjustment so carried forward,
shall amount to at least two cents ($0.02) per Warrant Security.
9. EXCHANGE AND REPLACEMENT OF WARRANT CERTIFICATES. Each Warrant
Certificate is exchangeable without expense, upon the surrender thereof by the
registered Holder at the principal executive office of the Company, for a new
Warrant Certificate of like tenor and date representing in the aggregate the
right to purchase the same number of Warrant Securities in such denominations as
shall be designated by the Holder thereof at the time of such surrender.
Upon receipt by the Company of evidence reasonably satisfactory to it of
the loss, theft, destruction or mutilation of any Warrant Certificate, and, in
case of loss, theft or destruction, of indemnity or security reasonably
satisfactory to it, and reimbursement to the Company of all reasonable expenses
incidental thereto, and upon surrender and cancellation of the Warrant, if
mutilated, the Company will make and deliver a new Warrant Certificate of like
tenor, in lieu thereof.
10. ELIMINATION OF FRACTIONAL INTERESTS. The Company shall not be
required to issue certificates representing fractions of shares of Common Stock
upon the exercise of the Warrant, nor shall it be required to issue scrip or pay
cash in lieu of fractional interests, it being the intent of the parties that
all fractional interests shall be eliminated by rounding any fraction up to the
nearest whole number of shares of Common Stock or other securities, properties
or rights.
11. RESERVATION AND LISTING OF SECURITIES. The Company shall at all
times reserve and keep available out of its authorized shares of Common Stock,
solely for the purpose of issuance upon the exercise of the Warrant, such number
of shares of Common Stock or other securities, properties or rights as shall be
issuable upon the exercise thereof. The Company covenants and agrees that, upon
exercise of the Warrant and payment of the Exercise Price therefor, all shares
of Common Stock, and other securities issuable upon such exercise shall be duly
and validly issued, fully paid, non-assessable and not subject to the preemptive
rights of any stockholder. As long as the Warrant shall be outstanding, the
Company shall use its best efforts to cause all shares of Common Stock issuable
upon the exercise of the Warrant to be listed (subject to official notice of
issuance) on all securities exchanges on which the Common Stock may then be
listed and/or quoted on Nasdaq SmallCap or Nasdaq.
12. NOTICES TO WARRANT HOLDERS. Nothing contained in this Agreement
shall be construed as conferring upon the Holders the right to vote or to
consent or to receive notice as a stockholder in respect of any meetings of
stockholders for the election of directors or any other matter, or as having any
rights whatsoever as a stockholder of the Company. If, however, at any time
prior to the expiration of the Warrant and their exercise, any of the following
events shall occur:
(a) the Company shall take a record of the holders of its shares of
Common Stock for the purpose of entitling them to receive a dividend or
distribution payable otherwise than in cash, or a cash dividend or
distribution payable otherwise than out of current or retained earnings
or capital surplus (in accordance with applicable law), as indicated by
the accounting treatment of such dividend or distribution on the books
of the Company; or
(b) the Company shall offer to all the holders of its Common Stock
any additional shares of capital stock of the Company or securities
convertible into or exchangeable for shares of capital stock of the
Company, or any option, right or warrant to subscribe therefor; or
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(c) a dissolution, liquidation or winding up of the Company (other
than in connection with a consolidation or merger) or a sale of all or
substantially all of its property, assets and business as an entirety
shall be proposed;
then, in any one or more of said events, the Company shall give written notice
of such event at least thirty (30) days prior to the date fixed as a record date
or the date of closing the transfer books for the determination of the
stockholders entitled to such dividend, distribution, convertible or
exchangeable securities or subscription rights, or entitled to vote on such
proposed dissolution, liquidation, winding up or sale. Such notice shall specify
such record date or the date of closing the transfer books, as the case may be.
Failure to give such notice or any defect therein shall not affect the validity
of any action taken in connection with the declaration or payment of any such
dividend, or the issuance of any convertible or exchangeable securities, or
subscription rights, options or Warrant, or any proposed dissolution,
liquidation, winding up or sale.
13. NOTICES.
All notices, requests, consents and other communications hereunder shall
be in writing and shall be deemed to have been duly made and sent when
delivered, or mailed by registered or certified mail, return receipt requested:
(a) If to the registered Holder of the Warrant, to the address of
such Holder as shown on the books of the Company; or
(b) If to the Company, to the address set forth in Section 3 hereof
or to such other address as the Company may designate by notice to the
Holders.
14. SUPPLEMENTS AND AMENDMENTS. The Company and Millennium may from time
to time supplement or amend this Agreement without the approval of any Holders
of Warrant Certificates (other than Millennium) in order to cure any ambiguity,
to correct or supplement any provision contained herein which may be defective
or inconsistent with any provisions herein, or to make any other provisions in
regard to matters or questions arising hereunder which the Company and
Millennium may deem necessary or desirable and which the Company and Millennium
deem shall not adversely affect the interests of the Holders of Warrant
Certificates.
15. SUCCESSORS. All the covenants and provisions of this Agreement shall
be binding upon and inure to the benefit of the Company, the Holders and their
respective successors and assigns hereunder.
16. TERMINATION. This Agreement shall terminate at the close of business
on _______, [2004]. Notwithstanding the foregoing, the indemnification
provisions of Section 7 shall survive such termination until the close of
business on _______, [2010].
17. GOVERNING LAW; LEGAL COSTS AND EXPENSES. This Agreement and each
Warrant Certificate issued hereunder shall be deemed to be a contract made under
the laws of the State of New York and for all purposes shall be construed in
accordance with the laws of said State without giving effect to the rules of
said State governing the conflicts of laws.
The Company, Millennium and the Holders agree that the prevailing
party(ies) in any action, proceeding or claim arising out of, or relating in any
way to this Agreement shall be entitled to recover from the other party(ies) all
of its/their reasonable legal costs and expenses relating to such action or
proceeding and/or incurred in connection with the preparation therefor.
18. ENTIRE AGREEMENT; MODIFICATION. This Agreement (including the
Underwriting Agreement) contains the entire understanding between the parties
hereto with respect to the subject matter hereof and may not be modified or
amended except by a writing duly signed by the party against whom enforcement of
the modification or amendment is sought.
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19. SEVERABILITY. If any provision of this Agreement shall be held to be
invalid or unenforceable, such invalidity or unenforceability shall not affect
any other provision of this Agreement.
20. CAPTIONS. The caption headings of the Sections of this Agreement are
for convenience of reference only and are not intended, nor should they be
construed as, a part of this Agreement and shall be given no substantive effect.
21. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement shall be
construed to give to any person or corporation other than the Company and
Millennium and any other registered Holder(s) of the Warrant Certificates or
Warrant Securities any legal or equitable right, remedy or claim under this
Agreement; and this Agreement shall be for the sole benefit of the Company and
Millennium and any other registered Holders of Warrant Certificates or Warrant
Securities.
22. COUNTERPARTS. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and such counterparts shall together constitute but one and the
same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, as of the day and year first above written.
AMERICAN DIVERSIFIED HOLDINGS, INC.
By: _______________________________
Name:
Title:
Attest:
___________________________________
Secretary
MILLENNIUM FINANCIAL GROUP, INC
By: _______________________________
Name:
Title:
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EXHIBIT 1
[FORM OF WARRANT CERTIFICATE]
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, (ii) TO THE
EXTENT APPLICABLE, RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT
RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) AN OPINION OF COUNSEL, IF
SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL FOR THE ISSUER, THAT AN
EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANT REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN.
EXERCISABLE ON OR BEFORE 5:30 P.M., NEW YORK TIME, __________, 2003.
No. W- Warrant to Purchase
____ Shares of Common Stock and/or
WARRANT CERTIFICATE
This Warrant Certificate certifies that __________, or registered
assigns, is the registered holder of Warrant to purchase initially, at any time
from the effective date of the Registration Statement until 5:30 p.m. New York
time on ___________, 2003 [five years from the effective date of the
Registration Statement] ("Expiration Date"), up to __________ fully-paid and
non-assessable shares of common stock, no par value ("Common Stock"), of
AMERICAN DIVERSIFIED HOLDINGS, INC., a Nevada corporation (the "Company"), at
the initial exercise price, subject to adjustment in certain events (the
"Exercise Price"), of $______ [150% of the initial public offering price] per
share of Common Stock upon surrender of this Warrant Certificate and payment of
the Exercise Price at an office or agency of the Company, but subject to the
conditions set forth herein and in the warrant agreement dated as of _______,
1998 between the Company and Millennium Financial Group, Inc. (the "Warrant
Agreement"). Payment of the Exercise Price shall be made by certified or
official bank check in New York Clearing House funds payable to the order of the
Company or by surrender of this Warrant Certificate.
No Warrant may be exercised after 5:30 p.m., New York time, on the
Expiration Date, at which time all Warrant evidenced hereby, unless exercised
prior thereto, hereby shall thereafter be void.
The Warrant evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrant issued pursuant to the Warrant Agreement, which
Warrant Agreement is hereby incorporated by reference in and made a part of this
instrument and is hereby referred to for a description of the rights, limitation
of rights, obligations, duties and immunities thereunder of the Company and the
holders (the words "holders" or "holder" meaning the registered holders or
registered holder) of the Warrant.
The Warrant Agreement provides that upon the occurrence of certain
events the Exercise Price and the type and/or number of the Company's securities
issuable thereupon may, subject to certain conditions, be adjusted. In such
event, the Company will, at the request of the holder, issue a new Warrant
Certificate evidencing the adjustment in the Exercise Price and the number
and/or type of securities issuable upon the exercise of the Warrant; provided,
however, that the failure of the Company to issue such new Warrant Certificates
shall not in any way change, alter, or otherwise impair, the rights of the
holder as set forth in the Warrant Agreement.
Upon due presentment for registration of transfer of this Warrant
Certificate at an office or agency of the Company, a new Warrant Certificate or
Warrant Certificates of like tenor and evidencing in the aggregate a like number
of Warrant shall be issued to the transferee(s) in exchange for this Warrant
Certificate, subject to the limitations provided
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herein and in the Warrant Agreement, without any charge except for any tax or
other governmental charge imposed in connection with such transfer.
Upon the exercise of less than all of the Warrant evidenced by this
Certificate, the Company shall forthwith issue to the holder hereof a new
Warrant Certificate representing such number of unexercised Warrant.
The Company may deem and treat the registered holder(s) hereof as the
absolute owner(s) of this Warrant Certificate (notwithstanding any notation of
ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, and of any distribution to the holder(s) hereof, and for all
other purposes, and the Company shall not be affected by any notice to the
contrary.
All terms used in this Warrant Certificate which are defined in the
Warrant Agreement shall have the meanings assigned to them in the Warrant
Agreement.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed under its corporate seal.
Dated as of ___________, 1998
AMERICAN DIVERSIFIED HOLDINGS, INC.
By: _______________________________
Name:
Title:
Ex-2
<PAGE> 41
[FORM OF ELECTION TO PURCHASE PURSUANT TO SECTION 3.1]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase:
[ ] _________________ shares of Common Stock;
and herewith tenders in payment for such securities a certified or official bank
check payable in New York Clearing House Funds to the order of American
Diversified Holdings, Inc. in the amount of $_______________________, all in
accordance with the terms of Section 3.1 of the Representative's Warrant
Agreement dated as of ______________________, 1998 between American Diversified
Holdings, Inc. and Millennium Financial Group, Inc. The undersigned requests
that a certificate for such securities be registered in the name of whose
address is and that such Certificate be delivered to ____________________ whose
address is ________________________.
Dated: _____________________
Signature__________________________
(Signature must conform in all
respects to name of holder as
specified on the face of the
Warrant Certificate.)
___________________________________
(Insert Social Security or Other
Identifying Number of Holder)
<PAGE> 42
[FORM OF ELECTION TO PURCHASE PURSUANT TO SECTION 3.2]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase:
[ ] _________________ shares of Common Stock;
and herewith tenders in payment for such securities ________ Warrant all in
accordance with the terms of Section 3.2 of the Representative's Warrant
Agreement dated as of __________________, 1998 between American Diversified
Holdings, Inc. and Millennium Financial Group, Inc. The undersigned requests
that a certificate for such securities be registered in the name of whose
address is _____________ and that such Certificate be delivered to
____________________ whose address is ______________________________.
Dated: ___________________
Signature ________________________
(Signature must conform in all
respects to name of holder as
specified on the face of the
Warrant Certificate.)
__________________________________
(Insert Social Security or Other
Identifying Number of Holder)
<PAGE> 43
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED _________________________ hereby sells, assigns and
transfers unto _________________________________________________________________
(Please print name and address of transferee)
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint Attorney, to transfer the
within Warrant Certificate on the books of the within-named Company, with full
power of substitution.
Dated:______________________
Signature __________________________
(Signature must conform in all
respects to name of holder as
specified on the face of the Warrant
Certificate.)
____________________________________
(Insert Social Security or Other
identifying Number of Holder)
<PAGE> 1
EXHIBIT 5.1
[JEFFERS, WILSON, SHAFF, & FALK, LLP LETTERHEAD]
November 9, 1998
American Diversified Holdings, Inc.
10900 Wilshire Blvd., Suite 930
Los Angeles, CA 90024
Re: Registration Statement on Form SB-2
Gentlemen:
We have acted as counsel to American Diversified Holdings, Inc. (the
"Company"), a Nevada corporation, in connection with the Registration Statement
on Form SB-2 (333-62489), filed with the Securities and Exchange Commission on
August 31, 1998, as amended (the "Registration Statement"), covering 1,733,334
shares of the Company's no par value Common Stock (the "Shares").
In acting as counsel for the Company and arriving at the opinions as
expressed below, we have examined and relied upon originals or copies, certified
or otherwise identified to our satisfaction, of such records of the Company,
agreements and other instruments, certificates of officers and representatives
of the Company, certificates of public officials and other documents as we have
deemed necessary or appropriate as a basis for the opinions expressed herein.
In connection with our examination we have assumed the genuineness of
all signatures, the authenticity of all documents tendered to us as originals,
the legal capacity of natural persons and the conformity to original documents
of all documents submitted to us as certified or photostated copies.
Based on the foregoing, and subject to the qualifications and
limitations set forth herein, it is our opinion that the Shares have been duly
authorized and when issued, delivered and paid for, will be validly issued,
fully paid and non-assessable.
We express no opinion with respect to laws other than those of the State
of California and federal laws of the United States of America, and we assume no
responsibility as to the applicability thereof, or the effect thereon, of the
laws of any other jurisdiction.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and to its use as part of the Registration Statement.
Very truly yours,
/s/ Jeffers, Wilson, Shaff & Falk, LLP
----------------------------------------
JEFFERS, WILSON, SHAFF & FALK, LLP
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the use in this Registration Statement on Form SB-2
of our report, dated October 16, 1998, except for Note 10 as to which
the date is October 30, 1998, relating to the consolidated financial
statements of American Diversified Holdings, Inc. and subsidiaries and
our report dated March 16, 1998, except for the last paragraph of Note 9
as to which the date is March 31, 1998, related to the financial
statements of James Buchanan Rea, Inc. We also consent to the reference
to our Firm under the caption "Experts" in the Prospectus.
/s/ McGladrey & Pullen, LLP
----------------------------------------
MCGLADREY & PULLEN, LLP
New York, New York
November 9, 1998
