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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS
Under Section 12(b) or (g) of the Securities Exchange Act of 1934
AMERICAN DIVERSIFIED HOLDINGS, INC.
(Name of small business issuer in its charter)
NEVADA 86-0854150
(State or jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12100 Wilshire Boulevard, Suite 680
Los Angeles, California 90025
310-442-9931
(Address and telephone number of principal executive offices)
Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
NONE N/A
Securities to be registered under Section 12(g) of the Act:
Common Stock
(Title of class)
Series A Preferred Stock
(Title of class)
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DESCRIPTION OF BUSINESS
GENERAL
American Diversified Holdings, Inc. ("the Company"), was incorporated on
February 4, 1997 under Nevada law and is a holding company formed to engage in
the financial services business in the United States and Europe. The Company has
established two wholly-owned subsidiaries: American Diversified Securities,
Inc., ("ADSI"), a Nevada corporation; and American Diversified Holdings, AG
(ADAG"), a German corporation ( together the Company and the subsidiaries are
referred to as "the Group"). The principal business activities of the Group will
be to provide financial services and distribute financial service products to
individual and institutional investors in the United States, Germany and the
European Common Market ("ECC") countries. The Group's initial principal activity
will be to act as investment manager and distributor in the United States and
the ECC for the Rea-Graham Balanced Fund (the "Fund"), a series mutual fund of
Rea-Graham Funds, Inc., a diversified, open-end investment company registered
under the Investment Company Act of 1940. ADAG is located in Berlin and will
provide financial services and be the initial distributor of the Group's mutual
fund products in Germany and the ECC. The Group intends to provide a wide range
of commercial and consumer financial services to customers in the United States
and Europe.
The merger of James Buchanan Rea, Inc. ("JBRI"), a California
corporation, with and into ADSI has been approved by the directors and
shareholders of the constituent corporations and is scheduled to become
effective on January 21, 1998. JBRI is a licensed broker-dealer and a registered
investment advisor under the Investment Advisers Act of 1940. JBRI has served as
the investment advisor and distributor to the Fund since its inception in 1982.
The shareholders of the Fund, at a meeting on January 12, 1998, approved a new
investment advisory agreement with ADSI upon completion of the merger. ADSI will
succeed to the business operations of JBRI and will operate as a broker-dealer
and registered investment advisor as a result of the merger. ADSI will succeed
as the investment advisor and distributor to the Fund. James Buchanan Rea, Jr.,
the former President and registered securities principal of JBRI will become the
President and general securities principal of ADSI. ADSI was organized in
February 1997 and does not have an operating history and has not previously
engaged in the investment management business or in the operation and
distribution of mutual funds. At the date of this filing, the investment
management business of ADSI, acquired through the JBRI merger, is the only
active business of the Company.
BUSINESS EXPANSION; CAPITAL GROWTH
The Company's management believes that an international financial
services group with management and offices in both the U.S. and Europe can
attract a clientele of institutional investors, banks, businesses and
individuals as customers. The Group's business strategy is to provide customers
of small-to medium-sized European banks with direct access to American financial
services and an opportunity to invest in tailored U.S. mutual funds, such as the
Fund. The Company believes there is a new and growing market in Germany and the
ECC 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 the traditional savings account deposits in commercial banks. The Company
intends to expand the mutual fund management and distribution business of ADSI
by organizing additional series funds, initially a small cap value fund, for
distribution to U.S. and European investors. The Company intends to market the
Fund and new series funds to European investors through ADAG. The Company also
intends to organize and distribute primarily to U.S. investors a German growth
fund. The Company intends to grow the Fund by marketing in Europe and thereby
increase the revenues and profitability of ADSI. ADSI's revenues and income are
variable with the net assets of the Fund and other mutual funds it may manage in
the future. The Group will initially have 12 full time employees, with
additional employees to be added as the business is expanded.
The Company intends to finance its business expansion through sales of
equity capital in Europe and the U.S. The Company is presently engaged in a $5
million private placement of its preferred stock in Germany in an offering that
is exempt from U.S. securities laws under Regulation S. The Company has
authorized 50,000,000 shares of blank check preferred stock and it anticipates
future offerings of preferred stock to finance future business expansion. There
can be no assurance that the current offering or future offerings will be
successful.
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MARKET AREA
The Group's European subsidiaries, starting with ADAG, which was
incorporated in Germany on April 30, 1997, will offer consumer focused financial
services including private money management, full service and online-brokerage
and U.S. mutual fund distribution to small and medium sized institutional
investors, banks and individual customers in its immediate market area.
The Group's initial targeted market area for the distribution of the
Fund and other financial service products in Europe is Berlin, Germany's future
capital and the location of one of Germany's five regional stock exchanges, and
other financial centers in Germany. Over the next two years, the Company's
expansion plans include the formation of subsidiaries and commencement of
financial services businesses in Vienna, Austria, Luxembourg and Zurich,
Switzerland. Initial steps have been taken to establish the Austrian subsidiary.
HISTORY OF JBRI
The initial business of the Company will be the continuation and
expansion of JBRI's investment management services. JBRI was founded in 1961 and
is a licensed broker-dealer and registered investment advisor engaged in
business as a sponsor, investment manager and distributor of mutual funds. JBRI
has served as the investment advisor, underwriter and distributor of the Fund
since 1982, a series portfolio of Rea-Graham Funds, Inc, a mutual fund series
company founded by James Buchanan Rea, Sr. and Benjamin Graham. Over the past
three years, this has been the principal business activity of JBRI.
LACK OF PROFITABILITY, POTENTIAL LOSSES
The Company has no operating history. The Group's business is subject to
the risks inherent in the establishment of a new business enterprise. Because
the Company was only recently formed, there is no history of operations.
From its inception on February 19, 1997 through December 31, 1997, the
Company has experienced aggregate losses of $(to come). Further, a key element
of the Company's strategy consists of an aggressive marketing for its financial
products in Europe. This strategy may result in continued net losses for the
Company during its start-up phase due to start-up costs associated with the
anticipated high marketing costs for the promotion of mutual funds in its market
area. Results of operations in the future will be influenced by numerous factors
including, among others, expansion, the ability of the Company to manage its
growth and maintain the quality of its personnel, and the ability of the Company
to implement its strategic plan. The Company may incur problems, delays,
expenses and difficulties in its development stage, many of which may be beyond
the Company's control. These include, but are not limited to, unanticipated
regulatory compliance, marketing problems and intense competition that may
exceed current estimates. There is no assurance that the Company will ever
operate profitably.
MANAGEMENT OF GROWTH
The Company plans to expand its business with the formation of
subsidiaries in Austria, Luxembourg and Switzerland. To a significant extent,
the Company's future success will be dependent upon its ability to engage in a
successful expansion program and will be dependent, in part, upon its ability to
secure regulatory approvals in its chosen markets, attract customers for its
financial products, maintain adequate financial controls and reporting systems
to manage a larger operation, and obtain additional capital upon favorable
terms. There can be no assurance that the Company will be able to successfully
implement its planned expansion, finance its growth or manage the resulting
larger operation.
COMPETITION
The investment management business is highly competitive. The Company
encounters significant competition in connection with the operation of its
business in the U.S., but only limited competition for its distribution of U.S.
mutual funds in its primary marketing area in Germany. The Company will compete
with a large number of investment management firms, commercial banks, insurance
companies broker-dealers and other financial services providers., which have
greater resources, assets under management, administration capability and offer
a broader array of investment products and services than the Company. Many
competitors devote substantial resources to advertising and marketing their
mutual funds which may adversely affect the ability of the Company's funds and
other new funds to grow. The Company's competitors in the U.S. include numerous
enterprises with extensive experience in the financial services sector. These
competitive conditions may adversely affect the Company's revenues,
profitability and ability to meet its business objectives. Management of the
Company believes it has identified a niche market in Germany and the ECC for the
marketing of U.S. mutual fund products to individual and small institutional
customers.
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Factors affecting the Company's business expansion success include: 1)
the abilities, performance records and reputations of its investment managers;
and, 2) its ability to develop new investment products and implement marketing
strategies in the U.S. and Europe. The Company's ability to retain and increase
its investment assets under management could be adversely affected if client
accounts underperform the market or if key investment managers leave the Group.
The marketability of the Company's investment products, primarily mutual funds,
is also dependent, in part, on the relative attractiveness of their investment
philosophies and methods 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 ECC markets.
REGULATION
The Company's international investment management and broker-dealer
operations are subject to extensive regulation, supervision and licensing under
various U.S. and European federal and state laws and regulations and under the
securities and corporate laws of the European countries under which it will
market its financial services. ADSI will initially operate under JBRI's
predecessor license as a broker-dealer under the Securities Exchange Act of
1934, as amended, and as an investment advisor under the Investment Company Act
of 1940, as amended. The Company and various entities of the Group will also be
subject to securities regulation in Germany and the various ECC jurisdictions
where it establishes business operations or distributes financial services
products.
The securities and investment management laws and regulations generally
grant supervisory agencies and bodies broad administrative powers, including the
power to limit or restrict an investment management firm from conducting
business or distributing products in the event that it fails to comply with such
laws and regulations. Possible sanctions could include the suspension of
business activities for specified periods of time, revocations of licenses to
operate, and other censures and fines.
SERVICEMARK APPLICATION
The Company has applied for, but not been issued any registered
servicemark for its "AMERICAN DIVERSIFIED(TM)" or "AmDiv(TM)" service-names. No
assurance can be given that the Company will be successful in obtaining these
marks, or that the servicemarks, if obtained, will afford the Company any
competitive advantages.
DESCRIPTION OF PROPERTY
The Group currently has two business offices under lease. ADSI is
negotiating the terms of a month-to-month rent arrangement and ADAG has entered
into a five year lease for office space in Berlin. It is anticipated that the
Company will enter into new office leases as additional subsidiaries are formed
and the Group's business activities are expanded into additional ECC countries.
DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES
MANAGEMENT
The Company is assembling an international team of managers and
entrepreneurs with experience in the Group's market area and a shared commitment
to its future growth and success.
Peter Hartmann, age 42, Chairman, President and Chief Executive Officer,
has over 20 years of experience with international project management. Between
1992 and January 1997, Mr. Hartmann served as President and Chief Executive
Officer of EMDC, an international consulting company with clients in Europe,
Russia, Singapore and Vietnam.
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James Buchanan Rea Jr., age 42, Vice-President and Chief Operating
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 ADSI, the Group's U.S. investment advisory and brokerage
subsidiary. He has served as President of James Buchanan Rea, Inc., the
predecessor of ADSI, since 1986.
Klaus Conradi, aged 27, Director and Chief Executive Officer of the
Group's German subsidiary, ADAG, is a registered real estate appraiser and a
professional banker. Prior to joining the Group, Mr. Conradi served as a
Vice-President of the Dresdner Bank and managing director of Imofin, a property
development and management group in Berlin.
Roland Kuettner, age 43, Vice-President and Chief Financial Officer,
qualified as a CPA in 1983 and gained ten years professional experience in North
America (the Pacific Northwest and eastern Canada) before moving to Germany. As
a Manager in the Accounting and Audit Division of Arthur Andersen & Co., Mr.
Kuettner gained extensive experience in dealing with matters effecting financial
reporting and control.
Thomas Corcovelos, age 47, Secretary of the Company is a partner in the
law firm of Corcovelos & Forry LLP in Long Beach, California.
Mr. Rea and Mr. Conradi intend to assemble management and marketing
staffs that will include several former employees of major German banks or their
subsidiaries. The Group intends to engage aggressively in the distribution of
U.S. mutual funds in Europe through a systematic program of direct marketing to
prospective customers and referral sources such as banks, insurance providers,
attorneys, accountants and to a lesser extent, personal business contacts.
DEPENDENCE ON KEY MANAGEMENT
The Company will rely on the business and technical expertise of its
executive officers and certain other key employees, particularly its Chief
Executive Officer, Peter Hartmann and its Chief Operating Officer, James
Buchanan-Rea Jr. The loss of the services of any of these individuals could have
a material adverse effect on the Company. 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.
REMUNERATION OF DIRECTORS AND OFFICERS
EXECUTIVE COMPENSATION
As a newly formed entity, the Company has no prior history of executive
compensation. The following table sets forth the compensation to be paid for the
fiscal year ending December 31, 1997, to the Company's executive officers.
The following table sets forth information concerning the compensation
to be received for the fiscal year ending December 31, 1998 for services
rendered to the Company in all capacities by the Company's executives. The
Company had no executive officers under employment during 1997.
SUMMARY COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITION SALARY($)
--------------------------- ---------
<S> <C>
Peter Hartmann, President and Chief
Executive Officer........................ $180,000
James Buchanan Rea, Jr., Chief Operating
Officer.................................. $100,000(1)
Roland Kuettner, Chief Financial Officer
and Treasurer............................ $100,000
Thomas Corcovelos, Secretary.................. None
</TABLE>
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(1) See "Employment Agreements" below for a description of Mr. Rea's benefits
entitlement. 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.
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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.
EMPLOYMENT AGREEMENTS
Mr. Rea has a three-year employment agreement with ADSI and the Company
to perform the duties of President, a Director, and Chief Executive Officer of
ADSI at an initial annual salary of $100,000 per year, and an annual
discretionary benefits fund of $50,000. Mr. Rea will also be the designated
general securities principal and financial principal of ADSI. If Mr. Rea is
terminated without cause or the employment agreement is not renewed, he would
receive a severance payment equal to the average base salary during the term of
his employment plus an amount equal to the highest annual bonus or
profit-sharing received during his employment. Mr. Rea is also entitled to
participate in all employee plans and benefits established for executive
employees.
Mr. Kuettner has a three-year employment agreement with the Company to
perform the duties of Vice-President, Chief Financial Officer and Director at an
initial annual salary of $100,000 per year, and an annual discretionary benefits
fund of $40,000.
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN SECURITYHOLDERS
The following table sets forth the number of shares of the Company's
common stock owned by its officers and directors, all officers and directors as
a group, and each shareholder who owns more than 10% of any class of the
Company's outstanding capital stock.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED(1)
-------------------
Name and Address of Beneficial Owner(2) Number Percent
--------------------------------------- ------ -------
<S> <C> <C>
Peter Hartmann............................................ 237,500 2.3%
James Buchanan Rea, Jr.................................... 237,500 2.3%
American Diversified Corporation.......................... 9,000,000 87.2%
</TABLE>
(1) Beneficial ownership is determined in accordance with the rules of the
Commission. 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 10,237,500 shares of Common Stock outstanding (giving
effect to the JBRI - ADSI Merger) and 1,433,629 Shares of Series A
Preferred Stock.
(2) The address of each of the Beneficial Owners is 12100 Wilshire Blvd., Suite
680, Los Angeles, California 90025.
INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS
Effective January 12, 1998, the directors and shareholders of JBRI and
ADSI have approved the terms of the merger of JBRI with and into ADSI; and the
shareholders of the Fund have approved a new investment advisory agreement with
ADSI. Under the terms of the merger, Mr. Rea will receive 237,500 shares of the
Company's common stock at the closing of the merger, and the other JBRI
shareholders will receive aggregate cash compensation of $160,875 in
consideration for their shares of JBRI.
The Company is presently effecting a private placement of up to
5,000,000 shares of its Series A Preferred Stock at $1 per share under a private
placement in Germany which is exempt from registration under U.S. securities
laws under Regulation S.
SECURITIES BEING OFFERED
No securities are being offered in connection with this filing. There is
no public trading market for the Company's common or preferred stock and there
is no assurance that a trading market will develop. As of the date of this
filing, there were outstanding 10,237,500 shares of Common Stock (giving effect
to the JBRI-ADSI merger), all of which shares were "restricted securities" under
applicable U.S. securities laws. The Company has accepted subscriptions for
1,433,629 shares of Series A Preferred Stock and intends to issue up to $5
million of Series A Preferred Stock pursuant to a current offering being
conducted in Europe under the exemption from U.S. securities laws provided under
Regulation S.
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DESCRIPTION OF CAPITAL STOCK
The following is a brief description of the material terms of the
Company's capital stock. This description does not purport to be complete and is
subject in all respects to applicable Nevada law and to the provisions of the
Company's Articles of Incorporation and Bylaws, copies of which are on file with
the Commission are incorporated by reference herein.
GENERAL
The Company's authorized equity capitalization consists of 110 million
shares of voting common stock, no par value, and 50 million shares of preferred
stock, of which 5 million shares have been designated Series A Preferred Stock.
The shares of preferred sock 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.
COMMON STOCK
As of December 31, 1997, there were 10,327,500 outstanding shares of
common stock (giving effect to the 237,500 shares to be issued to Mr. Rea upon
completion of the JBRI-ADSI merger), issued to the Company's founders and Mr.
Rea. Holders of Common Stock are entitled to receive dividends when, as and if
declared by the Board of Directors, out of funds legally available therefor.
Dividends on any outstanding shares of preferred stock may be required to be
paid in full before payment of any dividends on the Common Stock. Upon
liquidation, dissolution or winding up of the Company, holders of common stock
are entitled to share ratably in assets available for distribution after payment
of all debts and other liabilities and subject to the prior rights of any
holders of any preferred stock then outstanding.
Holders of common stock are entitled to one vote per share with respect
to all matters submitted to a vote of shareholders and do not have cumulative
voting rights. Accordingly, holders of a majority of the common stock entitled
to vote in any election of directors may elect all of the directors standing for
election, subject to the voting rights (if any) of any series of preferred stock
that may be outstanding from time to time. The Company's Articles of
Incorporation and Bylaws contain no restrictions on the repurchase by the
Company of shares of the common stock or preferred stock. All the outstanding
shares of common stock are, and additional shares of common stock will be, when,
issued, validly issued, fully paid and nonassessable.
PREFERRED STOCK
As of December 31, 1997, the Company had received subscriptions for
approximately 1,450,000 shares of Series A Preferred Stock, par value $1 per
share, pursuant to a private placement conducted in Germany that is exempt from
U. S. securities laws under Regulation S. The Series A Preferred Stock is
entitled to a cumulative preferential dividend of $.09 per share, when and as
declared by the Board of Directors. The Series A Preferred Stock ranks prior to
the common stock as to dividends and as to distributions in the event of
liquidation, dissolution or winding up of the Company. The Company may redeem
the Series A Preferred Stock at any time at the price of $1 per share, as
adjusted to give effect to anti-dilution, plus any cumulated but unpaid
dividends. The shares are convertible into common stock, at any time in the
ratio of three shares of Series A Preferred Stock into one share of common stock
and shall be automatically converted into common stock if the Company effects a
registered, firm commitment public offering under the Securities Act of 1933, as
amended, that results in net proceeds to the Company of at least $10 million.
The Board of Directors is authorized to designate with respect to each
series of preferred stock the number of shares in each such series, the dividend
rates and dates of payment, voluntary and involuntary liquidation preferences,
redemption prices, if any, whether or not dividends shall be cumulative and, if
cumulative, the date or dates from which the same shall be cumulative, the
sinking fund provisions if any, and the terms and conditions on which shares can
be converted into or exchanged for shares of another class or series, and the
voting rights, if any. As of the date hereof, there were no shares of Preferred
Stock issued and outstanding. The Series A Preferred Stock is non-voting. Any
series preferred stock issued will rank prior to the common stock as to
dividends and as to distributions in the event or liquidation, dissolution or
winding up of the Company. The ability of the Board of Directors to issue
preferred stock, while providing flexibility in connection with possible
acquisitions and other corporate purposes, could, among other things, adversely
affect the voting powers of holders of Common Stock. The preferred stock will,
when issued, be fully paid and nonassessable.
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PART II
Item 1. Market Price of and Dividends on the Registrant's Common Equity and
Other Shareholder Matters.
There is no current market for the Company's shares of common and
preferred stock and the Company has not declared any cash
dividends.
Item 2. Legal Proceedings.
None
Item 3. Changes in and Disagreements with Accountants.
None
Item 4. Recent Sales of Unregistered Securities.
See "Interest of Management and Others in Certain Transactions" above,
for a description of recent sales of unregistered securities.
Item 5. Indemnification of Directors and Officers.
The Articles of Incorporation limit the liability of directors and
officers to the fullest extent permitted under Nevada General Corporation Law.
As allowed by Nevada Revised Statutes, the Articles of Incorporation and Bylaws
of the Company provide that the liability of the directors of the Company for
monetary damages shall be eliminated to the fullest extent permissible under
Nevada law. This is intended to eliminate the personal liability of a director
for monetary damages in an action brought by or in the right of the Company for
breach of a director's duties to the Company or its shareholders except for
liability for acts or omissions that involve intentional misconduct or knowing
and culpable violation of law, for acts or omissions that a director believes to
be contrary the best interests of the Company or its shareholders or that
involve the absence of good faith on the part of the director, for any
transaction from which a director derived an improper personal benefit, for acts
or omissions that show a reckless disregard for the director's duty to the
Company or its shareholders in circumstances in which the director was aware, or
should have been aware, in the ordinary course of performing a director's
duties, of a risk of serious injury to the Company or its shareholders, for acts
or omissions that constitute an unexcused pattern of inattention that amounts to
an abdication of the director's duty to the Company or its shareholders, with
respect to certain contracts in which a director has a material financial
interest and for approval of certain improper distributions to shareholders or
certain loans or guarantees. This provision does not limit or eliminate the
rights of the Company or any shareholder to seek non-monetary relief such as an
injunction or rescission in the event of a breach of a director's duty of care.
<PAGE> 9
PART F/S
FINANCIAL STATEMENTS
See "Index to Consolidated Financial Statements" for a listing of the
consolidated financial states filed with this Form 10-SB.
<PAGE> 10
PART III
Item 2. Description of Exhibits
See "Exhibit Index"
<PAGE> 11
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized.
AMERICAN DIVERSIFIED HOLDINGS, INC.
(Registrant)
Date: January 13, 1998
By /s/ Peter Hartmann
--------------------------------
Peter Hartmann, President
<PAGE> 12
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
AMERICAN DIVERSIFIED HOLDINGS INC. AND SUBSIDIARIES
Independent Auditor's Report............................................................. F - 3
Consolidated Balance Sheet as of August 31, 1997......................................... F - 4
Consolidated Statements of Operations For The Period From
February 5, 1997 (inception) to August 31, 1997....................................... F - 5
Consolidated Statement of Stockholders Equity
For The Period From February 5, 1997 (inception to August 31, 1997.................... F - 6
Consolidated Statement of Cash Flows For The Period From
February 5, 1997 (inception) to August 31, 1997....................................... F - 7
Notes to Consolidated Financial Statements............................................... F - 8 to F - 11
JAMES BUCHANAN REA, INC.
Independent Auditor's Report............................................................. F - 12
Balance Sheets as of September 30, 1997, December 31, 1996 and 1995...................... F - 13
Statements of Operations For The Three Quarters Ended September 30, 1997
and For The Years Ended December 31, 1996 and 1995.................................... F - 14
Statements of Changes in Stockholders Equity For The Three Quarters Ended
September 30, 1997 and For The Years Ended December 31, 1996 and 1995................. F - 15
Statements of Cash Flows For The Three Quarters Ended September 30, 1997
and For The Years Ended December 31, 1996 and 1995.................................... F - 16
Notes to Financial Statements............................................................ F - 17 to F - 20
Unaudited Pro Forma Consolidated Financial Statements.................................... F - 21
Unaudited Pro Forma Consolidated Balance Sheet as of August 31, 1997..................... F - 22
Unaudited Pro Forma Consolidated Statement of Operations For The
Period From February 5, 1997 (inception) to August 31, 1997........................... F - 23
Notes to Unaudited Pro Forma Consolidated Financial Statements........................... F - 24
</TABLE>
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AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED FINANCIAL REPORT
AUGUST 31, 1997
F-1
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C O N T E N T S
- --------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT 1.00
- -------------------------------------------------------------------------------
FINANCIAL STATEMENTS
Consolidated statement of financial condition 2.00
Consolidated statement of operations 3.00
Consolidated statement of changes in stockholders' equity 4.00
Consolidated statement of cash flows 5.00
Notes to consolidated financial statements 6 - 7
- --------------------------------------------------------------------------------
F-2
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INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
American Diversified Holdings, Inc.
Rancho Santa Fe, California
We have audited the accompanying consolidated balance sheet of American
Diversified Holdings, Inc. and subsidiaries as of August 31, 1997, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the period from February 5, 1997 (inception) to August 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of American Diversified
Holdings, Inc. and subsidiaries as of August 31, 1997, and the result of their
operations and their cash flows for the period indicated in conformity with
generally accepted accounting principles.
New York, New York
December 22, 1997
F-3
<PAGE> 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEET
AUGUST 31, 1997
<TABLE>
<CAPTION>
ASSETS
- ------------------------------------------------------------------------
<S> <C>
Cash and cash equivalents $ 2264
Capital stock subscriptions receivable (Note 4) 117000
Prepaid expenses 4220
Equipment 14320
-------------
$ 137804
-------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------
Liabilities:
Accounts payable and accrued expenses $ 63577
-------------
Stockholders' Equity (Note 4 and 5):
Series A 9% convertible redeemable cumulative
preferred stock, $.001 par value;
5,000,000 shares authorized:
Issued and outstanding, no shares
Subscribed for but not paid for and not
issued, 162,495 shares 150545
Common stock, $.001 par value; 110,000,000 shares
authorized; issued and outstanding
10,000,000 shares 96754
Unpaid subscriptions as of December 22, 1997 -33545
Deficit accumulated during the development stage -139527
-------------
74227
-------------
$ 137804
-------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE> 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF OPERATIONS
PERIOD FROM FEBRUARY 5, 1997 (INCEPTION) TO AUGUST 31, 1997
<TABLE>
<S> <C>
Revenue $
Expenses (Note 2):
Travel and entertainment 22486
Employee compensation and benefits 20841
Professional fees 66474
Advertising 7220
Administrative 22506
--------------
139527
--------------
(Loss) before income taxes -139527
Income taxes
--------------
NET (LOSS) $ -139527
--------------
Average common shares outstanding 10000000
--------------
Net (loss) per common share $ -0.01
--------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE> 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
PERIOD FROM FEBRUARY 5, 1997 (INCEPTION) TO AUGUST 31, 1997
<TABLE>
<CAPTION>
Deficit
Accumulated Total
Series A During the Unpaid Stockholder's
Preferred Stock Common Stock Development Stage Subscriptions Equity
--------------- ------------ ----------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance, beginning $ $ $ $ $
Issuance of shares (Note 4):
10,000,000 common shares 96754 96754
162,495 preferred shares
subscribed for but not yet
paid for and not yet issued 150545 -33545 117000
Net (loss) -139527 -139527
Balance, ending $ 150545 $ 96754 $ -139527 $ -33545 $ 74227
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE> 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS
PERIOD FROM FEBRUARY 5, 1997 (INCEPTION) TO AUGUST 31, 1997
<TABLE>
- --------------------------------------------------------------------------------------------
<S> <C>
Cash Flows from Operating Activities
Net (loss) $ -139527
Adjustments to reconcile net (loss) to net cash (used in) operating
activities:
Noncash expenses, professional fees 48959
Change in assets and liabilities:
Increase in prepaid expenses -4220
Increase in accounts payable and accrued expenses 63577
-------------
NET CASH (USED IN) OPERATING ACTIVITIES -31211
-------------
Cash Flows from Investing Activities
Purchase of equipment -14320
-------------
Cash Flows from Financing Activities
Proceeds from issuance of common stock 47795
-------------
INCREASE IN CASH AND CASH EQUIVALENTS 2264
Cash and Cash Equivalents
Beginning
-------------
Ending $ 2264
-------------
Supplemental schedule of noncash financing activities
Issuance of 7,625,000 common shares in exchange for services rendered,
net of proceeds received of $22,979 $ 48959
-------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-7
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. 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 established three wholly owned subsidiaries during the period ended
August 31, 1997:
Planned Operation
----------------------------------------
American Diversified Holdings
Deutschland Gmbh ("Holdings") Provider of financial services in Germany
American Diversified Exclusive European distributor of planned
Distributor, Inc. mutual funds
American Diversified Investment adviser to planned mutual
Securities, Inc. funds
A summary of the Company's significant accounting policies follows:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries, all of which are wholly owned. All material intercompany
accounts and transactions are eliminated in consolidation.
CASH AND CASH EQUIVALENTS
Cash equivalents include highly liquid debt instruments which have a maturity of
three months or less from the date of purchase and other highly liquid
investments which are readily convertible into cash. Cash equivalents are stated
at cost which approximates market value.
EQUIPMENT
Equipment is reported at cost and includes expenditures for major improvements.
Depreciation will be determined using accelerated methods based on three to five
year estimated useful lives. The equipment has not been placed in service as of
August 31, 1997.
FOREIGN CURRENCY TRANSACTIONS
The Company has agreed to fund any cash flow deficits incurred by Holdings, its
European subsidiary. Until such time that Holdings generates sales revenue the
parent's functional currency (U.S. $) will be considered Holdings' functional
currency for financial reporting purposes.
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 carryforwards 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
F-8
<PAGE> 21
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.
The Company has approximately $30,000 of federal and state operating loss
carryforwards, which may be utilized to offset future taxable income. The
federal operating loss carryforwards expire in 2012 and the state operating loss
carryforwards expire in 2002. The tax benefit recognized for the net operating
loss has been offset by an equal increase in the valuation allowance for
deferred taxes resulting in no income tax expense or benefit reflected in the
accompanying statement of operations.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of cash and cash equivalents and capital stock subscriptions
receivable approximates carrying amounts because of the short term nature 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 the period.
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.
1. related Party Transactions
The Company has effectively operated out of the offices and residences of the
founding shareholders in the United States and Germany. Legal and other services
provided by the Company's shareholders and reported as operating expenses in the
accompanying financial statements totaled $19,639.
1. Lease Commitment
in July 1997, Holdings entered into a long term lease for office facilities in
Berlin, Germany. The lease provides for a monthly payment of 5,642 Deutschmarks
and expires in 2002. The lease agreement also requires Holdings to pay monthly
utilities and value added taxes. Future minimum lease commitments are as
follows:
1998 $ 38827
1999 40667
2000 42467
2001 44287
2002 14964
------------
$ 181212
============
F-10
<PAGE> 22
1. Preferred Stock Offering
The Company's Board of Directors has authorized the issuance of 5,000,000 shares
of Series A 9% cumulative convertible redeemable preferred stock. The cumulative
dividends are payable semi-annually, when and as declared, at an annual rate of
$.09 per share commencing January 1, 1998. The Company may at its option, and
subject to certain notification provisions, redeem all or a portion of the
preferred stock at the price of $1.00 per share, plus any accrued and unpaid
dividends. Each share is convertible at the option of the holder into common
stock at the rate of three preferred shares for one share of common stock. In
addition, each share of preferred stock shall be automatically converted into
shares of common stock at a conversion price equal to the initial issue price of
the preferred shares, subject to certain adjustments, immediately upon the
closing of a sale of the Company's common stock in a public offering under the
Securities Act of 1933, that results in net proceeds to the Company of at least
$10,000,000.
The Company commenced the sale of preferred stock in Germany under Regulation S,
guidelines established under the Securities Act of 1933 for Securities offers
made outside of the United States during August 1997. The Offering is registered
with the "Bundesaufsichtsamt fuer Wertpapierhandel", the German governmental
agency which regulates German securities transactions. As of August 31, 1997 the
Company received subscriptions for 162,495 preferred shares. Subscriptions
receivable of $117,000 for these shares were collected in September 1997.
1. Subsequent Events
In September 1997, the Company received additional subscriptions for 1,358,547
additional shares of preferred stock. Also in September 1997, the Company issued
9,000,000 (prior to ten-for-one stock split, see below) shares of its common
stock in exchange for a note receivable from an affiliate of one of the
Company's shareholders.
In November 1997, the Company's Board of Directors approved a ten-for-one stock
split which increased the number of authorized voting and non-voting shares to
110,000,000. All transactions in the Company's common stock and the earnings per
common share for the period ended August 31, 1997 have been adjusted to give
retroactive effect to the stock split as if it had occurred at inception.
On November 24, 1997, the Company signed an agreement to effect a merger with
James Buchanan Rea, Inc. ("JBR") the investment advisor and distributor of the
Rea-Graham Balanced Fund (the "Fund") since 1982. The merger is subject to the
approval of the Fund's shareholders. The merger, which will be accounted for as
a purchase, will be affected by an exchange of 2,375,000 shares of common stock
and cash of $160,875 for the common stock of JBR.
F-11
<PAGE> 23
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, 1996 and 1995, 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, 1996 and 1995, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
Pasadena, California
February 6, 1997
F-12
<PAGE> 24
<TABLE>
<CAPTION>
JAMES BUCHANAN REA, INC.
BALANCE SHEETS
SEPTEMBER 30, 1997, DECEMBER 31, 1996 AND 1995
SEPTEMBER 30,
1997
ASSETS (UNAUDITED) 1996 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash and cash equivalents $ 10942 $ 60838 $103115
Accounts receivable:
Investment advisory fees 8451 12043 13643
Distribution fees 2992 3363 3918
Income tax refunds receivable 552
Prepaid expenses 5680 2527 2940
Property and equipment, net (Note 2) 45832 48495 51991
Deposits 1387 1387 1487
---------------------------------------
$75284.00 $128653 $177646
---------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------------------
Liabilities:
Accounts payable and accrued expenses $ 1751 $ 5233 $ 4623
Dealer service fees payable 5195 5057 6333
---------------------------------------
6946.00 10290 10956
---------------------------------------
Stockholders' Equity (Note 6):
Common stock, no par value; authorized,
issued and
outstanding 100,000 shares 7500 7500 7500
Additional paid-in capital 184735 184735 184735
Accumulated deficit -123897 -73872 26545
---------------------------------------
68338.00 118363 166690
---------------------------------------
$75284.00 $128653 $177646
---------------------------------------
</TABLE>
See Notes to Financial Statements.
F-13
<PAGE> 25
<TABLE>
<CAPTION>
JAMES BUCHANAN REA, INC.
STATEMENTS OF OPERATIONS
THREE QUARTERS ENDED SEPTEMBER 30, 1997 AND YEARS ENDED
DECEMBER 31, 1996 and 1995
SEPTEMBER 30,
1997
(UNAUDITED) 1996 1995
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue:
Commissions (Note 4) $ 304 $ 590 $ 16788
Advisory fees (Note 4) 88986 119035 138654
Distribution fees and other (Note 4) 6742 42582 48864
Interest 936 3852 5910
Rental income 14119
-------------------------------------
96968 166059 224335
-------------------------------------
Expenses (Note 4):
Employee compensation and benefits 84027 114662 120503
Communications 1750 1613 1996
Occupancy and equipment rental 11758 16385 30691
Taxes other than income taxes 800 1195 1397
Other operating expenses 48658 80531 93818
-------------------------------------
146993 214386 248405
-------------------------------------
(Loss) before income -50025 -48327 -24070
taxes
Federal and state income taxes (Note 7)
-------------------------------------
NET (LOSS) $-50025 $-48327 $-24070
-------------------------------------
Weighted average number of common shares outstanding 100000 100000 100000
-------------------------------------
Net (loss) per common share $ -0.50 $ -0.48 $ -0.24
-------------------------------------
</TABLE>
See Notes to Financial Statements.
F-14
<PAGE> 26
<TABLE>
<CAPTION>
JAMES BUCHANAN REA, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
THREE QUARTERS ENDED SEPTEMBER 30, 1997 AND YEARS ENDED
DECEMBER 31, 1996 AND 1995
Additional Total
Common Paid-in Accumulated Stockholders'
Stock Capital Deficit Equity
------ ---------- ----------- -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1994 $7500 $184735 $ -1475 $190760
Net (loss) -24070 -24070
Balance, December 31, 1995 7500 184735 -25545 166690
Net (loss) -48327 -48327
Balance, December 31, 1996 $7500 $184735 $-73872 $118363
Net (loss) (unaudited) -50025 -50025
BALANCE, SEPTEMBER 30, 1997 $7500 184735 -123897 68338
</TABLE>
See Notes to Financial Statements.
F-15
<PAGE> 27
<TABLE>
<CAPTION>
JAMES BUCHANAN REA, INC.
STATEMENTS OF CASH FLOWS
THREE QUARTERS ENDED SEPTEMBER 30, 1997 AND YEARS ENDED
DECEMBER 31, 1996 AND 1995
SEPTEMBER 30,
1997
(UNAUDITED) 1996 1995
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net (loss) $-50025.00 $-48327 $-24070
Adjustments to reconcile net (loss) to
net cash (used in) operating
activities:
Depreciation and 2663.00 3496 6204
amortization
Change in assets and
liabilities:
3963.00 2155 2187
Decrease in receivables
-3153.00 1065 7612
Decrease in prepaids and other assets
Increase (decrease) in accounts payable
-3482.00 610 -26479
and accrued expenses
138.00 -1276 -1531
(Decrease) in dealer service fees payable
------------------------------------
NET CASH (USED IN) -49896.00 -42277 -36077
OPERATING ACTIVITIES
------------------------------------
Cash Flows from Investing Activities
Purchase of property and equipment -1238
------------------------------------
(DECREASE) IN CASH -49896.00 -42277 -37315
AND CASH EQUIVALENTS
Cash and Cash Equivalents
Beginning 60838.00 103115 140430
------------------------------------
Ending $10942.00 $ 60838 $103115
------------------------------------
</TABLE>
See Notes to Financial Statements.
F-16
<PAGE> 28
NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
James Buchanan Rea, Inc. (the Company) is engaged as the investment advisor and
principal underwriter of the Rea-Graham Funds Inc. (the Fund). The Company also
conducts business as an authorized dealer in Fund shares.
The Company operates under the provisions of Paragraph (k)(2)(ii) of Rule 15c3-3
of the Securities and Exchange Commission and, accordingly, is exempt from the
remaining provisions of that Rule.
SIGNIFICANT ACCOUNTING POLICIES
SECURITIES TRANSACTIONS
Securities transactions and related commission income and expense are recorded
on a trade date basis.
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 5.00
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.
F-17
<PAGE> 29
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.
PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1996 and 1995 is summarized as follows:
<TABLE>
<CAPTION>
1996 1995
-----------------------
<S> <C> <C>
Automobiles $ 7525.00 $ 7525
Capital improvements to executive office 66925.00 75888
Furniture and equipment 28972.00 78791
-----------------------
162204
103422.00
Less accumulated depreciation 54927.00 110213
-----------------------
$ 48495.00 $ 51991
-----------------------
</TABLE>
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 1996 and 1995.
RELATED PARTY TRANSACTIONS
The Company is retained as the investment advisor to the Rea-Graham Fund, Inc.
(the "Fund"). Under the terms of the agreement, the Company receives a monthly
fee of 1/12 of 1% of the first $20,000,000 of the Fund's net assets on the last
business day of the month, 1/12 of .75% of the next $80,000,000, 1/12 of .5% of
the next $100,000,000, and 1/12 of .45% of monthly net assets in excess of
$200,000,000.
The Company shares office space, personnel and other administrative costs with
the Fund. Total administrative expenses allocated to the Fund for the years
ended December 31, 1996 and 1995 aggregated $30,004 and $29,797, 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, 1996 and
F-18
<PAGE> 30
1995 were $42,582 and $48,864, respectively. Included in other operating
expenses is $22,269 and $26,140 representing trail commissions passed on to
other dealers in 1996 and 1995, respectively.
As principal underwriter and authorized dealer in Fund shares, the Company
received commissions of $590 and $725, during 1996 and 1995, respectively.
Commissions paid to the Company for services rendered as a broker-dealer in
securities transactions for the Fund, net of amounts allocated to clearing
brokers, were $16,063 for the year ended December 31, 1995.
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 $9,380 and $6,175 for the
years ended December 31, 1996 and 1995, respectively.
NET CAPITAL
The Company is subject to the net capital rule of the Securities and Exchange
Commission. This rule prohibits a broker-dealer from engaging in securities
transactions when its aggregate indebtedness exceeds 15 times its net capital as
those terms are defined in the Rule 15c3-1. Rule 15c3-1 also provides that
equity capital may not be withdrawn or cash dividends paid if the resulting net
capital ratio would exceed ten to one.
The Company's net capital, required net capital, and net capital ratio as of
December 31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
------------------------
<S> <C> <C>
Net Capital $58920 $101434
------------------------
Required net capital $ 5000 $ 5000
------------------------
New capital ratio .17 to 1 .11 to 1
------------------------
</TABLE>
INCOME TAXES
The Company has approximately $130,000 and $117,000 of federal and state
operating loss carryforwards, respectively, which may be utilized to offset
future taxable income as of December 31, 1996. The federal operating loss
carryforwards expire from years 2009 to 2011 and the state operating loss
carryforwards from years 1999 to 2001. For the years ended December 31, 1996 and
1995, tax benefits recognized for net operating losses were offset by equal
increase in the valuation allowance for deferred taxes resulting in no income
tax expense or benefit reflected on the Statements of Operations.
F-19
<PAGE> 31
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.
F-20
<PAGE> 32
UNAUDITED PROFORMA CONSOLIDATED FINANCIAL STATEMENTS
The unaudited proforma consolidated financial statements presented on the
following pages reflect the proforma effect of the acquisition of James Buchanan
Rea, Inc. ("JBR") and the issuance of notes payable and common stock, as
described in the accompanying notes. The proforma adjustments have been applied
to the historical consolidated financial statements of the Company for the
period from February 5, 1997 (inception) through August 31, 1997 and the
unaudited financial statements of JBR for the nine months ended September 30,
1997. The acquisition will be accounted for using the purchase method of
accounting. For purposes of the proforma statements, the purchase price of the
assets of JBR has been allocated to the acquired net assets based on information
currently available with regard to the values of such net assets. Final
adjustments to recorded amounts may differ from the proforma adjustments
presented herein. The proforma statements should be read in connection with the
notes thereto.
F-21
<PAGE> 33
AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED PROFORMA CONSOLIDATED BALANCE SHEET
AUGUST 31, 1997
<TABLE>
<CAPTION>
ASSETS Historical Adjustments As Adjusted
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash and cash equivalents $ 2264 $ 10942 (1)(2) $ 13206
Accounts receivable 11443 (2) 11443
Capital stock subscriptions receivable 117000 117000
Prepaid expenses 4220 7067 (2) 11287
Equipment 14320 45832 (2) 60152
Goodwill 330037 (2) 330037
----------------------------------------------
$ 137804 $ 405321 $ 543125
----------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------
Liabilities:
Accounts payable and accrued expenses $ 63577 $ 6946 (2) $ 70523
Note payable 160875 (1) 160875
----------------------------------------------
63577 167821 231398
----------------------------------------------
Stockholders' Equity:
Series A 9% convertible redeemable cumulative
preferred stock, $.001 par value:
Issued and outstanding, no shares
Subscribed for but not paid for and
not issued, 162,495 shares 117000 117000
Common stock, $.001 par value 96754 237500 (2) 334254
Deficit accumulated during the development -139527 -139527
stage
----------------------------------------------
74227 237500 $ 311727
----------------------------------------------
$ 137804 $ 405321 $ 543125
----------------------------------------------
</TABLE>
See Notes to Unaudited Proforma Consolidated Financial Statements.
F-22
<PAGE> 34
AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED PROFORMA CONSOLIDATED STATEMENT OF OPERATIONS
PERIOD FROM FEBRUARY 5, 1997 (INCEPTION) TO AUGUST 31, 1997
<TABLE>
<CAPTION>
Historical Purchase
American Accounting
Diversified JBR Adjustments Proforma
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $ $ 96968 $ $ 96968
------------------------------------------------------
Expenses (Note 2):
Travel and entertainment 22486 22486
Employee compensation and 20841 84027 104868
benefits
Professional fees 66474 9075 75549
Advertising and promotion 7220 16087 23307
Insurance 17344 17344
Administrative 22506 17796 40302
Depreciation and amortization 2663 12835 (4) 15498
Interest 7900 (3) 7900
------------------------------------------------------
139527 146992 20735 307254
------------------------------------------------------
(Loss) before income taxes -139527 -50024 -20735 -210286
Income taxes (5)
------------------------------------------------------
NET (LOSS) $ -139527 $-50024 $ -20735 $ -210286
------------------------------------------------------
Average common shares outstanding 10000000 2375000 12375000
------------------------------------------------------
Net (loss) per common share $ -0.01 $ -0.01
------------------------------------------------------
</TABLE>
See Notes to Unaudited Proforma Consolidated Financial Statements.
F-23
<PAGE> 35
AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED PROFORMA CONSOLIDATED FINANCIAL STATEMENTS
The unaudited proforma consolidated balance sheet is presented as if the
acquisition and financing had occurred on August 31, 1997. The unaudited
proforma consolidated statement of operations for the period from February 5,
1997 (inception) through August 31, 1997 was prepared as if the acquisition and
financing had occurred on February 5, 1997.
These proforma financial statements are not necessarily indicative of the
financial position or results of operations that might have occurred had the
acquisition and financing taken place at the beginning of the period or as of
August 31, 1997, or to project the Company's financial position or results of
operations at any future date or for any future period.
Adjustments were made as follows:
(1) Record issuance of notes payable to affiliate for cash portion of
purchase price
<TABLE>
<S> <C> <C>
Cash 160,875
Notes payable 160,875
(2) Record purchase of the net assets of JBR in exchange for cash and stock:
Purchase price allocated as follows:
Cash, receivables and other assets 29,452
Property and equipment 45,832
Goodwill 330,037
Accounts payable 6,946
Cash 160,875
Common stock 237,500
(3) Record interest on notes payable at an annual rate of 8.5%
Interest expense 7,900
--------
(4) Record amortization of goodwill over a period of 15 years
Amortization expense 12,835
--------
(5) The tax benefit for the proforma adjustments has been offset by an equal
increase in the valuation allowance for deferred taxes resulting in no
income tax expense or benefit reflected in the purchase accounting
adjustments
</TABLE>
F-24
<PAGE> 36
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ----------- ------------
<S> <C> <C>
2.1 Articles of Incorporation
2.2 Bylaws of the registrant
3.3 Certificate of Designation re: Series A Preferred Stock**
4.1 Specimen of Common Stock of Registrant
4.2 Specimen of Series A Preferred Stock of Registrant**
6.1 Form of Investment Management Contract of ADSI with
Rea-Graham Balanced Fund, Inc.**
8.1 Plan and Agreement of Merger and
Reorganization among JBRI, ADSI, the Company
and certain shareholders of JBRI.
27 Financial Data Schedule
</TABLE>
** To be filed by Amendment
<PAGE> 1
EXHIBIT 2.1
ARTICLES OF INCORPORATION
OF
AMERICAN DIVERSIFIED HOLDINGS, INC.
I, the person hereinafter named as incorporator, for the purpose
of associating to establish a corporation, under the provisions and subject to
the requirements of Title 7, Chapter 78 of Nevada Revised Statutes, and the acts
amendatory thereof, and hereinafter sometimes referred to as the General
Corporation Law of the State of Nevada, do hereby adopt and make the following
Articles of Incorporation:
FIRST: The name of the corporation (hereinafter called the
corporation) is American Diversified Holdings, Inc.
SECOND: The name of the corporation's resident agent in the State
of Nevada is CSC Services of Nevada, Inc., and the street address of the said
resident agent where process may be served on the corporation is 502 East John
Street, Carson City 89706. The mailing address and the street address of the
said resident agent are identical.
THIRD: The number of shares the corporation is authorized to
issue is 1,000,000, all of which are without nominal or par value. All such
shares are of one class and are designated as Common Stock.
Each share of stock of the corporation shall entitle the holder
thereof to a preemptive right, for a period of thirty days, to subscribe for,
purchase, or otherwise acquire any shares of stock of the same class of the
corporation or any equity and/or voting shares of stock of any class of the
corporation which the corporation proposes to issue or any rights or options
which the corporation proposes to grant for the purchase of shares of stock of
the same class of the corporation or of equity and/or voting shares of any class
of stock of the corporation or for the purchase of any shares of stock, bonds,
securities, or obligations of the corporation which are convertible into or
exchangeable for, or which carry any rights, to subscribe for, purchase, or
otherwise acquire shares of stock of the same class of the corporation or equity
and/or voting shares of stock of any class of the corporation, whether now or
hereafter authorized or created, whether having unissued or treasury status, and
whether the proposed issue, reissue, transfer, or grant is for cash, property,
or any other lawful consideration; and after the expiration of said thirty days,
any and all of such shares of stock, rights, options, bonds, securities, or
obligations of the corporation may be issued, reissued, transferred, or granted
by the Board of Directors, as the case may be, to such persons, firms,
corporations, and associations, and for such lawful consideration, and on such
terms, as the Board of Directors in its discretion may determine. As used
herein, the terms "equity shares" and "voting shares" shall mean, respectively,
shares of stock which confer unlimited dividend rights and shares of stock which
confer unlimited voting rights in the election of one or more directors.
1
<PAGE> 2
FOURTH: The governing board of the corporation shall be styled as
a "Board of Directors", and any member of said Board shall be styled as a
"Director."
The number of members constituting the first Board of Directors
of the corporation is four; and the name and the post office box or street
address, either residence or business, or each of said members are as follows:
<TABLE>
<CAPTION>
NAME ADDRESS
---- -------
<S> <C>
William Smith 8162 Manitoba St., #119
Playa Del Rey, CA 90293
Torsten Dittrich Kietz 20
Berlin 12557, Federal Republic of Germany
Klaus Conradi Marmara WEG 44
12109 Berlin, Federal Republic of Germany
Stanley B. Kass 11260 Overland Ave., #18F
Culver City, CA 90230
</TABLE>
The numbers of directors of the corporation may be increased or
decreased in the manner provided in the Bylaws of the corporation; provided,
that the number of directors shall never be less than one. In the interim
between elections of directors by stockholders entitled to vote, all vacancies,
including vacancies caused by an increase in the number of directors and
including vacancies resulting from the removal of directors by the stockholders
entitled to vote which are not filled by said stockholders, may be filled by the
remaining directors, though less than a quorum.
FIFTH: The name and the post office box or street address, either
residence or business, of the incorporator signing these Articles of
Incorporation are as follows:
<TABLE>
<CAPTION>
NAME ADDRESS
---- -------
<S> <C>
R.A. Arthur 5670 Wilshire Boulevard, Suite 750
Los Angeles, CA 90036
</TABLE>
SIXTH: The corporation shall have perpetual existence.
SEVENTH: The personal liability of the directors of the
corporation is hereby eliminated to the fullest extent permitted by the General
Corporation Law of the State of Nevada, as the same may be amended and
supplemented.
EIGHTH: The corporation shall, to the fullest extent permitted by
the General Corporation Law of the State of Nevada, as the case may be amended
and supplemented,
2
<PAGE> 3
indemnify any and all persons whom it shall have power to indemnify under said
Law from and against any and all of the expenses, liabilities, or other matters
referred to in or covered by said Law, and the indemnification provided for
herein shall not be deemed exclusive of any other rights to which those
indemnified may be entitled under any Bylaw, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in his official capacity
and as to action in another capacity while holding such office, and shall
continue as to a person who has ceased to be a director, officer, employee, or
agent and shall inure to the benefit of the heirs, executors, and administrators
of such a person.
NINTH: The corporation may engage in any lawful activity.
TENTH: The corporation reserves the right to amend, alter,
change, or repeal any provision contained in these Articles of Incorporation in
the manner now or hereafter prescribed by statute, and all rights conferred upon
stockholders herein are granted subject to this reservation.
IN WITNESS WHEREOF, I do hereby execute these Articles of
Incorporation on February 3, 1997.
-----------------------------
R.A. Arthur, Incorporator
3
<PAGE> 4
STATE OF CALIFORNIA )
) SS.
COUNTY OF LOS ANGELES )
On this 3rd day of February, 1997, personally appeared before me,
a Notary Public in and for the State and County aforesaid, R.A. Arthur, known to
me to be the person described in and who executed the foregoing Articles of
Incorporation, and who acknowledged to me that he executed the same freely and
voluntarily and for the uses and purposes therein mentioned.
WITNESS my hand and official seal, the day and year first above
written.
-----------------------------------
Notary Public
(Notarial Seal)
4
<PAGE> 5
Certificate of Amendment of
Articles of Incorporation
of
AMERICAN DIVERSIFIED HOLDINGS, INC.
Pursuant to the provisions of Nevada Revised Statutes, Title 7, Chapter 78, the
undersigned officers do hereby certify:
FIRST: The name of the Corporation is: American Diversified Holdings, Inc.
SECOND: The Board of Directors of the Corporation duly adopted the following
resolutions on March 27, 1997:
RESOLVED, that it is advisable in the judgment of the Board of
Directors of the Corporation that number of authorized shares be
increased, and that, in order to accomplish the same, Article
third the Articles of Incorporation be amended to read as
follows:
"THIRD: The corporation is authorized to issue two classes of
common stock, to be designated as "voting" and "non-voting." The
total number of voting shares authorized is 1,000,000, all of
which are without nominal or par value, and are designated as
Voting Common Stock. The total number of non-voting shares
authorized is 1,000,000, all of which are without nominal or par
value, and are designated as Non-Voting Common Stock."
FURTHER RESOLVED, that a special meeting of stockholders having
voting power be and it is hereby called and that notice be given
in the manner prescribed by the Bylaws of the Corporation and by
Nevada Revised Statutes, Title 7, Chapter 78, unless the said
stockholders shall waive the notice of meeting in writing or
unless all of said stockholders shall dispense with the holding
of a meeting and shall take action upon the proposed amendments
by a consent in writing signed by them; and
FURTHER RESOLVED, that, in the event that the said stockholders
shall adopt the aforesaid proposed amendments by a vote in favor
thereof by at least a majority of the voting power or by a
written consent in favor thereof signed by all of them without a
meeting, the Corporation is hereby authorized to make by the
hands of its President or a Vice President and by its Secretary
or an Assistant Secretary a certificate setting forth the said
amendments
1
<PAGE> 6
and to cause the same to be filed pursuant to the provisions of
Nevada Revised Statutes, Title 7, Chapter 78.
THIRD: The total number of outstanding shares having voting power of the
corporation is 1,000,000 and the total number of votes entitled to be case by
the holders of all of said outstanding shares is .
FOURTH: The holders of all of the aforesaid total number of outstanding shares
having voting power, to wit, shares, dispensed with the holding of a meeting of
stockholders and adopted the amendments herein certified by a consent in writing
signed by all of them in accordance with the provisions of Nevada Revised
Statutes, Title 7, Section 78.320.
2
<PAGE> 7
Signed on March 27, 1997.
AMERICAN DIVERSIFIED HOLDINGS, INC.
By:
--------------------------------------
Peter Hartmann, President
--------------------------------------
William Smith, Secretary
STATE OF CALIFORNIA )
) SS.
COUNTY OF )
On March 27, 1997, personally appeared before me, a Notary Public, for the State
and County aforesaid, Peter Hartmann, as President of American Diversified
Holdings, Inc., and William Smith as Secretary of American Diversified Holding,
Inc., who acknowledged that they executed the above instrument.
--------------------------------------
Notary Public
(Notarial Seal)
3
<PAGE> 1
EXHIBIT 2.2
BY-LAWS
OF
AMERICAN DIVERSIFIED HOLDINGS, INC.
A NEVADA CORPORATION
ARTICLE I
OFFICES
Section 1. PRINCIPAL OFFICE. The principal office for the
transaction of business of the corporation shall be located in the City and
State designated in the Articles of Incorporation. The location may be changed
by approval of a majority of the authorized Directors, and additional offices
may be established and maintained at such other place or places, either within
or without Nevada, as the Board of Directors may from time to time designate.
Section 2. OTHER OFFICES. Branch or subordinate offices may at
any time be established by the Board of Directors at any place or places where
the corporation is qualified to do business.
ARTICLE II
SHAREHOLDERS' MEETINGS
Section 1. PLACE OF MEETINGS. All meetings of the Shareholders
shall be held at the principal executive office of the corporation unless some
other appropriate and convenient location be designated for that purpose from
time to time by the Board of Directors.
Section 2. ANNUAL MEETINGS. the annual meetings of the
Shareholders shall be held, each year, within five months after the close of the
fiscal year of the Corporation. Unless otherwise noticed in writing, it shall be
held at the time and on the day following:
Time of Meeting: 10:00 A.M.
Date of Meeting: First Tuesday in March
If this day shall be a legal holiday, then the meeting shall be
held on the next succeeding business day, at the same hour. At the annual
meeting, the Shareholders shall elect a Board of Directors, consider reports of
the affairs of the corporation and transact such other business as may be
properly before the meeting.
Section 3. SPECIAL MEETINGS. Special meetings of the Shareholders
may be called at any time by the Board of Directors or by the President, and
SHALL be called by the President or the Secretary, at the written request of the
holders of ten percent (10%) of the shares then outstanding and entitled to vote
thereat, or as otherwise required under the Business corporation Act.
Upon receipt of a written request addressed to the President or
Secretary, mailed or delivered personally to such Officer by any person entitled
to call a special meeting of shareholders, such Officer shall cause notice to be
given, to the Shareholders entitled to vote, that a meeting will be held at a
time requested by the
-1-
<PAGE> 2
person or persons calling the meeting, not less than ten (10) nor more than
fifty (50) days after the receipt of such request. If such notice is not given
within twenty (20) day after receipt of such request, the persons calling the
meeting may give notice thereof in the manner provided by these By-Laws.
-2-
<PAGE> 3
Section 4. NOTICE OF MEETINGS - REPORTS. Notice of meetings,
annual or special, shall be given in writing not less than ten (10) nor more
than sixty (50) days before the date of the meeting to Shareholders entitled to
vote thereat. Such notice shall be given by the Secretary or the Assistant
Secretary, or if there be not such Officer, or in the case of his or her neglect
or refusal, by any Director or Officer.
Such notices or any reports shall be given personally or by mail
or other means of written communication as provided in Sec. 601 of the Code and
shall be sent to the Shareholder's address appearing on the books of the
corporation, or supplied by him or her to the corporation for the purpose of
notice, and in the absence thereof, as provided in Sec. 601 of the Code.
Notice of any meeting of Shareholders shall specify the place,
the day and the hour of meeting and (1) in case of a special meeting, the
general nature of the business to be transacted and no other business may be
transacted, or (2) in the case of an annual meeting, those matters which the
Board at date of mailing, intends to present for action by the Shareholders. At
any meetings where Directors are to be elected, notice shall include the names
of the nominees, if any, intended at date of notice to be presented by
management for election.
If a Shareholder supplies no address, notice shall be deemed to
have been given if mailed to the place where the principal executive office of
the corporation, in California, is situated, or published at least once in some
newspaper of general circulation in the County of said principal office.
Notice shall be deemed given at the time it is delivered
personally or deposited in the mail or sent by other means of written
communication. The Officer giving such notice or report shall prepare and file
an affidavit or declaration thereof.
When a meeting is adjourned for forty-five (45) days or more,
notice of the adjourned meeting shall be given as in case of an original
meeting. Save, as aforesaid, it shall not be necessary to give any notice of
adjournment or of the business to be transacted at an adjourned meeting other
than by announcement at the meeting at which such adjournment is taken.
Section 5. WAIVER OF NOTICE OR CONSENT BY ABSENT SHAREHOLDERS.
The transactions of any meeting of Shareholders, however called and noticed,
shall be valid as though had at a meeting duly held after regular call and
notice, if a quorum be present either in person or by proxy, and if, either
before or after the meeting, each of the Shareholders entitled to vote, not
present in person or by proxy, sign a written waiver of notice or a consent to
the holding of such meeting or an approval of the minutes thereof. All such
waivers, consents or approvals shall be filed with the corporate records or made
a part of the minutes of the meeting.
Section 6. SHAREHOLDERS ACTION WITHOUT A MEETING - DIRECTORS. Any
action which may be taken at a meeting of the Shareholders, may be taken without
a meeting or notice of meeting if authorized by a writing signed by all of the
Shareholders entitled to vote at a meeting for such purpose, and filed with the
Secretary of the corporation, provided, further, that while ordinarily Directors
can only
-3-
<PAGE> 4
be elected by unanimous written consent, if the Directors fail to fill a
vacancy, then a Director to fill that vacancy may be elected by the written
consent of persons holding a majority of shares entitled to vote for the
election of Directors.
Section 7. OTHER ACTIONS WITHOUT A MEETING. Unless otherwise
provided in the California Corporations Code or the Articles, any action which
may be taken at any annual or special meeting of Shareholders may be taken
without a meeting and without prior notice, if a consent in writing, setting
forth the action so taken signed by the holders of outstanding shares having not
less than the minimum number of votes that would be necessary to authorized or
take such action at a meeting at which all shares entitled to vote thereon were
present and voted.
Any Shareholder giving a written consent, or the Shareholder's
proxy holders, or a transferee of the shares of a personal representative of the
Shareholder or their respective proxy holders, may revoke the consent by a
writing received by the corporation prior to the time that written consents of
the number of shares required to authorize the proposed action have been filed
with the Secretary of the corporation, but may not do so thereafter. Such
revocation is effective upon its receipt by the Secretary of the corporation.
Section 8. QUORUM. The holders of a majority of the shares
entitled to vote thereat, present in person, or represented by proxy, shall
constitute a quorum at all meetings of the Shareholders for the transaction of
business except as otherwise provided by law, by the Articles of Incorporation,
or by these By-Laws. If, however, such majority shall not be present or
represented at any meeting of the Shareholders, the Shareholders entitled to
vote thereat, present in person, or by proxy, shall have the power to adjourn
the meeting from time to time, until the requisite amount of voting shares shall
be present. At such adjourned meeting at which the requisite amount of voting
shares shall be represented, any business may be transacted which might have
been transacted at a meeting as originally notified.
If a quorum be initially present, the Shareholders may continue
to transact business until adjournment, notwithstanding the withdrawal of enough
Shareholders to leave less than a quorum, if any action taken is approved by a
majority of the Shareholders required to initially constitute a quorum.
Section 9. VOTING. Only persons in whose names shares entitled to
vote stand on the stock records of the corporation on the day of any meeting of
Shareholders, unless some other day be fixed by the Board of Directors for the
determination of Shareholders of record, and then on such other day, shall be
entitled to vote at such meeting.
Except as otherwise provided, each holder of rocord shall be
entitled to one vote for each share of stock registered in his name.
The candidates receiving the highest number of votes up to the
number of Directors to be elected are elected.
-4-
<PAGE> 5
The Board of Directors may fix a time in the future not exceeding
sixty (60) days preceding the date of any meeting of Shareholders or the date
fixed for the payment of any dividend or distribution, or for the allotment or
rights, or when any change or conversion or exchange of shares shall go into
effect, as a record date for the determination of the Shareholders entitled to
notice of and to vote at any such meeting, or entitled to receive any such
dividend or distribution, or any allotment of rights, or to exercise the rights
in respect to any such change, conversion or exchange of shares. In such case
only Shareholders of record on the date so fixed shall be entitled to notice of
and to vote at such meeting, or to receive such dividend, distribution or
allotment of rights, or to exercise such rights, as the case may be
notwithstanding any transfer of any share on the books of the corporation after
any record date fixed as aforesaid. The Board of Directors may close the books
of the corporation against transfers of shares during the whole or any part of
such period.
Section 10. PROXIES. Every Shareholder entitled to vote, or to
execute consents, may do so either in person or by written proxy, executed in
writing by the shareholder or by his attorney in fact so authorized in writing
by the shareholder. No proxy shall be valid more than eleven (11) months after
its execution, unless otherwise specified in the proxy. All proxies shall be
exhibited to the Secretary at the meeting and filed with the records of the
Corporation
Section 11. ORGANIZATION. The President, or in the absence of the
President, any Vice President, shall call the meeting of the Shareholders to
order, and shall act as chairman of the meeting. In the absence of the President
and all of the Vice Presidents, Shareholders shall appoint a chairman for such
meeting. The Secretary of the corporation shall act as Secretary of all meetings
of the Shareholders, but in the absence of the Secretary at any meeting of the
Shareholders, the presiding Officer may appoint any person to act as Secretary
of the meeting.
Section 12. INSPECTORS OF ELECTION. In advance of any meeting of
Shareholders the Board of Directors may, if they so elect, appoint inspectors of
election to act at such meeting or any adjournment thereof. If inspectors of
election be not so appointed, or if any persons so appointed fail to appear or
refuse to act, the chairman of any such meeting may, and on the request of any
Shareholder or his or her proxy shall, make such appointment at the meeting in
which case the number of inspectors shall be either one (1) or three (3) as
determined by a majority of the Shareholders represented at the meeting.
ARTICLE III
DIRECTORS - MANAGEMENT
Section 1. RESPONSIBILITY OF BOARD OF DIRECTORS. Subject to the
provisions of the General Corporation Law and to any limitations in the Articles
of Incorporation of the corporation relating to action required to be approved
by the Shareholders, the business and affairs of the corporation shall be
managed and all corporate powers shall be exercised by or under the direction of
the Board of Directors. The Board may delegate the management of the day-to-day
operation of the business of the corporation to a management company or other
person, provided that the
-5-
<PAGE> 6
business and affairs of the corporation shall be managed and all corporate
powers shall be exercised under the ultimate direction of the Board.
Section 2. STANDARD OF CARE. Each Director shall perform the
duties of a Director, including the duties as a member of any committee of the
Board upon which the Director may serve, in good faith, in a manner such
Director believes to be in the best interests of the corporation, and with such
care, including reasonable inquiry, as an ordinary prudent person in a like
position would use under similar circumstances.
Section 3. NUMBER AND QUALIFICATION OF DIRECTORS. The authorized
number of Directors shall be FIVE (5) until changed by a duly adopted amendment
to the Articles of Incorporation or by an amendment to this by-law adopted by
the vote or written consent of holders of a majority of the outstanding shares
entitled to vote.
Section 4. ELECTION AND TERM OF OFFICE OF DIRECTORS. Directors
shall be elected at each annual meeting of the Shareholders to hold office until
the next annual meeting. Each Director, including a Director elected to fill a
vacancy, shall hold office until the expiration of the term for which elected
and until a successor has been elected and qualified.
Section 5. VACANCIES. Vacancies in the Board of Directors may be
filled by a majority of the remaining Directors, though less than a quorum, or
by a sole remaining Director, except that a vacancy created by the removal of a
Director by the vote or written consent of the Shareholder or by court order may
be filled only by the vote of a majority of the shares entitled to vote
represented at a duly held meeting at which a quorum is present, or by the
written consent of holders of a majority of the outstanding shares entitled to
vote. Each Director so elected shall hold office until the next annual meeting
of the Shareholders and until a successor has been elected and qualified.
A vacancy or vacancies in the Board of Directors shall be deemed
to exist in the event of the death, resignation, or removal of any Director, or
if the Board of Directors by resolution declares vacant the office of a Director
who has been declared of unsound mind by an order of court or convicted of a
felony, or if the authorized number of Directors is increased, or if the
shareholders fail, at any meeting of shareholders at which any Director or
Directors are elected, to elect the number of Directors to be voted for at that
meeting.
The Shareholders may elect a Director or Directors at any time to
fill any vacancy or vacancies not filled by the Directors, but any such election
by written consent shall require the consent of a majority of the outstanding
shares entitled to vote.
No reduction of the authorized number of Directors shall have the
effect of removing any Director before that Director's term of office expires.
-6-
<PAGE> 7
Section 6. REMOVAL OF DIRECTORS. The entire Board of Directors or
any individual Director may be removed from office for good cause by the Board,
or with or without cause by a majority of the sharegolders at a special meeting
called for that purpose. In such case, the remaining Board members may elect a
successor Director to fill such vacancy for the remaining unexpired term of the
Director so removed,unless the removal is by the shareholders, in which case
they shall vote to fill the vacancy.
Section 7. NOTICE, PLACE AND MANNER OF MEETINGS. Meetings of the
Board of Directors may be called by the Chairman of the Board, or the President,
or any Vice President, or the Secretary, or any two (2) Directors and shall be
held at the principal executive office of the corporation, unless some other
place is designated in the notice of the meeting. Members of the Board may
participate in a meeting through use of a conference telephone or similar
communications equipment so long as all members participating in such a meeting
can hear one another. Accurate minutes of any meeting of the Board or any
committee thereof, shall be maintained by the Secretary or other Officer
designated for that purpose.
Section 8. ORGANIZATION MEETINGS. The organization meetings of
the Board of Directors shall be held immediately following the adjournment of
the annual meeting of the Shareholders.
Section 9. SPECIAL MEETINGS - NOTICES - WAIVERS. Special meetings
of the Board may be called at any time by any of the aforesaid officers, i.e.,
by the Chairman of the Board or the President or any Vice President or the
Secretary or any two (2) Directors.
At least forty-eight (48) hours notice of the time and place of
special meetings shall be delivered personally to the Directors or personally
communicated to them by a corporate Officer by telephone or telegraph. If the
notice is sent to a Director by letter, it shall be addressed to him or her at
his or her address as it is shown upon the records of the corporation, or if it
is not so shown on such records or is not readily ascertainable, at the place in
which the meetings of the Directors are regularly held. In case such notice is
mailed, it shall be deposited in the United States mail, postage prepaid, in the
place in which the principal executive office of the corporation is located at
least four (4) days prior to the time of the holding of the meeting. Such
mailing, telegraphing, telephoning, or delivery as above provided shall be due,
legal and personal notice to such Director.
When all of the Directors are present at any Directors' meeting,
however called or noticed, and either (i) sign a written consent thereto on the
records of such meeting, or, (ii) if a majority of the Directors are present and
if those not present sign a waiver of notice of such meeting or a consent to
holding the meeting or an approval of the minutes thereof, whether prior to or
after the holding of such meeting, which said waiver, consent or approval shall
be filed with the Secretary of the corporation, or, (iii) if a Director attends
a meeting without notice but without protesting, prior thereto or at its
commencement, the lack of notice, then the transactions thereof are as valid as
if had at a meeting regularly called and noticed.
-7-
<PAGE> 8
Section 10. SOLE DIRECTOR PROVIDED BY ARTICLES OF INCORPORATION
OR BY-LAWS. In the event only one (1) Director is required by the By-Laws or
Articles of Incorporation, then any reference herein to notices, waivers,
consents, meetings or other actions by a majority or quorum of the Directors
shall be deemed to refer to such notice, waiver, etc., by such sole Director,
who shall have all the rights and duties and shall be entitled to exercise all
of the powers and shall assume all the responsibilities otherwise herein
described as given to a Board of Directors.
Section 11. DIRECTORS ACTION BY UNANIMOUS WRITTEN CONSENT. Any
action required or permitted to be taken by the Board of Directors may be taken
without a meeting and with the same force and effect as if taken by a unanimous
vote of Directors, if authorized by a writing signed individually or
collectively by all members of the Board. Such consent shall be filed with the
regular minutes of the Board.
Section 12. QUORUM. A majority of the number of Directors as
fixed by the Articles of Incorporation or By-Laws shall be necessary to
constitute a quorum for the transaction of business, and the action of a
majority of the Directors present at any meeting at which there is a quorum, may
adjourn from time to time, but may not transact any business. A meeting at which
a quorum is initially present may continue to transact business, notwithstanding
the withdrawal of Directors, if any action taken is approved by a majority of
the required quorum for such meeting.
Section 13. NOTICE OF ADJOURNMENT. Notice of the time and place
of holding an adjourned meeting need not be given to absent Directors if the
time and place be fixed at the meeting adjourned and held within twenty-four
(24) hours, but if adjourned more than twenty-four(24) hours, notice shall be
given to all Directors not present at the time of the adjournment.
Section 14. COMPENSATION OF DIRECTORS. Directors, as such, shall
not receive any stated salary for their services, but by resolution of the Board
a fixed sum and expense of attendance, if any, may be allowed for attendance at
each regular and special meeting of the Board; provided that nothing herein
contained shall be construed to preclude any Director from serving the
corporation in any other capacity and receiving compensation therefor.
Section 15. COMMITTEES. Committees of the Board may be appointed
by resolution passed by a majority of the whole Board. Committees shall be
composed of two (2) or more members of the Board, and shall have such powers of
the Board as may be expressly delegated to it by resolution of the Board of
Directors.
Section 16. ADVISORY DIRECTORS. The Board of Directors from time
to time may elect one or more persons to be Advisory Directors who shall not by
such appointment be members of the Board of Directors. Advisory Directors shall
be available from time to time to perform special assignments specified by the
President, to attend meetings of the Board of Directors upon invitation and to
furnish consultation to the Board. the period during which the title shall be
held may be prescribed by the
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Board of Directors. If no period is prescribed, the title shall be held at the
pleasure of the Board.
Section 17. RESIGNATIONS. Any Director may resign effective upon
giving written notice to the Chairman of the Board, the President, the Secretary
or the Board of Directors of the corporation, unless the notice specifies a
later time for the effectiveness of such resignation. If the resignation is
effective at a future time, a successor may be elected to take office when the
resignation becomes effective.
Section 18. CONTRACTS. (a) No contract or other transaction
between this Corporation and any other Corporation shall be impaired, affected
or invalidated, nor Shall any director be liable in any way by reason of the
fact that any one or more of the directors of this Corporation is or are
interested in, or is a director or officer, or are directors or officers of such
other Corporation, provided that such facts are disclosed or made known to the
Board of Directors.
(b) Any director, personally and individually, may be a party to or may
be interested in any contract or transaction of this Corporation, and no
director shall be liable in any way by reason of such interest, provided that
the fact of such interest be disclosed or made known to the Board of Directors,
and provided that the Board of Directors shall authorize, approve or ratify Such
contract or transaction by the vote (not counting the vom of any such director)
of a majority of a quomm, notwithstanding the presence of any such director at
the meeting at which Such action is taken. Such director or directors may be
counted in detemining the presence of a quorum at such meeting. This Section
Shall not be construed to; impair or invalidate or in any way affect any
contract or other transaction, which would otherwise be valid under the law
(comnon, Statutory or otherwise) applicable thereto.
ARTICLE IV
OFFICERS
Section 1. OFFICERS. the Officers of the corporation shall be a
President, a Secretary, and a Chief Financial Officer. The corporation may also
have, at the discretion of the Board of Directors, a Chairman of the Board, one
or more Vice Presidents, one or more Assistant Secretaries, one or more
Assistant Treasurers, and such other Officers as may be appointed in accordance
with the provisions of Section 3 of this Article III. Any number of offices may
be held by the same person.
Section 2. ELECTION. The Officers of the corporation, except such
Officers as may be appointed in accordance with the provisions of Section 3 or
Section 5 of this Article, shall be chosen annually by the Board of Directors,
and each shall hold office until he or she shall resign or shall be removed or
otherwise disqualified to serve, or a successor shall be elected and qualified.
Section 3. SUBORDINATE OFFICERS, ETC. The Board of Directors may
appoint such other Officers as the business of the corporation may require, each
of whom shall hold office for such period, have such authority and perform such
duties
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as are provided in the By-Laws or as the Board of Directors may from time
to time determine.
Section 4. REMOVAL AND RESIGNATION OF OFFICERS. Subject to the
rights, if any, of an Officer under any contract of employment, any Officer may
be removed, either with or without cause, by the Board of Directors, at any
regular or special meeting to the Board, or, except in case of any Officer
chosen by the Board of Directors, by any Officer upon whom such power of removal
may be conferred by the Board of Directors.
Any Officer may resign at any time by giving written notice to
the corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the Officer is a
party.
Section 5. VACANCIES. A vacancy in any office because of death,
resignation, removal, disqualification or any other cause shall be filled in the
manner prescribed in the By-Laws for regular appointments to that office.
Section 6. CHAIRMAN OF THE BOARD. The Chairman of the Board, if
such an officer be elected, shall, if present, preside at meetings of the Board
of Directors and exercise and perform such other powers and duties as may be
from time to time assigned by the Board of Directors or prescribed by the
By-Laws. If there is no President, the Chairman of the Board shall in addition
be the Chief Executive Officer of the corporation and shall have the powers and
duties prescribed in Section 7 of this Article III.
Section 7. PRESIDENT. Subject to such supervisory powers, if any,
as may be given by the Board of Directors to the Chairman of the Board, if there
be such an Officer, the President shall be the Chief Executive Officer of the
corporation and shall, subject to the control of the Board of Directors, have
general supervision, direction and control of the business and Officers of the
corporation. He or she shall preside at all meetings of the Shareholders and in
the absence of the Chairman of the Board, or if there be none, at all meetings
of the Board of Directors. The President shall be ex officio a member of all the
standing committees, including the Executive Committee, if any, and shall have
the general powers and duties of management usually vested in the office of
President of a corporation, and shall have such other powers and duties as may
be prescribed by the Board of Directors or the By-Laws.
Section 8. VICE PRESIDENT. In the absence or disability of the
President, the Vice Presidents, if any, in order of their rank as fixed by the
Board of Directors, or if not ranked, the Vice President designated by the Board
of Directors, shall perform all the duties of the President, and when so acting
shall have all the powers of, and be subject to, all restrictions upon, the
President. The Vice President shall have such other powers and perform other
duties as from time to time may be prescribed for them respectively by the Board
of Directors or the By-Laws.
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Section 9. SECRETARY. The Secretary shall keep, or cause to be
kept, a book of minutes at the principal office or such other place as the Board
of Directors may order, of all meetings of Directors and Shareholders, with the
time and place of holding, whether regular or special, and if special, how
authorized, the notice thereof given, the names of those present at Directors'
meetings, the number of shares present or represented at Shareholders' meetings
and the proceedings thereof.
The Secretary shall keep, or cause to be kept, at the principal
office or at the office of the corporation's transfer agent, a share register,
or duplicate share register, showing the names of the Shareholders and their
addresses; the number and classes of shares held by each; the number and date of
certificates issued for the same, and the number and date of cancellation of
every certificate surrendered for cancellation.
The Secretary shall give, or cause to be given, notice of all the
meetings of the Shareholders and of the Board of Directors required by the
By-Laws or by law to be given. He or she shall keep the seal of the corporation
in safe custody, and shall have such other powers and perform such other duties
as may be prescribed by the Board of Directors or by the By-Laws.
Section 10. CHIEF FINANCIAL OFFICER. The Chief Financial Officer
shall keep and maintain, or cause to be kept and maintained in accordance with
generally accepted accounting principles, adequate and correct accounts of the
properties and business transactions of the corporation, including accounts of
its assets, liabilities, receipts, disbursements, gains, losses, capital,
earnings (or surplus) and shares. The books of account shall at all reasonable
times be open to inspection by any Director.
This Officer shall deposit all moneys and other valuables in the
name and to the credit of the corporation with such depositories as may be
designated by the Board of Directors. He or she shall disburse the funds of the
corporation as may be ordered by the Board of Directors, shall render to the
President and Directors, whenever they request it, an account of all of his or
her transactions and of the financial condition of the corporation, and shall
have such other powers and perform such other duties as may be prescribed by the
Board of Directors or the By-Laws.
ARTICLE V
CERTIFICATES AND TRANSFER OF SHARES
Section 1. CERTIFICATES FOR SHARES. Certificates for shares shall
be of such form and device as the Board of Directors may designate and shall
state the name of the record holder of the shares represented thereby; its
number; date of issuance; the number of shares for which it is issued; a
statement of the rights, privileges, preferences and restrictions, if any; a
statement as to the redemption or conversion, if any; a statement of liens for
restrictions upon transfer or voting, if any; if the shares be assessable or, if
assessments are collectible by personal action, a plain statement of such facts.
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<PAGE> 12
All certificates shall be signed in the name of the corporation
by the Chairman of the Board or Vice Chairman of the Board or the President or
Vice President and by the Chief Financial Officer or an Assistant Treasurer or
the Secretary or any Assistant Secretary, certifying the number of shares and
the class or series of shares owned by the Shareholder.
Any or all of the signatures on the certificate may be facsimile.
In case any Officer, transfer agent, or registrar who has signed or whose
facsimile signature has been placed on a certificate shall have ceased to be
that Officer, transfer agent, or registrar before that certificate is issued, it
may be issued by the corporation with the same effect as if that person were an
Officer, transfer agent, or registrant at the date of issue.
Section 2. TRANSFER ON THE BOOKS. Upon surrender to the Secretary
or transfer agent of the corporation of a certificate for shares duly endorsed
or accompanied by proper evidence of succession, assignment or authority to
transfer, it shall be the duty of the corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate and record the
transaction upon its books.
Section 3. LOST OR DESTROYED CERTIFICATES. Any person claiming a
certificate of stock to be lost or destroyed shall make an affidavit or
affirmation of the fact and shall, if the Directors so require, give the
corporation a bond of indemnity, in form and with one or more sureties
satisfactory to the Board, in a least double the value of the stock represented
by said certificate, whereupon a new certificate may be issued in the same tenor
and for the same number of shares as the one alleged to be lost or destroyed.
Section 4. TRANSFER AGENTS AND REGISTRANTS. The Board of
Directors may appoint one or more transfer agents or transfer clerks, and one or
more registrars, which shall be an incorporated bank or trust company, either
domestic or foreign, who shall be appointed at such times and places as the
requirements of the corporation may necessitate and the Board of Directors may
designate.
Section 5. CLOSING STOCK TRANSFER BOOKS - RECORD DATE. In order
that the corporation may determine the Shareholders entitled to notice of any
meeting or to vote or entitled to receive payment of any dividend or other
distribution or allotment of any rights or entitled to exercise any rights in
respect of any other lawful action, the Board may fix, in advance, a record
date, which shall not be more than fifty (50) nor less than ten (10) days prior
the date of such meeting nor more than fifty (50) days prior to any other
action.
If no record date is fixed; the record date for determining
Shareholders entitled to notice of or to vote at a meeting of Shareholders shall
be at the close of business on the business day next preceding the day on which
notice is given, or, if notice is waived, at the close of business on the
business day next preceding the day on which the meeting is held. The record
date for determining Shareholders entitled to give consent to corporate action
in writing without a meeting, when no prior action by the Board is necessary,
shall be the day on which the first written consent is given.
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<PAGE> 13
The record date for determining Shareholders for any other
purpose shall be at the close of business on the day on which the Board adopts
the resolution relating thereto, or the fiftieth (50th ) day prior to the date
of such other action, whichever is later.
Section 6. LEGEND CONDITION. In the event any shares of this
corporation are issued pursuant to a permit or exemption therefrom requiring the
imposition of a legend condition, the person or persons issuing or transferring
said shares shall make sure said legend appears on the certificate and shall not
be required to transfer any shares free of such legend unless an amendment to
such permit or a new permit be first issued so authorizing such a deletion.
ARTICLE VI
AMENDMENTS TO BY-LAWS
Section 1. AMENDMENT BY SHAREHOLDERS. New By-Laws may be adopted
or these By-Laws may be amended or repealed by the vote or written consent of
holders of a majority of the outstanding shares entitled to vote; provided
however, that if the Articles of Incorporation of the corporation set forth the
number of authorized Directors of the corporation, the authorized number of
Directors may be changed only by an amendment of the Articles of Incorporation.
Section 2. POWERS OF DIRECTORS. Subject to the right of the
Shareholders to adopt, amend or repeal By-Laws, the Board of Directors may
adopt, amend or repeal any of these By-Laws other than a By-Law or amendment
thereof changing the authorized number of Directors.
Section 3. RECORD OF AMENDMENTS. Whenever an amendment or new
By-Law is adopted, it shall be copied in the book of By-Laws with the original
By-Laws, in the appropriate place. If any By-Law is repealed, the fact of repeal
with the date of the meeting at which the repeal was enacted or written assent
was filed shall be stated in said book.
ARTICLE VII
FISCAL YEAR
The accounting year of the corporation shall be fixed by
resolution of the Board of Directors.
ARTICLE VIII
CORPORATE SEAL
The corporate seal, if any, shall be in such forrn as shall be
approved from time to time by the Board of Directors.
ARTICLE IX
INDEMNITY
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Any person made a party to any action, suit or proceeding, by
reason of the fact that he, his testator or intestam representative is or was a
director, officer or employee of the Corporation, or of any Corporation in which
he served as such at the request of the Corporation, shall be indetnnified by
the Corporation against the reasonable expenses, including attomey's fees,
actually and necessarily incurred by him in connection with the defense of such
action, suit of proceedings, or in connection with any appeal therein that such
officer, director or employee is liable for negligence or misconduct in the
perfomance of his duties.
The foregoing right of indemnification Shall not be deemed
exclusive of any other rights to which any officer or director or employee may
be entitled apart from the provisions of this Section.
The amount of indemnity to which any officer or any director may
be entitled shall be fixed by the Board of Directors, except that in any case
where there is no disinterested majority of the Board available, the anount
shall be fixed by arbitration pursuant to then existing rules of the American
Arbitration Association.
CERTIFICATE OF ADOPTION OF BY-LAWS
CERTIFICATE BY SECRETARY OF ADOPTION BY DIRECTORS
THIS IS TO CERTIFY:
That I am the duly elected, qualified and acting Secretary of the
above named corporation and that the above and foregoing Code of By-Laws was
submitted to the Board of Directors at their first meeting and recorded in the
minutes thereof, and was ratified by the vote of the Board of Directors.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed the
corporate seal this March___, 1997.
------------------------
WILLIAM SMITH, Secretary
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<PAGE> 1
EXHIBIT 4.1
INCORPORATED UNDER THE LAWS OF THE STATE OF NEVADA
NUMBER SHARES
AMERICAN DIVERSIFIED HOLDINGS, INC.
AUTHORIZED: 110,000,000 SHARES COMMON STOCK
NO PAR VALUE
THIS CERTIFIES THAT ______________________________________________________is the
registered holder of _____________________________________________________Shares
transferable only on the books of the Corporation by the holder hereof in
person or by Attorney upon surrender of this Certificate properly endorsed.
IN WITNESS WHEREOF, the said Corporation has caused this Certificate to be
signed by its duly authorized officers and its Corporate Seal to be hereunto
affixed
this ____________day [SEAL] of _______________A.D. 19__
<PAGE> 2
For Value Received, _____ hereby sell, assign and transfer
unto __________________________________________________________
________________________________________________________ Shares
represented by the within Certificate, and do hereby
irrevocably constitute and appoint
______________________________________________________ Attorney
to transfer the said Shares on the books of the within named
Corporation with full power of substitution in the premises.
Dated ___________________ ____
In presence of
________________________________
_____________________________________
NOTICE: THE SIGNATURE OF THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE
FACE OF THE CERTIFICATE, IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
<PAGE> 1
EXHIBIT 8.1
PLAN AND AGREEMENT OF MERGER AND REORGANIZATION
among
AMERICAN DIVERSIFIED SECURITIES, INC.
a Nevada corporation
and
JAMES BUCHANAN REA, INC.,
a California corporation
November 24, 1997
<PAGE> 2
PLAN AND AGREEMENT OF MERGER AND REORGANIZATION
This PLAN AND AGREEMENT OF MERGER AND REORGANIZATION (this
"Agreement") is entered into as of November 24, 1997 among American Diversified
Corporation, a Delaware corporation (the "Corporation"), American Diversified
Holdings, Inc., a Nevada corporation (the "Parent"), American Diversified
Securities, Inc., a Nevada corporation (the "Subsidiary") and James Buchanan
Rea, Inc., a California corporation (the "Company"), and James Buchanan Rea,
Jr., an individual and the majority shareholder of the Company (the "Majority
Shareholder").
R E C I T A L S
A. WHEREAS, the Boards of Directors of the Corporation, the
Parent, the Subsidiary and the Company have approved the merger of the Company
with and into the Subsidiary pursuant to this Agreement (the "Merger") and the
transactions contemplated hereby upon the terms and subject to the conditions
set forth herein; and
B. WHEREAS, it is intended that Parent, the Subsidiary, the
Company and the Majority Shareholder will recognize no gain or loss for federal
income tax purposes under the Internal Revenue Code of 1986, as amended (the
"Code"), and the regulations thereunder as a result of the consummation of the
Merger:
NOW, THEREFORE, in consideration of the premises and the
representations, warranties, covenants and agreements contained herein, the
parties hereto, intending to be legally bound hereby, agree as follows:
ARTICLE 1
DEFINITIONS
Unless otherwise defined herein or the context otherwise
requires, the terms defined in this Article 1 shall have the meanings herein
specified for all purposes of this Agreement, applicable to both the singular
and plural forms of any of the terms herein defined.
"Action" shall mean any legal action, suit, arbitration or other
legal, administrative or other legal, administrative or other governmental
investigation, inquiry or proceeding (whether federal, state, local or foreign).
"Advisers Act" shall mean the Investment Advisers Act of 1940, as
amended, and the rules and regulations of the SEC thereunder.
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<PAGE> 3
"Affiliate" of a Person shall mean any Person that directly or
indirectly controls, is controlled by, or is under common control with, the
indicated Person.
"Agreement" shall mean this Plan and Agreement of Merger and
Reorganization.
"Applicable Law" shall mean any domestic or foreign federal,
state or local statute, law, ordinance, rule, administrative interpretation,
regulation, order, writ, injunction, directive, judgment, decree, policy,
guideline or other requirement applicable to the Subsidiary, the Majority
Shareholders, the Company, the Fund or any of their respective Affiliates,
properties, assets, officers, directors, employees or agents.
"Closing" and "Closing Date" shall have the respective meanings
assigned to such terms in Section 3.3(a).
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Company" shall mean James Buchanan Rea, Inc., a California
corporation. After the Effective Time of the Merger, the term "Company" shall
also include the "Subsidiary" as the surviving corporation in the Merger.
"Company Balance Sheet" shall have the meaning assigned to such
term in Section 6.15.
"Company Financial Statements" shall have the meaning assigned to
such term in Section 6.15.
"Company Policies" shall have the meaning assigned to such term
in Section 6.20.
"Company Common Stock" shall mean the Company's authorized class
of common stock, no par value per share.
"Corporation" shall mean American Diversified Corporation, a
Delaware corporation that owns 90% of the Parent.
"Damages" shall mean any and all losses, liabilities,
obligations, costs, expenses, damages or judgments of any kind or nature
whatsoever (including reasonable attorneys', accountants' and experts, fees,
disbursements of counsel, and other costs and expenses incurred pursuing
indemnification claims under Article 13 hereof).
"Dealer Agreements" shall mean those agreements between the
Company and Persons registered as brokers or dealers with the SEC pursuant to
which such Persons agree to act as non-exclusive dealers in shares of the Fund.
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<PAGE> 4
"Effective Time" shall have the meaning assigned to such term in
Section 2.2.
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended from time to time.
"ERISA Affiliate" shall mean any Person which is (or at any
relevant time was) a member of a controlled group of corporations within the
meaning of Code Section 414(b), all trades or businesses under common control
within the meaning of Code Section 414(c), and all affiliated service groups
within the meaning of Code Section 414(m), of which the Company is (or at any
relevant time was) a member.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, and all the rules and regulations of the SEC thereunder.
"Fund" shall mean Rea-Graham Funds, Inc., a Maryland corporation.
"Fund Financial Statements" shall have the meaning assigned to
such term in Section 6.14.
"Fund Policies" shall have the meaning assigned to such term in
Section 6.12.
"GAAP" shall mean generally accepted accounting principles.
"Governmental Entity" shall mean any nation or government, any
state or other political subdivision thereof, any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government, including the SEC or any other government authority, agency,
department, board, commission or instrumentality of the United States, any
foreign government, any State of the United States or any political subdivision
thereof, and any court, tribunal or arbitrators) of competent jurisdiction, and
any governmental or non-governmental self-regulatory organization, agency or
authority (including the NASD and the Investment Management Regulatory
Organization Limited).
"Indebtedness" shall mean any obligation of the Company or the
Fund which under GAAP is required to be shown on the balance sheet of the
Company or the Fund, as applicable, as a liability.
"Intellectual Property Rights" shall have the meaning assigned to
such term in Section 6.19.
"Investment Advisory Agreement" shall mean that certain
Investment Advisory Agreement between the Company and the Fund dated as of July
15, 1988.
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<PAGE> 5
"Investment Company Act" shall mean the Investment Company Act of
1940, as amended, and all rules and regulations of the SEC thereunder.
"IRS" shall mean the United States Internal Revenue Service.
"Legal Requirement" shall mean any statute, law, ordinance, rule,
regulation, permit, order, writ, judgment, injunction, decree or award issued,
enacted or promulgated by any Governmental Entity or any arbitrator.
"Lien" shall mean and include any lien, pledge, mortgage,
security interest, claim, lease, charge, option, right of first refusal,
easement, or any other encumbrance whatsoever.
"Majority Shareholder" shall mean James Buchanan Rea, Jr., an
individual.
"Material Adverse Effect" shall mean a material adverse effect on
the business, financial condition, properties, profitability, prospects or
operations of the Company or the Fund, as applicable.
"Manager" shall mean the manager of the Company and the
Subsidiary pursuant to the Agreement.
"Merger Filing" shall have the meaning assigned to such term in
Section 2.2.
"Names" shall mean "Rea" and "Rea-Graham".
"NASD" shall mean the National Association of Securities Dealers,
Inc.
"New Advisory Agreement" shall have the meaning assigned to such
term in Section 8.4.
"New Underwriting Agreement" shall have the meaning assigned to
such term in Section 8.4.
"Ordinary Course" shall mean, when used with reference to the
Company, the ordinary course of the Company's business, consistent with past
practices.
"Parent" shall mean American Diversified Holdings, Inc., a Nevada
corporation.
"Permits" shall have the meaning assigned to such term in Section
6.23.
"Person" shall mean all natural persons, corporations, business
trusts, associations, companies, partnerships, joint ventures, Governmental
Entities and any other entities.
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<PAGE> 6
"Radix Software" shall have the meaning assigned to such term in
Section 8.2.
"Recent Company Statement Date" shall have the meaning assigned
to such term in Section 6.15.
"Recent Fund Statement Date" shall have the meaning assigned to
such term in Section 6.14.
"SEC" shall mean the Securities and Exchange Commission.
"Securities Act" shall mean the Securities Act of 1933, as
amended, and all the rules and regulations of the SEC thereunder.
"Securities Laws" shall mean the Securities Act, the Exchange
Act, the Investment Company Act, the Advisers Act, and the rules and regulations
of the SEC promulgated thereunder.
"Shareholder" shall mean the holders of all of the issued and
outstanding shares of the Company's Common Stock, as set forth on Exhibit A,
attached hereto.
"Subsidiary" shall mean American Diversified Securities, Inc., a
Nevada corporation.
"Tax" shall mean any federal, state, local or foreign income,
gross receipts, license, payroll, unemployment, excise, severance, stamp,
occupation, premium, windfall profits, environmental (including, without
limitation, taxes under Code Section 59A), customs duties, capital stock,
franchise, profits, withholding, social security (or similar), employment,
disability, real property, personal property, sales, use, transfer,
registration, value added, alternative or add-on minimum, estimated tax or other
tax, assessment or charge of any kind whatsoever, including, without limitation,
any interest, fine penalty or addition thereto, whether disputed or not.
"Tax Return" shall mean any return, declaration, report, claim
for refund or information, or statement relating to Taxes, and any exhibit,
schedule, attachment or amendment thereto.
"U.S." shall mean the United States of America.
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<PAGE> 7
ARTICLE 2
THE MERGER
SECTION 2.1 THE MERGER. At the Effective Time in accordance with the
Nevada law, the Company shall be merged with and into the Subsidiary and the
separate existence of the Company shall thereupon cease. The Subsidiary shall be
the surviving corporation in the Merger (hereinafter sometimes referred to as
the "Surviving Corporation").
SECTION 2.2 EFFECTIVE TIME OF THE MERGER. The Merger shall become
effective at such time (the "Effective Time") as the Agreements and Articles of
Merger, in the forms set forth as Exhibit B-1 and B-2 hereto, are filed with the
Secretaries of State of the State of Nevada and the State of California (the
"Merger Filing"); such filing shall be made simultaneously with or as soon as
practicable after the closing of the transactions contemplated by this Agreement
in accordance with Section 3.3.
ARTICLE 3
CONVERSION OF SHARES
SECTION 3.1 CONVERSION OF COMPANY SHARES IN THE MERGER. At the Effective
Time, by virtue of the Merger and without any action on the part of any holder
of any capital stock of the Company (a) each issued and outstanding share of
Common Stock of the Company ("Company Common Stock") held by the Majority
Shareholder shall, be converted into the right to receive, and become
exchangeable for, 237,500 shares of validly issued, fully paid and nonassessable
share of common stock of Parent ("Parent Common Stock"), as provided in this
Agreement; and (b) each issued and outstanding share of Company Common Stock
held by all shareholders of the Company other than the Majority Shareholder
shall be converted into the right to receive and become exchangeable for $3.25
in cash (an aggregate cash amount of $160,875).
SECTION 3.2 CANCELLATION OF COMPANY STOCK. All shares of Company Common
Stock held by the Subsidiary shall be canceled automatically and returned to the
status of authorized but unissued shares.
SECTION 3.3 CLOSING OF THE MERGER AND REORGANIZATION.
(a) The closing (the "Closing") of the merger and reorganization
transactions contemplated by this Agreement shall take place at the offices of
Jeffers, Wilson, Shaff & Falk, LLP, on the business day immediately after the
last of the conditions set forth in Article 11 hereof is fulfilled or waived, or
at such other time and place as Parent and the Company shall agree (the date on
which the Closing occurs being the "Closing Date").
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<PAGE> 8
(b) Deliveries by the Company to the Subsidiary. On the Closing Date,
the Company will deliver to the Subsidiary the following:
(i) stock certificates duly endorsed in blank representing all issued
and outstanding shares of the Company's Common Stock;
(ii) a certificate from the appropriate Secretary of State or other
similar government official of the jurisdiction of incorporation as to the good
standing of the Company, as of a date within five (5) days of the Closing Date;
(iii) copies of the resolutions or consents of the Board of Directors
of Company approving the Merger and the other agreements and transactions
contemplated hereby, certified by the corporate secretary or assistant corporate
secretary of the Company, and certified copies of the resolutions or consents,
in form and substance reasonably satisfactory to the Subsidiary, certified by
the corporate secretary or assistant corporate secretary of the Company,
constituting Shareholder approval of the Merger, termination of the Shareholder
Agreement of the Company, and all other agreements and transactions contemplated
hereby by the Shareholders;
(iv) all of the documents, certificates and instruments required to be
delivered, or cause to be delivered by the Company pursuant to Section 11.1
hereof;
(v) a certificate of the corporate secretary or an assistant corporate
secretary of the Company certifying the name, title and true signature of each
officer of Company executing any of the other documents and certificates to be
delivered pursuant to or in connection with this Agreement, as applicable; and
(vi) such other documents as are required to be delivered prior to or
on the Closing Date pursuant to this Agreement or as may reasonably be requested
by the Subsidiary.
(c) Deliveries by Parent and/or the Subsidiary. On the Closing Date,
Parent and/or the Subsidiary will deliver to the Company the following:
(i) stock certificate(s) representing the shares of the Parent's
common stock issuable to the Majority Shareholder;
(ii) (a) certified or bank cashier's checks in the amount of $3.25 per
share payable to each of the Shareholders other than the Majority Shareholder
times the number of shares of Company Common Stock registered in the name(s) of
such Shareholders; and
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(iii) a copy of the charter of Parent and of Subsidiary certified as of
a date within five (5) days of the Closing Date by the Secretary of State of the
state of incorporation of each such corporation and certified by the corporate
secretary or an assistant corporate secretary of each such corporation as to the
absence of any amendments between the dates of certification by such official
and the Closing Date;
(iv) a certificate from the appropriate Secretary of State or other
similar government official of the jurisdiction of incorporation as to the good
standing of the Parent and of Subsidiary, as of a date within five (5) days of
the Closing Date;
(v) copies of the resolutions or consents of each of the Board of
Directors of the Subsidiary and Parent approving the Merger, the issuance of
Parent Common Stock issuable hereunder and the other agreements and transactions
contemplated hereby, as applicable, and, certified by the corporate secretary or
an assistant corporate secretary of the Subsidiary and/or Parent;
(vi) all of the documents, certificates and instruments required to be
delivered, or cause to be delivered by the Company pursuant to Section 11.2
hereof;
(vii) the opinion of Subsidiary counsel referred to in Section 11.2.4
hereof;
(viii) a certificate of the corporate secretary or an assistant
corporate secretary of the Subsidiary and/or Parent certifying the name, title
and true signature of each officer of the Subsidiary any of the Agreements and
the other documents and certificates to be delivered pursuant to or in
connection with this Agreement;
(ix) all Approvals from third parties as are required for the Subsidiary
to consummate the Merger and the other transactions contemplated by the
Agreements hereto; and
(x) such other documents as are required to be delivered prior to or on
the Closing Date pursuant to this Agreement or as may be reasonably requested by
Company.
ARTICLE 4
LIMITED LICENSE OF "REA" AND "REA-GRAHAM" NAMES
SECTION 4.1 LIMITED LICENSE OF "REA" AND "REA-GRAHAM" NAMES. The names
"Rea" and "Rea-Graham" (the "Names") are proprietary to Majority Shareholder.
Majority Shareholder hereby grants a limited license to the Subsidiary to use
the Names only in connection
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with series portfolio(s) of the Fund and only so long as such series investment
policies are based on the value-based principles of the published writings of
Benjamin Graham as generally set forth in the Fund's current prospectus and so
long as Majority Shareholder remains employed by the Subsidiary or an affiliate.
If, at any time, Majority Shareholder's employment with the Subsidiary or an
affiliate shall cease, whether by resignation or termination, or in the
judgement of Majority Shareholder any such series of the Fund is no longer being
operated as set forth in the preceding sentence, on written demand by Majority
Shareholder, the Subsidiary will cause all or any such series of the Fund to
amend its governing instruments, including its Articles of Incorporation and
Bylaws, to delete the Names or any approximation thereof. It is recognized that
damages would not be an adequate remedy at law to enforce this provision; and
Majority Shareholder shall therefore have the right to enforce this provision by
all legal means, including the right of injunction.
ARTICLE 5
LIMITED LICENSE OF RADIX SOFTWARE
SECTION 5.1 LIMITED LICENSE OF RADIX SOFTWARE. The proprietary
investment research and analysis software known as "Radix" (the "Radix
Software") is owned by and is proprietary to Majority Shareholder. Majority
Shareholder hereby grants a limited license to the Subsidiary to use the Radix
Software, at no licensing fee cost to Subsidiary, in connection with the
Subsidiary's investment research and analysis activities for a term that shall
terminate upon the cessation of Majority Shareholder's employment by the
Subsidiary or an affiliate. Subsidiary shall pay the ongoing costs and expenses
associated with its use of Radix Software during the period of the license.
ARTICLE 6
REPRESENTATIONS AND WARRANTIES
CONCERNING THE COMPANY AND THE FUND
The Company represents and warrants to, and covenant and agree
with, the Subsidiary that:
SECTION 6.1 ORGANIZATION, QUALIFICATION AND CORPORATE AUTHORITY OF THE
COMPANY. The Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of California, and has all requisite
corporate power to own its property and to carry on its business as it is now
being conducted. The Company is duly licensed or qualified to do business as a
foreign corporation and is in good standing in each jurisdiction in which such
license or qualification is necessary under Applicable Law as a result of the
conduct of its business. The copies of the Articles of Incorporation and bylaws
of the Company which have been delivered to the Subsidiary prior to the
execution of this Agreement are true and correct
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and have not been amended or repealed.
SECTION 6.2 CAPITAL STOCK OF THE COMPANY. The Company's authorized
capital stock consists of 100,000 shares of Common Stock, of which 100,000
shares are issued and outstanding and held by the Shareholders as reflected in
Exhibit A, and no other shares are issued and outstanding. All of the Company's
issued and outstanding Common Stock has been duly authorized and is validly
issued, fully paid and nonassessable. There are no outstanding securities
convertible into or exchangeable for the capital stock of the Company or any
outstanding options, calls or other commitments for the issuance, sale or
delivery of any shares of the capital stock of the Company or of any securities
so convertible or exchangeable.
SECTION 6.3 ORGANIZATION, QUALIFICATION AND CORPORATE AUTHORITY OF THE
FUND. The Fund is a corporation duly organized, validly existing and in good
standing under the laws of the State of Maryland, and has all requisite
corporate power to own its property and to carry on its business as it is now
being conducted. The Fund is duly licensed or qualified to do business as a
foreign corporation and is in good standing in each jurisdiction in which such
license or qualification is necessary under Applicable Law as a result of the
conduct of its business. The copies of the Articles of Incorporation and bylaws
of the Fund which have been delivered to the Subsidiary prior to the execution
of this Agreement are true and correct and have not been amended or repealed.
SECTION 6.4 CAPITAL STOCK OF THE FUND. The Fund's authorized capital
stock consists of 20,000,000 shares of common stock, $1.00 par value per share.
All of the Fund's issued and outstanding shares of common stock has been duly
authorized and is validly issued, fully paid and nonassessable. All outstanding
shares of the Fund required to be registered under the Securities Act have been
sold pursuant to an effective registration statement filed thereunder. All
outstanding shares of the Fund required to be registered or qualified under
state securities laws were registered or qualified under those laws as required.
The Fund's records accurately reflect the number of the outstanding shares and
the record holders thereof.
SECTION 6.5 NO SUBSIDIARIES. Neither the Company nor the Fund has any
subsidiary nor owns or controls, or has any other equity investment or other
interest in, directly or indirectly, any corporation, joint venture,
partnership, association or other entity.
SECTION 6.6 INVESTMENT ADVISOR REGISTRATION. The Company is and has been
duly registered as an investment advisor under the Advisers Act since 1980 and
under California law since 1980. The Company is duly registered as an investment
advisor in the states and jurisdictions listed on Schedule 6.6, and all of such
registrations are current and in full force and effect. The Company is in good
standing as a registered investment advisor in each such state or jurisdiction.
The Company has previously delivered to the Subsidiary true and complete copies
of the Company's Form ADV filed with the SEC.
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SECTION 6.7 INVESTMENT ADVISORY BUSINESS.
(a) The Company is the investment advisor to the Fund pursuant to the
Investment Advisory Agreement, a true and complete copy of which has been
delivered to the Subsidiary, and such agreement is in full force and effect on
the date hereof. The Company does not provide investment advisory services to
any Person other than the Fund.
(b) Each Shareholder, director or employee of the Company who is
required to be registered as an investment adviser's agent or representative, a
principal or an associated person of an investment adviser or in any other
similarly designated position, with the SEC, the securities commission of any
state or any self-regulatory organization is duly registered as required and
each such registration is in full force and effect.
(c) Neither the Company nor any "affiliated person" thereof, as defined
in the Advisers Act, (i) is ineligible pursuant to Section 9(a) of the Advisers
Act to serve as an investment adviser (or in any other capacity contemplated by
the Advisers Act) to a registered investment company, or (ii) has engaged or is
engaging in any of the conduct specified in Section 9(b) of the Advisers Act or
Section 203(e) of the Advisers Act that would be reasonably expected to result
in SEC action to disqualify the Company as an investment adviser.
(d) The Company has no arrangements, understandings or intentions to
impose an "unfair burden", as that term is used in Section 15 of the Investment
Company Act, upon the Fund as a result of the transactions contemplated by this
Agreement.
(e) The Company has adopted a formal code of ethics and a written policy
against insider trading. Such code and policy comply with Section 204 of the
Advisers Act.
(f) The Company is now, and at all times since 1990 has been, in
compliance with any net capital requirements imposed by federal and securities
laws to which it is subject.
SECTION 6.8 MATERIAL CONTRACTS OF THE COMPANY; NO DEFAULTS. Schedule 6.8
contains a true and complete list of each material contract, agreement,
operating lease, capital lease, permit, commitment, binding arrangement or
instrument to which the Company is a party or by which the Company is bound,
including, without limitation, the Investment Advisory Agreement and all Dealer
Agreements. There has not been any material default in any contract, agreement,
operating lease, capital lease, permit, commitment, binding arrangement or
instrument, and the Company has not waived any material right thereunder or with
respect thereto.
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SECTION 6.9 BROKER/DEALER REGISTRATION AND BUSINESS.
(a) The Company is and has been duly registered as a broker and a dealer
pursuant to Section 15 of the Exchange Act since 1990, and under California law
since 1990, which registrations are in full force and effect. With respect to
the registrations under the Exchange Act and under California law, neither the
applications for registration nor any amendment thereto contain any untrue
statement of a material fact or omitted to state any material fact necessary to
make the statements therein not misleading. The Company is a member in good
standing with the NASD. The Company has previously delivered to the Subsidiary a
true and complete copy of the Company's Form BD filed with the SEC and NASD.
(b) The Company is duly registered as a broker and a dealer in the
states and jurisdictions listed on Schedule 6.9 hereto, and all of such
registrations are current and in full force and effect. The Company is in good
standing as a registered broker and registered dealer in each such state or
jurisdiction.
(c) The Company has not effected any transaction as a broker or as a
dealer either as principal or as agent for any Person, including, without
limitation, the Fund, since October, 1995, other than as an
underwriter/distributor for the Fund.
(d) The Company has filed with the SEC all reports required by the
Exchange Act Rule 17a-5(a) for the three years prior to the Closing Date. All of
such reports are fairly stated in all material respects and were prepared in
accordance with Applicable Law.
(e) The Company is now, and at all times since 1990 has been, in
compliance with the net capital provisions of Rule 15c3-1 under the Exchange Act
and all other applicable rules and regulations of the SEC and the NASD.
(f) The Company is now, and at all times since 1990 has been, in
compliance with the net capital provisions required to be maintained by each
state or jurisdiction in which the Company is registered as a broker-dealer.
(g) There are no special restrictions or limitations imposed by the NASD
relating to the conduct of the Company's business except those which may be
contained in the Company's current membership agreement with the NASD.
SECTION 6.10 DEALER AGREEMENTS. No party with which the Company has
entered into a Dealer Agreement has indicated to the Company any intent to
terminate its Dealer Agreement with the Company, and the Company has no reason
to believe that any such party intends to terminate its Dealer Agreement,
including upon consummation of the Merger contemplated by this Agreement. The
Company has not encouraged any such party to terminate its Dealer Agreement with
the Company.
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SECTION 6.11 BUSINESS OF THE FUND.
(a) The Fund is registered as an open-end management investment company
under the Investment Company Act. The registration statements of the Fund under
the Securities Act and the Investment Company Act complied with the requirements
of the respective Acts and no such registration statement contained, as of its
effective date, any untrue statement of a material fact or omitted to state any
material fact necessary to make the statements therein not misleading. (b) The
Fund is being and has been operated fully in compliance with its investment
objectives, policies, limitations and restrictions, all as set forth in the
registration statement and governing instruments for the Fund.
(b) The Fund is being and has been operated fully in compliance with its
investment objectives, policies, limitations and restrictions, all as set forth
in the registration statement and governing instruments for the Fund.
(c) The Board of Directors of the Fund has been properly constituted and
complies, to the extent applicable, with the requirements of Section 10 of the
Investment Company Act. No member of the Board of Directors of the Fund is or
has been subject to any disability under Section 9 of the Investment Company
Act.
(d) The Fund has elected to be treated as a "regulated investment
company" under Subchapter M of the Code and has qualified as a regulated
investment company for each year during its existence. The Fund has complied
with all applicable provisions of law necessary to preserve and retain the
Fund's election and status as a regulated investment company.
(e) None of the information furnished by the Company for inclusion by
the Fund in its proxy materials for the three years prior to the Closing Date
have contained any untrue statement of a material fact or omitted to state any
material fact necessary to make the statements therein not misleading.
(f) The Fund has duly adopted procedures pursuant to Rule 17e-1 under
the Advisers Act, to the extent applicable; and the Fund has complied, for a
period of at least [three] years prior to the date hereof, currently complies
and will comply with the requirements of Section 17(e) of the Investment Company
Act and Rule 17e-1 thereunder, to the extent applicable. The Fund has not
engaged in any transaction prohibited by Section 10(f) of the Investment Company
Act.
(g) The Fund has adopted a formal code of ethics and a written policy
against insider trading. Such code and policy comply with Section 17(j) of the
Investment Company Act and Rule 17j-1 thereunder.
(h) The current prospectus and statement of additional information of
the Fund, and all current supplemental advertising or marketing material
relating to the Fund, comply with the Securities Act, the Investment Company
Act, all applicable state laws and any applicable rules of the NASD. No such
document or material contains any untrue statement of
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<PAGE> 15
a material fact or omits to state any material fact necessary to make the
statements therein not misleading.
(i) All advertising or marketing materials relating to the
Fund required to be filed with the NASD or under any state securities law have
been so filed in a timely manner.
SECTION 6.12 FUND INSURANCE. There are in full force and effect one or
more policies of insurance issued by insurers of recognized responsibility,
including, without limitation, a fidelity bond underwritten by ICI Mutual
Insurance Company, insuring the Fund and its properties and business against
such losses and risks, and in such amounts, as are customary, or required by any
Governmental Entity, in the case of corporations of established reputation
engaged in the same or similar business and similarly situated (collectively,
"Fund Policies"). The Fund has no reason to believe that it will be unable to
renew its existing insurance coverage as and when the same shall expire upon
terms at least as favorable as those presently in effect.
SECTION 6.13 MATERIAL CONTRACTS OF THE FUND; NO DEFAULTS. Schedule 6.13
contains a true and complete list of each material contract, agreement,
operating lease, capital lease, permit, commitment, binding arrangement or
instrument to which the Fund is a party or by which the Fund is bound,
including, without limitation, administrative agreements, transfer agent
agreements, custody agreements, underwriting and distribution related agreements
(including copies of all plans adopted under Rule 12b-1 under the Investment
Company Act). There has not been any material default in any contract,
agreement, operating lease, capital lease, permit, commitment, binding
arrangement or instrument, and the Fund has not waived any material right
thereunder or with respect thereto.
SECTION 6.14 FUND FINANCIAL STATEMENTS. The audited balance sheet of the
Fund as of March 31, 1997 and the related financial statements for the year then
ended, as reported on by McGladrey & Pullen, LLP, and the unaudited balance
sheet of the Fund as of September 30, 1997 (the "Recent Fund Statement Date")
and the related unaudited financial statements for the period then ended, as
prepared by McGladrey & Pullen, LLP, and each balance sheet of the Fund, and the
related financial statements, as of a date or period subsequent to the Recent
Fund Statement Date, have been or will be prepared in accordance with GAAP
applied on a consistent basis, and present fairly the financial position and
results of operation of the Fund on the dates and for the periods stated therein
(subject, in the case of unaudited interim statements, to normal year-end audit
adjustments in accordance with GAAP) (collectively, the financial statements
referred to above being referred to as the "Fund Financial Statements").
SECTION 6.15 COMPANY FINANCIAL STATEMENTS. The audited balance sheet of
the company as of December 31, 1996 and the related financial statements for the
year then ended, as reported on by McGladrey & Pullen LLP, and the unaudited
balance sheet of the Company (the "Company Balance Sheet"), as of September 30,
1997 (the "Recent Company Statement Date") and the related unaudited financial
statements for the period then ended, as prepared by Julie S. Kurland, C.P.A.,
and each balance sheet of the Company, and the related financial statements,
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as of a date or period subsequent to the Recent Company Statement Date, have
been or will be prepared in accordance with GAAP applied on a consistent basis,
and present fairly the financial position and results of operation of the
Company on the dates and for the periods stated therein (subject, in the case of
unaudited interim statements, to normal year-end audit adjustments in accordance
with GAAP) (collectively, the financial statements referred to above being
referred to as the "Company Financial Statements").
SECTION 6.16 CONSENTS. Other than as listed in Schedule 6.16 hereto, no
approval, authorization, consent, license, clearance or order of, declaration or
notification to, or filing, registration or compliance with, any Governmental
Entity or any other Person is required in order to permit the Shareholders to
effect the Merger as contemplated hereby.
SECTION 6.17 NO UNDISCLOSED LIABILITIES. Except (a) to the extent set
forth or provided for in either the Fund Financial Statements and the notes
thereto or the Company Financial Statements or the notes thereto, (b) as set
forth in Schedule 6.17, or (c) for non-material current liabilities incurred
since the Recent Company Statement Date or the Recent Fund Statement Date in the
Ordinary Course, as of the date hereof neither the Fund nor the Company has any
liabilities, whether accrued, absolute, contingent or otherwise, whether due or
to become due and whether the amounts thereof are readily ascertainable or not,
or any unrealized or anticipated losses from any commitments of a contractual
nature, including Taxes with respect to or based upon the transactions or events
occurring at or prior to the Closing.
SECTION 6.18 PROPERTIES AND ASSETS; ENCUMBRANCES. The Company has good
and marketable title to all of its properties and assets including, without
limitation, the properties and assets listed in the Company Balance Sheet, free
and clear of all Liens. Each lease and sublease under which the Company is
lessee of any real or personal property is in full force and effect, and there
is not under any such lease any existing or claimed default by the Company. The
Company owns no real property.
SECTION 6.19 INTANGIBLE ASSETS. The Company and the Fund are validly
licensed or otherwise have the right to use, all trademarks, trademark rights,
trade names, trade name rights, service marks, service mark rights, copyrights
and other proprietary intellectual property rights, including computer programs
and software (collectively, "Intellectual Property Rights"), which are used in
the conduct of the business of the Company or the Fund, including but not
limited to the use of the name "Rea-Graham" by the Fund. No claims are pending
or overtly threatened that the Company or the Fund is infringing or otherwise
conflicting with the asserted rights of any Person with regard to any
Intellectual Property Rights, including but not limited to the use of the name
"Rea-Graham" by the Fund. No Person is infringing on the rights of the Company
or the Fund with respect to any Intellectual Property Right, No Person has
threatened any claim against the Company or the Fund in connection with the
involvement of such Person in the conception and development of Intellectual
Property Rights of the Company or the Fund.
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SECTION 6.20 COMPANY INSURANCE. There are in full force and effect one
or more policies of insurance or fidelity bonds issued by insurers of recognized
responsibility, insuring the Company and its properties and business against
such losses and risks, and in such amounts, as are customary, or required by any
Governmental Entity, in the case of corporations of established reputation
engaged in the same or similar business and similarly situated (collectively,
"Company Policies"). The Company has no reason to believe that it will be unable
to renew its existing insurance coverage as and when the same shall expire upon
terms at least as favorable as those presently in effect.
SECTION 6.21 JUDGMENTS; LITIGATION. There is no Action pending or
threatened against or affecting the Company or the Fund or their properties,
assets or business. The Company is not aware of any fact which might result in
or form the basis for any such Action. Neither the Company nor the Fund is in
default with respect to any order, writ, judgment, injunction, decree,
determination or award of any court or of any Governmental Entity.
SECTION 6.22 EMPLOYEE BENEFIT PLANS; EMPLOYEE RELATIONS. Except as set
forth in Schedule 6.22, neither the Company nor the Fund has any (a) bonus,
deferred compensation, pension, profit-sharing, stock option, employee stock
purchase or retirement plans or other employee benefit plans, including, without
limitation, any "employee benefit plan" as defined in Section 3(3) of ERISA, or
(b) collective bargaining agreements or any written employment agreements.
SECTION 6.23 PERMITS, LICENSES, ETC. The Company and the Fund have all
franchises, licenses, permits and other governmental approvals (including,
without limitation, registrations under the Securities Laws, the rules and
regulations of NASD and under California law) (collectively, the "Permits")
necessary to enable them to carry on their business as presently conducted.
There are no proceedings pending or, to the knowledge of the Company, no event
has occurred and no condition exists that is reasonably likely to form the basis
for any proceeding, which is reasonably likely to result in revocation,
cancellation or suspension of any Permit.
SECTION 6.24 TAX MATTERS. With respect to the Company and the Fund, (a)
all Tax Returns required by law to be filed have been filed, (b) all Taxes due
with respect to such Tax Returns have been paid, except Taxes as to which
adequate reserves have been provided in accordance with GAAP, (c) no
deficiencies for any Taxes have been proposed, assessed or asserted by any
taxing authority against either the Company or the Fund, (d) no adjustments to
the net operating loss carryovers and the tax basis in the amortizable
intangible assets of the Company or the Fund have been proposed, assessed or
asserted by the IRS, (e) no waivers of the time to assess any material Taxes are
outstanding nor are any written requests for such waivers pending, and (f) no
Tax Return is currently being or has been audited by any taxing authority.
SECTION 6.25 NO CONFLICT. Neither the execution, delivery and
performance of this Agreement by the Company, nor the consummation by the
Company of the transactions contemplated hereby, will (a) conflict with, or
result in a breach of, any of the terms, conditions
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or provisions of the Articles of Incorporation or bylaws of the Company, (b)
conflict with, result in a breach or violation of, give rise to a default under,
or result in the acceleration of performance under any mortgage, lease,
agreement, note, bond, indentures, guarantee, any Permit, or any Legal
Requirement to which the Company may be subject, or (c) give rise to an
imposition of any Lien upon any of the assets of the Company.
SECTION 6.26 ABSENCE OF CERTAIN CHANGES. Except as set forth in Schedule
6.26, since the Recent Company Statement Date or the Recent Fund Statement Date,
as applicable, (a) there has been no Material Adverse Effect, (b) there has not
been any material adverse change, or any event of which could reasonably be
expected to cause a Material Adverse Effect, and (c) each of the Company and the
Fund have conducted its business only in the ordinary Course.
SECTION 6.27 COMPLIANCE WITH LAW. The Company and the Fund are in
compliance with all Legal Requirements applicable to their business. The Company
and the Fund have made all required registrations and filings with and
submissions to all applicable Governmental Entities relating to their respective
operations as currently conducted and as proposed to be conducted. All such
registrations, filings and submissions were in compliance with all Legal
Requirements when filed, no material deficiencies have been asserted by any such
applicable Governmental Entities with respect to such registrations, filings or
submissions, and no facts or circumstances exist which would indicate that a
material deficiency may be asserted by any such authority with respect to any
such registration, filing or submission.
SECTION 6.28 BROKER FEES. No broker, finder or similar agent has been
employed by or on behalf of the Company or the Fund in connection with this
Agreement or the transactions contemplated hereby, and neither the Company nor
the Fund has entered into any agreement or understanding of any kind with any
Person or entity for the payment of any brokerage commission, finder's fee or
any similar compensation in connection with this Agreement or the transactions
contemplated hereby.
SECTION 6.29 DISCLOSURE. No representation or warranty of the Company in
this Agreement and no information contained in any Schedule or other writing
delivered pursuant to this Agreement or at the Closing contains or will contain
any untrue statement of a material fact or omits or will omit to state a
material fact required to make the statements herein or therein not misleading.
ARTICLE 7
REPRESENTATIONS AND WARRANTIES OF PARENT AND SUBSIDIARY
The Parent and Subsidiary hereby represent and warrant to, and
covenant and agree with, the Company that:
SECTION 7.1 EXECUTION AND DELIVERY. This Agreement has been duly
executed
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and delivered by Parent and Subsidiary and constitutes a legal, valid
and binding agreement of Subsidiary enforceable against such Parent and
Subsidiary in accordance with its terms.
SECTION 7.2 NO CONFLICTS. The execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated hereby will
not conflict with or result in a breach or violation of any term or provision
of, or (with or without notice or passage of time, or both) constitute a default
under, any indenture, mortgage, deed of trust, trust (constructive and other),
loan agreement or other agreement or instrument to which such Subsidiary is a
party or by which Parent and/or Subsidiary is bound, or violate any Legal
Requirement applicable to or binding upon Parent and/or Subsidiary.
SECTION 7.3 NO BROKERS. No broker, finder or similar agent has been
employed by or on behalf of Parent or Subsidiary in connection with this
Agreement or the transactions contemplated hereby, and Parent or Subsidiary has
not entered into any agreement or understanding of any kind with any person or
entity for the payment of any brokerage commission, finder's fee or any similar
compensation in connection with this Agreement or the transactions contemplated
hereby.
SECTION 7.4 REGULATION S OFFERING. The Parent is effecting a public
offering of its preferred stock in Germany in full compliance with the
exemptions from Securities Laws provided under Regulation S under the Securities
Act and in full compliance with the securities laws of Germany and any other
country where the offering is being made.
ARTICLE 8
AFFIRMATIVE COVENANTS OF THE COMPANY
During the period commencing on the date hereof and continuing
through the Closing Date, the Company covenants and agrees that:
SECTION 8.1 QUALIFICATION. The Company shall maintain all qualifications
to transact business and remain in good standing in the State of California and
in the foreign jurisdictions where it is presently registered or qualified.
SECTION 8.2 ORDINARY COURSE. The Company shall conduct its business in,
and only in, the Ordinary Course and, to the extent consistent with such
business, the Company shall preserve intact its current business organization,
keep available the services of its current officers and employees and preserve
its relationships with customers, suppliers and others having business dealings
with it to the end that its goodwill and going business value shall be
unimpaired at the Closing Date.
SECTION 8.3 COMPLIANCE WITH LEGAL REQUIREMENTS. The Company shall comply
promptly with all requirements that Applicable Law may impose upon it and its
operations and
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with respect to the transactions contemplated by this Agreement, and shall
cooperate promptly with, and furnish information to, the Subsidiary in
connection with any such requirements imposed upon any Subsidiary, or upon any
of its Affiliates, in connection therewith or herewith.
SECTION 8.4 ADVISORY AGREEMENT AND UNDERWRITING AGREEMENT CONSENT. The
Company shall use its best efforts to (a) cause the Board of Directors of the
Fund to approve, and to solicit the shareholders of the Fund as promptly as
practicable to approve (including recommending that the shareholders approve), a
new investment advisory agreement for the Fund substantially in the form
attached hereto as Annex A (the "New Advisory Agreement"), to be effective on
the Closing Date, pursuant to the provisions of Section 15 of the Investment
Company Act and consistent with all requirements of the Investment Company Act
applicable thereto, and (b) to cause the Board of Directors of the Fund or the
shareholders of the Fund to approve a new underwriting agreement for the Fund
substantially in the form attached hereto as Annex B (the "New Underwriting
Agreement"), to be effective on the Closing Date; pursuant to the provisions of
Section 15 of the Investment Company Act applicable thereto. Without limiting
the generality of the foregoing, the Company shall use its best efforts to
prepare and file or cause to be prepared and filed with the SEC and all other
applicable governmental bodies and regulatory authorities, as promptly as
practicable, all proxy solicitation materials necessary or advisable for
solicitation of the approval of the shareholders of the Fund of the New Advisory
Agreement and the New Underwriting Agreement. All such proxy solicitation
materials shall comply in all material respects with all requirements of
Applicable Law, including, without limitation, the Exchange Act and the
Investment Company Act, and shall not 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 contained therein not misleading. All costs and
expenses associated with such proxy solicitation shall be borne by the
Subsidiary as a post-closing allocation and shall not be charged to the Company
or the Fund.
SECTION 8.5 OTHER CONSENTS. The Company shall use its best efforts to
obtain any consent, authorization or approval of, or exemption by, any Person
required to be obtained or made by any party hereto in connection with the
transactions contemplated hereby or the taking of any action in connection with
the consummation thereof.
SECTION 8.6 MAINTAIN INSURANCE. The Company shall maintain its Company
Policies and the Fund shall maintain its Fund Policies in full force and effect
and shall not do, permit or willingly allow to be done any act by which any of
the Company Policies or the Fund Policies may be suspended, impaired or
canceled.
SECTION 8.7 PERMITS. The Company shall maintain in full force and
effect, and comply with, all Permits.
SECTION 8.8 TAX ASSESSMENTS AND AUDITS. The Company shall furnish
promptly to the Subsidiary a copy of all notices of proposed assessment or
similar notices or reports that
20
<PAGE> 21
are received from any taxing authority and which relate to the Company's
operations for periods ending on or prior to the Closing Date. The Company shall
promptly inform the Subsidiary, and permit the participation in and control by
the Subsidiary, of any investigation, audit or other proceeding by a
Governmental Entity in connection with any Taxes, assessment, governmental
charge or duty and shall not consent to any settlement or final determination in
any proceeding without the prior written consent of the Subsidiary.
21
<PAGE> 22
SECTION 8.9 SECTION 15(F). The Company shall use its best efforts to
assure the compliance with the conditions of Section 15(f) of the Investment
Company Act as it applies to the transactions contemplated by this Agreement.
SECTION 8.10 CONDITIONS TO CLOSING. The Company shall use its best
efforts to bring about the satisfaction of the conditions precedent to Closing
set forth in Section 11.1 of this Agreement.
SECTION 8.11 MATERIAL ADVERSE EFFECT. The Company shall promptly advise
the Subsidiary orally and, within three business days thereafter, in writing of
any change in the Company's or the Fund's business or condition that has had or
may have a Material Adverse Effect.
SECTION 8.12 ACCESS AND INFORMATION. The Company shall afford to the
Subsidiary and the Subsidiary's accountants, counsel and other representatives,
reasonable access to all of its properties, books, contracts, commitments,
records and personnel and, during such period, shall furnish promptly to the
Subsidiary all information concerning its business, properties and personnel as
the Subsidiary may reasonably request.
SECTION 8.13 FURTHER ASSURANCES. Subject to the terms and conditions of
this Agreement, each of the parties hereto agrees to use all reasonable efforts
to take, or cause to be taken, all action, and to do, or cause to be done, all
things necessary, proper or advisable under applicable Legal Requirements, to
consummate and make effective the transactions contemplated by this Agreement.
If at any time after the Closing any further action is necessary or desirable to
carry out the purposes of this Agreement, the Company and the Subsidiary, as the
case may be, shall take or cause to be taken all such necessary or convenient
action and execute, and deliver and file, or cause to be executed, delivered and
filed, all necessary or convenient documentation.
ARTICLE 9
NEGATIVE COVENANTS OF THE COMPANY
During the period commencing on the date hereof and continuing
through the Closing Date, the Company covenants and agrees (except as expressly
contemplated by this Agreement or to the extent that the Subsidiary shall
otherwise expressly consent in writing) that:
SECTION 9.1 DISCHARGE. The Company shall not cancel, compromise, release
or discharge any claim of the Company upon or against any person or waive any
right of the Company of material value, or discharge any Lien upon any asset of
the Company or compromise any debt or other obligation of the Company to any
person other than Liens, debts or obligations with respect to current
liabilities of the Company.
SECTION 9.2 CHANGE IN BUSINESS. The Company shall not (a) amend its
Articles
22
<PAGE> 23
of Incorporation or bylaws, (b) acquire by merging or consolidating with, or
agreeing to merge or consolidate with, or purchase substantially all of the
stock or assets of, or otherwise acquire, any business or any corporation,
partnership, association or other business organization or division thereof, (c)
enter into any partnership or joint venture, (d) declare, set aside, make or pay
any dividend or other distribution in respect of its capital stock or purchase
or redeem, directly or indirectly, any shares of its capital stock, (e) issue or
sell any shares of its capital stock of any class or any options, warrants,
conversion or other rights to purchase any such shares or any securities
convertible into or exchangeable for such shares, or (f) liquidate or dissolve
or obligate itself to do.
SECTION 9.3 INDEBTEDNESS. The Company shall not incur any Indebtedness
other than non-material obligations in the ordinary course of business, sell any
debt securities or lend money to or guarantee the Indebtedness of any Person
other than any additional subordinated loans that may be required to maintain
the Company's compliance with the net capital rules under federal Securities
Laws.
SECTION 9.4 ACCOUNTING CHANGES. The Company shall not make any changes
in the accounting principles, methods, record or practices followed by it or
depreciation or amortization policies or rates heretofore adopted by it, and
maintain its books, records and accounts in accordance with GAAP applied on a
basis consistent with that of prior periods.
SECTION 9.5 DISPOSITION OF ASSETS. The Company shall not sell, transfer,
license, lease or otherwise dispose of, or suffer or cause the encumbrance by
any Lien upon any of its properties or assets, tangible or intangible, or any
interest therein.
SECTION 9.6 EMPLOYMENT MATTERS. The Company shall not (a) adopt or amend
in any material respect any collective bargaining, bonus, profit-sharing,
compensation, stock option, pension, retirement, deferred compensation,
employment or other plan, agreement, trust, fund or arrangement for the benefit
of employees (whether or not legally binding) other than to comply with any
Legal Requirement or (b) pay, or make any accrual or arrangement for payment of,
any increase in compensation, bonuses or special compensation of any kind, or
any severance or termination pay to, or enter into any employment or loan or
loan guarantee agreement with, any current or former officer, director, employee
or consultant of the Company other than any additional subordinated loans as are
referenced in Section 9.3.
SECTION 9.7 MATERIAL CONTRACTS. The Company shall not terminate or
modify, or commit or cause or suffer to be committed any act that will result in
breach or violation of any term of or (with or without notice or passage of
time, or both) constitute a default under or otherwise give any person a basis
for nonperformance under, any indenture, mortgage, deed of trust, loan or credit
agreement, lease, license or other agreement, instrument, arrangement or
understanding, written or oral, disclosed in this Agreement or the Schedules
hereto. The Company shall not become a party to any contract or commitment other
than in the Ordinary
23
<PAGE> 24
Course, and shall meet all of its contractual obligations in accordance with
their respective terms.
SECTION 9.8 FUND QUALIFICATION. The Company shall not take any action
(a) that would prevent the Fund from qualifying as a "regulated investment
company" within the meaning of Section 851 of the Code, or (b) that would be
inconsistent with the Fund's prospectus as currently in effect and other
offering, advertising and marketing materials currently in use.
SECTION 9.9 COMPETING OFFERS; MERGER OR LIQUIDATION. The Company shall
not directly or indirectly, through any officer, director, agent, or otherwise,
solicit, initiate or encourage the submissions of bids, offers or proposals by,
any Person with respect to an acquisition of the Company or its assets or
capital stock or a merger or similar transaction, and shall not engage any
broker, financial adviser or consultant with an incentive to initiate or
encourage proposals or offers from other parties. Furthermore, the Company shall
not, directly or indirectly, through any officer, director, agent or otherwise,
engage in negotiations concerning any such transaction with, or provide
information to, any Person other than the Subsidiary and its representatives
with a view to engaging, or preparing to engage, that Person with respect to any
matters in this Section 9.9. The Company shall not commence any proceeding to
merge, consolidate or liquidate or dissolve or obligate itself to do so.
ARTICLE 10
COVENANTS OF CORPORATION, PARENT AND SUBSIDIARY
The Corporation, Parent and Subsidiary jointly and severally
covenant and agree (except as expressly contemplated by this Agreement or to the
extent that the Company shall otherwise expressly consent in writing) as
follows:
SECTION 10.1 SECTION 15(F)(1)(A). The Subsidiary agrees that, for a
period of not less than three years after the Closing Date, the Subsidiary shall
(unless otherwise permitted pursuant to any exemptive order or other relief
granted by the SEC) use its best efforts to ensure that no more than 25% of the
members of the Board of Directors of the Fund shall be "interested persons" (as
defined in the Investment Company Act) of the Company or any person that before
or after the Closing Date was or is an affiliated person of the Company within
the meaning of the Investment Company Act.
SECTION 10.2 SECTION 15(F)(1)(B). The Subsidiary agrees that, for a
period of not less than three years, the Subsidiary shall not take, recommend or
endorse any action that would constitute an "unfair burden," as that term is
used in Section 15 of the Investment Company Act, on the Fund.
SECTION 10.3 CAPITALIZATION AND OPERATIONS OF THE SUBSIDIARY. The Parent
shall have a minimum equity capitalization at the Closing Date of at least
$10,000,000 U.S., which shall be reflected on a balance sheet of a date not more
than 5 business days prior to the
24
<PAGE> 25
Closing Date and certified as true and accurate by the Parent as of the Closing
Date. Parent will cause Majority Shareholder to be elected a Director and
President, Chief Executive Officer, Chief Financial Officer and designated
Principal of the Subsidiary and Majority Shareholder shall have an initial
three-year employment agreement with the Parent and the Subsidiary,
substantially in the form of Annex C hereto. Subsidiary shall continue to be
operated as a registered broker-dealer and investment adviser including as an
underwriter and distributor of the Fund and shall be the principal operating
vehicle for the mutual fund and investment advisory business operations in the
U. S. of Parent and Subsidiary and any affiliates thereof.
SECTION 10.4 OPERATIONS OF THE COMPANY AND THE FUND. Promptly after the
Closing, Subsidiary will cause the name of the Fund to be changed to American
Diversified Funds, Inc. with a single portfolio to remain the Rea-Graham
Balanced Fund. Subsidiary will further prepare and register with the SEC under
the Securities Act, two additional mutual fund series portfolios, one an
American Diversified Mini-Cap Fund for distribution in Europe and one an
American Diversified Germany Growth Fund for distribution in the U.S. Subsidiary
agrees to ensure that any series of the Fund using the Names shall not take or
endorse any action that would render the name or title of the Fund, or of any
security of which such series is the issuer, deceptive or misleading. Subsidiary
will continue to manage the Rea-Graham Balanced Fund for a period of at least
three (3) years from the Closing in accordance with the investment policies set
forth in the current Fund Prospectus and shall use its best efforts to increase
the marketing and sale of shares of the Fund to increase the Fund assets by
least $20 million within three months of closing.
SECTION 10.5 COVENANTS OF THE CORPORATION. The Corporation agrees to
take all action as shall be required to cause the Parent and Subsidiary to
complete the Merger and to perform and comply with all conditions to which they
are subject under this Agreement.
ARTICLE 11
CONDITIONS PRECEDENT TO CLOSING
SECTION 11.1 CONDITIONS OF SUBSIDIARY'S OBLIGATIONS. Notwithstanding any
other provision of this Agreement, the obligations of the Subsidiary to
consummate the transactions contemplated hereby shall be subject to the
satisfaction, at or prior to the Closing Date, of the following conditions:
11.1.1 New Advisory Agreement. The shareholders of the
Fund shall have approved the terms of the New Advisory Agreement in accordance
with provisions of Section 15 of the Investment Company Act.
11.1.2 New Underwriting Agreement. The Board of
Directors of the Fund or the shareholders of the Fund shall have approved the
terms of the New Underwriting Agreement in accordance with the provisions of
Section 15 of the Investment Company Act.
25
<PAGE> 26
11.1.3 NASD Broker/Dealer Approval. The NASD shall have
approved in writing the change in ownership of the Company contemplated by this
Agreement.
11.1.4 Adverse Proceedings. There shall not be
instituted, or pending or threatened, any Action before any Government Entity
(a) challenging the Merger or otherwise seeking to restrain or prohibit the
consummation of the transactions contemplated hereby or (b) seeking to prohibit
the direct or indirect ownership or operation by the Subsidiary of all or a
material portion of the business or assets of the Company, or to compel the
Subsidiary or the Company to dispose of or hold separate all or a material
portion of the business or assets of the Company or the Subsidiary.
11.1.5 No Errors, etc. The representations and
warranties of the Company in this Agreement shall be true and correct on and as
of the Closing Date with the same effect as if made on the Closing Date and the
Company shall have complied with all covenants and agreements and satisfied all
conditions on the Company's part to be performed or satisfied on or prior to the
Closing Date
11.1.6 Opinion of the Company's Counsel. Subsidiary
shall have received from Jeffers, Wilson, Shaff & Falk LLP, counsel for the
Company, a written opinion dated the Closing Date and addressed to the
Subsidiary, in substantially the form attached as Exhibit C hereto.
11.1.7 Certificate of the Company. Subsidiary shall
have received from the Company a certificate dated the Closing Date in
substantially the form attached as Exhibit D hereto.
11.1.8 Other Consents. All consents from third parties,
including from any Governmental Entity, landlord or other Person, necessary for
the consummation of the transactions contemplated hereby shall have been
obtained.
11.1.9 Government Filings. All filings and approvals
required to have been made with or obtained from any Governmental Entity in
connection with the transactions contemplated hereby by the Company will have
been made or obtained.
11.1.10 Material Adverse Effect. No act, event or
condition shall have occurred after the date hereof which the Subsidiary, in its
reasonable discretion, determines has had or could have a Material Adverse
Effect.
11.1.11 Material Contracts. All material contracts listed
in Schedules 6.8 and 6.13 hereto, including, without limitation, the Dealer
Agreements, shall be in full force and effect on the Closing Date.
SECTION 11.2 CONDITIONS OF COMPANY'S OBLIGATIONS. Notwithstanding any
other provision of this Agreement, the obligations of the Company to consummate
the transactions contemplated hereby shall be subject to the satisfaction, at or
prior to the Closing Date, of the
26
<PAGE> 27
following conditions:
11.2.1 Adverse Proceedings. There shall not be instituted and pending or
threatened any Action before any Governmental Entity (a) challenging the Merger
or otherwise seeking to restrain or prohibit the consummation of the
transactions contemplated hereby or (b) seeking to prohibit the direct or
indirect ownership or operation by the Subsidiary of all or a material portion
of the business or assets of the Company, or to compel the Subsidiary or the
Company to dispose of or hold separate all or a material portion of the business
or assets of the Company or the Subsidiary.
11.2.2 No Errors, etc. The representations and warranties of the Parent
and Subsidiary in this Agreement shall be true and correct on and as of the
Closing Date with the same effect as if made on the Closing Date and the Parent
and/or Subsidiary shall have complied with all covenants and agreements and
satisfied all conditions on person's part to be performed or satisfied on or
prior to the Closing Date.
11.2.3 Certificates of Corporation, Parent and Subsidiary. The Company
shall have received from the Corporation, Parent and Subsidiary certificates
dated the Closing Date in substantially the form attached as Exhibits E-1, E-2
and E-3 hereto.
11.2.4 Opinion of the Subsidiary's Counsel. Company shall have received
from counsel for the Subsidiary a written opinion dated the Closing Date and
addressed to the Company, in substantially the form attached as Exhibit F
hereto.
ARTICLE 12
TERMINATION, AMENDMENT AND WAIVER
SECTION 12.1 TERMINATION. This Agreement may be terminated at any time prior
to the Closing:
(a) by mutual consent of the Subsidiary and the
Company;
(b) by the Subsidiary if the Closing has not occurred
on or before March 1, 1998;
(c) by the Subsidiary if (i) at any time the Subsidiary
has reasonable grounds to believe, and does believe, that there has been a
material misrepresentation, breach of warranty or breach of covenant by the
Company under this Agreement or (ii) any of the conditions precedent to Closing
set forth in Section 11.1 of this Agreement have not been met on the Closing
Date; or
(d) by the Company if (i) at any time the Company has
reasonable
27
<PAGE> 28
grounds to believe, and does believe, that there has been a material
misrepresentation, breach of warranty or breach of covenant by the Subsidiary
sunder this Agreement or (ii) any of the conditions precedent to Closing set
forth in Section 11.2 of this Agreement have not been met on the Closing Date.
SECTION 12.2 EFFECT OF TERMINATION.
(a) Upon termination of this Agreement as provided in
Section 12.1(a), this Agreement shall forthwith become void and there shall be
no liability or obligation on the part of any party hereto or their respective
agents or other representatives.
(b) In the event of termination of this Agreement as
provided in Section 12.1(b), (c) or (d) hereof, such termination shall be
without prejudice to any rights that the terminating party or parties may have
against the breaching party or parties or any other Person under the terms of
this Agreement or otherwise.
SECTION 12.3 AMENDMENT. This Agreement may be amended at any time only
by a written instrument executed by the Corporation, Parent, Subsidiary, Company
and the Majority Shareholder.
SECTION 12.4 WAIVER. Any term or provision of this Agreement may be
waived in writing at any time by the party or parties entitled to the benefits
thereof. No failure to exercise and no delay in exercising any right, power or
privilege shall operate as a waiver thereof, nor shall any single or partial
exercise of any right, power or privilege preclude the exercise of any other
right, power or privilege. No waiver of any breach of any covenant or agreement
hereunder shall be deemed a waiver of any preceding or subsequent breach of the
same or any other covenant or agreement. The rights and remedies of each party
under this Agreement are in addition to all other rights and remedies, at law or
in equity, that such party may have against the other parties.
ARTICLE 13
SURVIVAL OF REPRESENTATIONS AND WARRANTIES;
INDEMNIFICATION
SECTION 13.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The
representations and warranties of the Company contained in this Agreement or in
any writing delivered pursuant hereto or at the Closing shall survive the
Closing and the consummation of the transactions contemplated hereby (and any
examination or investigation by or on behalf of any party hereto) for a period
of three years from the Closing and no claim may be made hereunder unless
written notice of the claim is given within a three year period.
28
<PAGE> 29
SECTION 13.2 INDEMNIFICATION.
(a) The Company covenants and agrees to defend,
indemnify and hold harmless each Subsidiary from and against any Damages arising
out of or resulting from: (i) any inaccuracy in or breach of any representation
or warranty made by the Company in this Agreement or in any writing delivered
pursuant to this Agreement or at the Closing; (ii) the failure of the Company to
perform or observe fully any covenant, agreement or provision to be performed or
observed by the Company pursuant to this Agreement; or (iii) any Action arising
out of or resulting from the conduct by the Company of its business or
operations, or the Company's occupancy or use of its properties or assets, on or
prior to the Closing Date.
(b) The Subsidiary covenants and agrees to defend,
indemnify and hold harmless the Company from and against any Damages arising out
of or resulting from: (i) any inaccuracy in or breach of any representation or
warranty made by such Subsidiary in this Agreement or in any writing delivered
pursuant to this Agreement or at the Closing or (ii) the failure of such
Subsidiary to perform or observe fully any covenant, agreement or provision to
be performed or observed by such Subsidiary pursuant to this Agreement.
SECTION 13.3 THIRD PARTY CLAIMS.
(a) If any party entitled to be indemnified pursuant to
Section 13.2 (an "Indemnified Party") receives notice of the assertion by any
third party of any claim or of the commencement by any such third party of any
Action (any such claim or Action being referred to herein as an "Indemnifiable
Claim") with respect to which another party hereto (an "Indemnifying Party") is
or may be obligated to provide indemnification, the Indemnified Party shall
promptly notify the Indemnifying Party in writing (the "Claim Notice") of the
Indemnifiable Claim; provided, however, that the failure to provide such notice
shall not relieve or otherwise affect the obligation of the Indemnifying Party
to provide indemnification hereunder, except to the extent that any Damages
directly resulted or were caused by such failure.
(b) The Indemnifying Party shall have thirty (30) days
after receipt of the Claim Notice to undertake, conduct and control, through
counsel of its own choosing, and at its expense, the settlement or defense
thereof, and the Indemnified Party shall cooperate with the Indemnifying Party
in connection therewith; provided, however, that (i) the Indemnifying Party
shall permit the Indemnified Party to participate in such settlement or defense
through counsel chosen by the Indemnified Party (subject to the consent of the
Indemnifying Party, which consent shall not be unreasonably withheld), provided
that the fees and expenses of such counsel shall not be borne by the
Indemnifying Party, and (ii) the Indemnifying Party shall not settle any
Indemnifiable Claim without the Indemnified Party's consent. So long as the
Indemnifying Party is vigorously contesting any such Indemnifiable Claim in good
faith, the Indemnified Party shall not pay or settle such claim without the
Indemnifying Party's consent, which consent shall not be unreasonably withheld.
29
<PAGE> 30
(c) If the Indemnifying Party does not notify the
Indemnified Party within thirty (30) days after receipt of the Claim Notice that
it elects to undertake the defense of the Indemnifiable Claim described therein,
the Indemnified Party shall have the right to contest, settle or compromise the
Indemnifiable Claim in the exercise of its reasonable discretion; provided,
however, that the Indemnified Party shall notify the Indemnifying Party of any
compromise or settlement of any such Indemnifiable Claim.
(d) Anything contained in this Section 13.3 to the
contrary notwithstanding, the Company shall not be entitled to assume the
defense for any Indemnifiable Claim (and shall be liable for the reasonable fees
and expenses incurred by the Indemnified Party in defending such claim) if the
Indemnifiable Claim seeks an order, injunction or other equitable relief for
other than money damages against the Subsidiary or which the Subsidiary
determines, after conferring with its counsel, cannot be separated from any
related claim for money damages and which, if successful, would adversely affect
the business, properties or prospects of the Subsidiary.
SECTION 13.4 LIMITATIONS ON INDEMNIFICATION.
(a) Notwithstanding any other provision of this
Agreement, an Indemnified Party shall have no right to indemnification under
this Article 13 unless an until the amount of Damages due the Indemnified Party,
together with all claims for Damages of all Indemnified Parties, equals or
exceeds $10,000.00 in the aggregate, in which event the Indemnified Parties
shall be indemnified for the entire amount of such Damages (including the first
$10,000.00).
SECTION 13.5 INDEMNIFICATION NON-EXCLUSIVE. The foregoing
indemnification provisions are in addition to, and not in derogation of, any
statutory, equitable or common law remedy any party may have for breach of
representation, warranty, covenant or agreement.
ARTICLE 14
GENERAL PROVISIONS
SECTION 14.1 NOTICES. All notices and other communications under
or in connection with this Agreement shall be in writing and shall be deemed
given (a) if delivered personally (including by overnight express or messenger),
upon delivery, (b) if delivered by registered or certified mail (return receipt
requested), upon the earlier of actual delivery or three days after being
mailed, or (c) if given by telecopy, upon confirmation of transmission by
telecopy, in each case to the parties at the following addresses:
(i) if to the Company or the Majority Shareholder:
James Buchanan Rea, Inc.
12100 Wilshire Blvd., #680
Los Angeles, CA 90025
Attention: James Buchanan Rea, Jr.
Telephone: (310) 442-2660
Telecopy: (310) 442-2661
30
<PAGE> 31
With a copy to:
Jeffers Wilson, Shaff & Falk LLP
18881 Von Karman, Suite 1400
Irvine, California 92612
Attention: Michael B. Jeffers, Esq.
Telephone: (714) 660-7700
Telecopy: (714) 660-7799
(ii) If to the Subsidiary:
American Diversified Securities, Inc.
127 Via Coronado
Rancho Santa Fe, California 92091
Attention: Peter Hartmann
Telephone: (619) 759-3552
Telecopy: (619) 759- 3563
With a copy to:
[name of counsel]
(iii) If to the Parent:
American Diversified Holdings, Inc.
3525 Del Mar Heights Road, #145
San Diego, California 92130
Attention: Peter Hartmann
Telephone: (619) 759-3552
Telecopy: (619) 759-3563
(iv) If to the Corporation:
American Diversified Corporation
_________________________________
_________________________________
Attention:
Telephone: ____________________________
Telecopy: ____________________________
31
<PAGE> 32
SECTION 14.2 SEVERABILITY. If any term or provision of this Agreement or
the application thereof to any circumstance shall, in any jurisdiction and to
any extent, be invalid or unenforceable, such term or provision shall be
ineffective as to such jurisdiction to the extent of such invalidity or
unenforceability without invalidating or rendering unenforceable such term or
provision in any other jurisdiction, the remaining terms and provisions of this
Agreement or the application of such terms and provisions to circumstances other
than those as to which it is held invalid or enforceable.
SECTION 14.3 ENTIRE AGREEMENT. This Agreement, including the annexes and
schedules attached hereto and other documents referred to herein, contains the
entire understanding of the parties hereto in respect of its subject matter and
supersedes all prior and contemporaneous agreements and understandings, oral and
written, between the parties with respect to such subject matter.
SECTION 14.4 SUCCESSORS AND ASSIGNS. This Agreement shall be binding
upon and inure to the benefits of the Corporation, Parent, Subsidiary, Company
and the Majority Shareholder and their respective transferees, successors, heirs
and permitted assigns.
SECTION 14.5 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all such
counterparts together shall constitute but one and the same Agreement.
SECTION 14.6 RECITALS, SCHEDULES AND ANNEXES. The recitals, schedules
and annexes to this Agreement are incorporated herein and, by this reference,
made a part hereof as if fully set forth at length herein.
SECTION 14.7 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the internal laws (and not the law of conflicts) of
the State of California.
32
<PAGE> 33
(PLAN AND AGREEMENT OF MERGER AND REORGANIZATION SIGNATURE PAGE)
IN WITNESS WHEREOF, each of the parties hereto has executed this
Agreement, all as of the date first above set forth.
CORPORATION:
AMERICAN DIVERSIFIED CORPORATION
By /s/ Klaus Conradi
--------------------------------
Its President
--------------------------------
PARENT:
AMERICAN DIVERSIFIED HOLDINGS, INC.
By /s/ Peter Hartmann
--------------------------------
Its President
--------------------------------
SUBSIDIARY:
AMERICAN DIVERSIFIED SECURITIES, INC.
By /s/ James Buchanan Rea, Jr.
--------------------------------
Its President, CFO
--------------------------------
COMPANY:
JAMES BUCHANAN REA, INC.
By /s/ James Buchanan Rea, Jr.
--------------------------------
MAJORITY SHAREHOLDER:
/s/ James Buchanan Rea, Jr.
-------------------------------
James Buchanan Rea, Jr.
33
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