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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 9, 1998
REGISTRATION NO. 333-62489
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AMDIV.COM, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
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NEVADA 6211 86-0854150
(STATE OR JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
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10900 WILSHIRE BOULEVARD, 9TH FLOOR
LOS ANGELES, CALIFORNIA 90024
(310) 209-5090
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)
JAMES BUCHANAN REA, JR.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
AMDIV.COM, INC.
10900 WILSHIRE BOULEVARD, 9TH FLOOR
LOS ANGELES, CALIFORNIA 90024
(310) 209-5090
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE OF PROCESS)
THE COMMISSION IS REQUESTED TO SEND COPIES OF ALL COMMUNICATION TO:
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MICHAEL B. JEFFERS, ESQ. GERALD A. EPPNER, ESQ.
JEFFERS, WILSON, SHAFF & FALK, LLP CADWALADER, WICKERSHAM & TAFT
18881 VON KARMAN AVENUE, SUITE 1400 100 MAIDEN LANE
IRVINE, CALIFORNIA 92612 NEW YORK, NY 10038
(949) 660-7700 (212) 504-6323
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APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
As soon as reasonably practicable after the effective date of this Registration
Statement
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED PER SHARE PRICE(1) FEE
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Common Stock, no par value(2)...... 1,993,334 $14.00 $27,906,676 $15,061.00
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Total.................... 1,993,334 $27,906,676 $15,061.00
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(1) Estimated solely for purposes of calculating the registration fee, pursuant
to rule 457(a) under the Securities Act.
(2) Assumes full exercise of an option granted to the Underwriters to purchase
up to 260,000 shares of Common Stock to cover over-allotments, if any.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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CROSS REFERENCE SHEET
BETWEEN ITEMS OF FORM SB-2 AND PROSPECTUS
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ITEM IN FORM SB-2 LOCATION IN PROSPECTUS
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Front of Registration Statement and outside
front cover of Prospectus.......................... Facing Page; Cross Reference Sheet; Outside
Front Cover Page
Inside Front and Outside Back Cover Page
of Prospectus...................................... Inside Front Cover Page; Outside Back Cover
Page
Summary Information and Risk Factors................. PROSPECTUS SUMMARY; RISK FACTORS
Use of Proceeds...................................... PROSPECTUS SUMMARY; RISK FACTORS; USE OF
PROCEEDS
Determination of Offering Price...................... UNDERWRITING
Dilution............................................. DILUTION
Selling Security Holders............................. Not Applicable
Plan of Distribution................................. Inside Front Cover Page; SECURITY OWNERSHIP OF
MANAGEMENT AND CERTAIN SECURITYHOLDERS;
UNDERWRITING
Legal Proceeding..................................... DESCRIPTION OF BUSINESS -- Legal Proceedings
Directors, Executive Officers, Promoter and Control
Persons............................................ DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT
EMPLOYEES
Security Ownership of Certain Beneficial Owners and
Management......................................... SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN
SECURITY HOLDERS
Description of Securities............................ Outside Front Cover Page; CAPITALIZATION;
DESCRIPTION OF SECURITIES; UNDERWRITING
Interest of Named Experts and Counsel................ LEGAL MATTERS; EXPERTS
Disclosure of Commission Position on Indemnification
for Securities Act Liabilities..................... DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT
EMPLOYEES
Organization Within Last Five Years.................. DESCRIPTION OF BUSINESS; DIRECTORS, EXECUTIVE
OFFICERS AND CERTAIN EMPLOYEES; INTEREST OF
MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS
Description of Business.............................. PROSPECTUS SUMMARY; DESCRIPTION OF BUSINESS
Management's Discussion and Analysis or Plan of
Operations......................................... MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Description of Property.............................. DESCRIPTION OF PROPERTIES
Certain Relationships and Related Transactions....... INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN
TRANSACTIONS
Market for Common Equity and Related Shareholder
Matters............................................ RISK FACTORS; DESCRIPTION OF SECURITIES;
UNDERWRITING
Executive Compensation............................... REMUNERATION OF DIRECTORS AND OFFICERS --
Executive Compensation
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ITEM IN FORM SB-2 LOCATION IN PROSPECTUS
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Financial Statements................................. CONSOLIDATED FINANCIAL STATEMENTS
Changes in and Disagreement With Accountants on
Accounting and Financial Disclosure................ Not Applicable
Indemnification of Directors and Officers............ Information not required in Prospectus;
Indemnification of Directors and Officers
Other Expenses of Issuance and Distribution.......... Information not required in the Prospectus;
Other Expenses of Issuance and Distribution
Recent Sales of Unregistered Securities.............. Information not required in Prospectus; Recent
Sales of Unregistered Securities
Exhibits............................................. Information not required in the Prospectus;
Exhibits
Undertakings......................................... Information Not Required in Prospectus;
Undertakings
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Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED DECEMBER 9, 1998
PROSPECTUS
LOGO
1,733,334 SHARES
COMMON STOCK (NO PAR VALUE)
------------------------
amdiv.com, inc., formerly American Diversified Holdings, Inc. (the
"Company"), is offering hereby 1,733,334 shares of the Company's Common Stock,
no par value (the "Common Stock"). As of the date of this Prospectus, the
Company has one class of stock outstanding, the Common Stock offered hereby.
Except as otherwise indicated, all share information for 1998 and per share
information for the periods presented reflect the 1:10 reverse stock split on
May 26, 1998; the 1:2 reverse stock split on August 20, 1998; and the conversion
of 5,000,000 shares of outstanding Series A Preferred Stock into 1,666,611
shares of Common Stock in October 1998.
Prior to this offering (the "Offering"), there has been no public market
for the Company's Common Stock and there can be no assurance that any such
market will develop. It is currently anticipated that the initial public
offering price will be $14.00 per share (the "Price to Public"). The Company's
Common Stock has been approved for quotation on the NASDAQ National Market under
the symbol "AMDV," subject to the completion of this Offering and payment of the
initial listing fee. The Price to Public for the Common Stock offered hereby has
been determined arbitrarily by negotiations between the Company and the
Underwriters and does not necessarily bear any relationship to the Company's
results of operations, net worth, prospects, or other commonly recognized
criteria of value. See "Risk Factors" and "Underwriting."
THESE SECURITIES ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK AS WELL
AS IMMEDIATE AND SUBSTANTIAL DILUTION. SEE "RISK FACTORS" AND "DILUTION."
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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UNDERWRITING DISCOUNTS PROCEEDS TO
PRICE TO PUBLIC AND COMMISSIONS(1) COMPANY(2)
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Per Share.................... $ $ $
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Total(3)..................... $ $ $
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(1) Excludes value of warrants to be issued to Nutmeg Securities, Ltd. (the
"Representative") to purchase, at a purchase price representing a premium of
20% over the Price to Public, such number of shares of the Company's Common
Stock equal to ten percent of the total number of shares placed by and sold
through the Representative in this Offering (the "Representative's
Warrants"). The Company has agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933.
See "Underwriting."
(2) Before deducting expenses of this Offering payable by the Company estimated
at $242,000.
(3) The Company has granted the Underwriters an option exercisable within 45
days after the date of this Prospectus to purchase up to 260,000 shares of
Common Stock, on the same terms and conditions set forth above to cover
over-allotments, if any (the "Underwriters' Over-Allotment Option"). If the
Underwriters' Over-Allotment Option is exercised in full, the total Price to
Public, underwriting discount and net proceeds to the Company will be
approximately $ , $ and $ , respectively. See
"Underwriting."
The shares of Common Stock offered hereby are offered by the several
Underwriters when, as and if delivered to and accepted by the Underwriters and
subject to their right to reject orders, in whole or in part, and subject to
certain other conditions. It is expected that the shares of the Common Stock
will be ready for delivery on or about , 1998, against payment in
immediately available funds.
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Nutmeg Securities, Ltd.
THE DATE OF THIS PROSPECTUS IS DECEMBER , 1998
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TABLE OF CONTENTS
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PAGE
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PROSPECTUS SUMMARY.......................................... 1
The Company............................................... 1
Introduction.............................................. 1
Securities Brokerage and Related Services................. 1
Investment Management and Mutual Funds.................... 2
Market Overview........................................... 2
Business Strategies....................................... 2
The Offering.............................................. 5
RISK FACTORS................................................ 6
Limited Operating History and Losses From Operations
Creates Uncertainty About Future Results............... 6
Delay in Commencing Operations............................ 6
Regulation................................................ 6
Need for Additional Capital............................... 7
Dependence on Computer Systems............................ 7
Dependence on Intellectual Property Rights................ 8
Volatile Nature of Securities Business.................... 8
Risks Associated with International Operations............ 8
Risk Associated with Foreign Exchange Rate Fluctuations
and Introduction of the Euro........................... 9
Rapidly Evolving Markets.................................. 10
Risks Associated with New Products and New Markets........ 10
Dependence on Key Management and Principal Consultants.... 11
Management of Growth...................................... 11
Risks Associated with Strategic Acquisitions and
Relationships.......................................... 11
Lack of Trademark Protection.............................. 11
Immediate and Substantial Dilution........................ 11
Potential for Security Compromises........................ 11
Effect of Net Capital Requirements........................ 12
Broad Discretion in the Use of Proceeds................... 12
No Assurance of Public Trading Market or Continued Listing
on NASDAQ; Possible Volatility of Stock Price.......... 12
Shares Eligible for Future Sale........................... 13
Litigation and Potential Securities Laws Liability........ 13
Dependence on Cash Inflows to Mutual Funds................ 14
Dependence on Systems and Third Parties................... 14
Competition............................................... 14
THE COMPANY................................................. 15
General................................................... 15
Organizational Structure.................................. 15
USE OF PROCEEDS............................................. 17
Restricted Proceeds....................................... 17
DILUTION.................................................... 19
DIVIDEND POLICY............................................. 20
CAPITALIZATION.............................................. 21
DESCRIPTION OF BUSINESS..................................... 22
General................................................... 22
Securities Brokerage and Related Services................. 22
Investment Management and Mutual Funds.................... 23
The Business Opportunity.................................. 24
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Securities Industry Developments in Germany............... 25
Business Strategies....................................... 26
Development of Products and Services...................... 27
Marketing................................................. 30
Customer Service.......................................... 31
Competition............................................... 31
Government Regulation..................................... 33
Net Capital Requirements; Liquidity....................... 34
Employees................................................. 35
Systems................................................... 35
Servicemark Application................................... 36
Legal Proceedings......................................... 36
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS....... 37
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS.... 37
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL
STATEMENTS................................................ 38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION.................................. 39
Plan of Operation......................................... 39
ADAM's Historical Operations.............................. 39
Year 2000 Compliance...................................... 41
DESCRIPTION OF PROPERTY..................................... 42
DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES..... 42
Management................................................ 42
Principal Advisors........................................ 44
ADAG's Executive Team..................................... 44
Management Committees..................................... 45
Limitation of Directors and Officers' Liability and
Indemnification........................................ 45
REMUNERATION OF DIRECTORS AND OFFICERS...................... 46
Executive Compensation.................................... 46
Employment Agreements..................................... 46
1998 Stock Option and Incentive Plan...................... 47
Stock Option Grants....................................... 48
Individual Grants......................................... 48
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN
SECURITYHOLDERS........................................... 49
Preferred Stock........................................... 49
INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS... 50
DESCRIPTION OF SECURITIES................................... 50
General................................................... 50
Common Stock.............................................. 51
Preferred Stock........................................... 51
SHARES ELIGIBLE FOR FUTURE SALE............................. 52
UNDERWRITING................................................ 53
LEGAL MATTERS............................................... 55
EXPERTS..................................................... 55
ADDITIONAL INFORMATION...................................... 55
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.................. F-1
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PROSPECTUS SUMMARY
The summary information below should be read in conjunction with, and is
qualified in its entirety by, the detailed information appearing elsewhere in
this Prospectus. Capitalized terms used herein shall have the definitive
meanings assigned to them in the text below.
This Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act. Forward-looking statements may be found
throughout this Prospectus, particularly under the captions "Prospectus
Summary," "Use of Proceeds," "Management's Discussion and Analysis of Financial
Condition and Results of Operation" and "Description of Business." Such
forward-looking statements are indicated by the use of such words as "intends,"
"expects," "may," "anticipates," "estimates," "desires," "believes" and similar
expressions. Actual results may differ from those described by forward-looking
statements as a result of many risks and uncertainties, including, but not
limited to, those described under the captions "Risk Factors." Prospective
investors are advised not to rely upon forward-looking statements, but rather
base their investment decisions on actual results to date.
THE COMPANY
INTRODUCTION
amdiv.com, inc., a Nevada corporation (the "Company"), is a development
stage enterprise formed on February 5, 1997, to capitalize on the growing demand
for financial services and products in Germany and other European Union ("EU")
countries. The Company will provide financial services consisting mainly of
global on-line discount brokerage services, full service securities brokerage,
securities underwriting, mutual fund distribution and asset management services
to individual and institutional investors in Germany and other EU countries, and
the United States. The Company has developed proprietary technology, systems and
software to provide retail and professional investors with a multi-lingual,
multi-currency, user-friendly, cost effective, and secure state-of-the-art
electronic trading platform that will, usually within seconds, execute trades on
leading European and U.S. stock exchanges and trading markets from a desktop
terminal using one account from most locations throughout the world. See "Risk
Factors -- Dependence on Intellectual Property Rights." In addition to on-line
brokerage services available under the domain names "amdiv.de" and
"eu-trade.de," the Company is developing a family of mutual funds and plans to
underwrite and be a selling group participant of initial public offerings by EU
and U.S. companies. The Company and its subsidiaries have assembled a staff of
management, brokerage, asset management and marketing personnel, including
former employees of major German banks. See "Risk Factors -- Dependence on Key
Management and Principal Consultants."
SECURITIES BROKERAGE AND RELATED SERVICES
Through its German subsidiary, American Diversified AG ("ADAG"), the
Company will begin providing securities brokerage services to individual
investors and institutions in Europe through the Internet, direct dial-up
terminals and ADAG's registered representatives, after ADAG has received a full
banking license in Germany, which is expected to occur in the first quarter of
1999. The Company will offer trade execution for stocks, mutual funds, options
and bonds, as well as market data and research tools to investors in Europe. The
Company's U.S. broker-dealer subsidiary will act as the introducing broker for
all transactions involving U.S. securities that are executed through the Company
in the U.S. The electronic infrastructure and primary systems necessary to
operate the Company's securities brokerage business are currently in place and
are substantially operational. In addition to offering securities brokerage
services, the Company plans to engage in underwriting initial public offerings
of small to medium-sized European companies, especially in Germany. The Company
cannot provide any assurance or guarantee that the regulatory approvals
necessary for the Company to commence its planned securities brokerage business
will be given in a timely manner or at all. See "Risk Factors -- Delay in
Commencing Operations."
The Company believes it has developed substantial name recognition through
the aggressive advertisement of ADAG's services during the last six months. ADAG
has received over 10,000 applications for new accounts during the last six
months through the aggressive advertisement of its services in Germany, although
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ADAG does not intend to take orders or otherwise commence its brokerage business
in Germany until it has received a full banking license.
INVESTMENT MANAGEMENT AND MUTUAL FUNDS
Through its U.S. subsidiaries, American Diversified Asset Management, Inc.
("ADAM") and amdiv securities, inc. ("ASI"), the Company is engaged in the
management and distribution in the U.S. of the American Diversified Global Value
Fund, a value based equity fund that is a series portfolio of American
Diversified Funds, Inc., an open-end investment company registered under the
Investment Company Act of 1940. The Company currently has a new mutual fund
series portfolio in registration, the American Diversified International Value
Fund, (collectively with the Global Value Fund, the "Funds"). The Funds are
managed by ADAM, based on Benjamin Graham's "value investment" principles. Mr.
Graham authored "Security Analysis" and "The Intelligent Investor," which are
recognized texts on the fundamental value of common stocks. Ladas & Hulings,
Inc. ("Ladas & Hulings"), a leader in global value investing with over 25 years
of experience, became sub-advisor to the Global Value Fund in April 1998 and
provides the day-to-day investment management (sub-advisory services) for the
Funds.
The Company is in the process of registering an umbrella fund, American
Diversified Funds plc, in Ireland under the Undertaking for Collective
Investments in Transferrable Securities ("UCITS") directive for distribution in
the EU, which will offer three sub-fund portfolios: the Global Value,
International Value, and SmallCap Value portfolios. Marketing and distribution
services are expected to be provided in Germany and other EU countries through
ADAG and contemplated alliances with medium-sized banks, broker-dealers and
insurance agents. See "The Company -- Organizational Structure."
MARKET OVERVIEW
The Company believes that there is a new and growing market in the EU for
multi-lingual and cross-border financial services and products primarily due to
the following factors: (i) the planned transition in 1999 to a single European
currency, the EURO; (ii) implementation of regulatory reforms in Germany and
other EU countries, which have removed substantial barriers to entry into the
securities brokerage market; (iii) implementation of the UCITS directive in
October 1989, which was designed to create a single EU mutual funds market and
has expanded the range of available funds for distribution in Europe; (iv) the
continuing growth of the mutual fund market; and (v) the Xetra(R) electronic
trading system of the Frankfurt Stock Exchange, which has expanded the number of
tradeable instruments and execution possibilities for electronic securities
trading. The integration of other major European stock exchanges into this
system and NASDAQ's reported interest in participating, creates the possibility
of a Pan-European stock market for the future. In addition, regulatory reforms
in Germany and other EU countries have enabled smaller financial services
companies to compete for investment dollars traditionally flowing to savings
account deposits at commercial banks. Management believes that an international
financial services group with offices in both the United States and Europe can
attract a diverse clientele, including institutional investors, banks, and
individual investors. See "Description of Business -- The Business Opportunity."
BUSINESS STRATEGIES
The Company's ability to implement its business strategies successfully is
dependent on obtaining a full banking license in Germany and approval for
conducting expanded brokerage activities in the U.S., successfully establishing
customer accounts, fully integrating its international systems and links to the
major European and U.S. stock exchanges and trading markets, and a variety of
other internal and external factors. See "Risk Factors." The Company is a
development-stage enterprise and the success of the business strategies cannot
be fully known until the Company has commenced full operations. There can be no
assurance that the Company will successfully implement its business strategies
or achieve its operational goals.
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The Company seeks to exploit the opportunities created primarily as a
result of regulatory reforms and changing conditions in the financial services
industry generally, and particularly in Germany and other EU countries, and to
expand its market share by pursuing the following five key strategies:
- Market Distinct Brands. ADAG will market distinct brands of financial
products with a range of services and commission rate structures designed
to attract specific groups of investors in Europe. The Company believes
that, by tailoring products and services for customers within specific
demographic categories, ADAG can attract a broader range of investors
seeking brokerage services at discount prices. ADAG will offer discount
on-line brokerage services in Europe under the EU TRADE(TM) brand name,
which has been created for European investors seeking simple and
efficient execution services at the lowest possible transaction cost, and
European investors who are comfortable with the Internet and prefer to
trade exclusively through electronic communications in exchange for
low-priced trade executions. EU TRADE(TM) is designed to be the first
global on-line brokerage system and will provide European clients with
access to multiple securities markets using a single account. The
tradename AMERICAN DIVERSIFIED(R) has been created to designate ADAG's
system that provides high net-worth customers with a full range of
brokerage services, private asset management and mutual fund products,
and underwriting services. AMDIV.PRONET(TM) is the tradename of a
technologically advanced financial system that will provide ADAG's
correspondent European brokerage firms and financial institutions with
special terminals to access the major European and U.S. stock markets
through the Company's integrated computer network.
- Create Technologically Innovative Solutions to Investor Needs. Since
April 1997, the Company has worked on the development of its integrated
electronic systems, which combine the Company's newly developed software
with existing electronic services in the U.S. and Europe. EU TRADE(TM)
and AMDIV.PRONET(TM) each comprise a single-source trading system for
U.S. and European stocks, which offer immediate execution services. The
"Dial-In" feature of AMDIV.PRONET(TM) provides institutional
correspondents with a secure link to Europe's and the U.S.'s leading
stock exchanges and trading markets using special terminals, which enable
direct access through the Company's integrated computer network. The
Company is actively pursuing additional technologies to service the
rapidly evolving financial services industry. See "Description of
Business -- Development of Products and Services" and "Risk
Factors -- Dependence on Intellectual Property Rights."
- Provide Transaction Value to Investors. The Company strives to offer
investors transaction value by providing specified services at prices
that are among the lowest in the discount brokerage industry. EU
TRADE(TM) will be offered at a flat commission rate on Internet-only
trades for equity orders having a market value of up to EURO 11,000.
AMERICAN DIVERSIFIED(R) will provide investors with access to trained
registered representatives and other customized services for a fee equal
to .44% of the order volume for each equity order. Through more efficient
operations, synergies of strategic alliances, increasing volume and the
use of advanced technology, the Company strives to minimize costs, which
are designed to allow the Company to offer what it believes are some of
the best transaction values in the industry. See "Description of
Business -- Development of Products and Services" and "Description of
Business -- Competition".
- Expand Mutual Fund Products and Distribution. The Company has been
expanding its sponsorship of mutual funds by developing a new mutual fund
series portfolio in the U.S., the International Value Fund. In addition,
the Company is in the process of registering an umbrella fund in Dublin,
Ireland under the UCITS directive for European distribution, which will
offer three sub-fund portfolios: the Global Value, International Value
and SmallCap Value portfolios. The Ireland-based funds will be
distributed initially in Germany and thereafter in other EU countries
through ADAG's distribution network and other channels in Europe.
- Expand the Underwriting of Initial Public Offerings. ADAG will engage in
underwriting initial public offerings for small and medium-sized EU
companies that plan to be listed on either a leading European or U.S.
stock exchange or trading market. ADAG has commenced due diligence review
of four companies in connection with proposed initial public offerings.
ADAG intends to expand its underwrit-
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ing business to take advantage of the increased demand for equity
financing among small and medium-sized companies in the EU, commencing
with activities in Germany. There were approximately 31 public equity
securities offerings in Germany during 1997, and 71 have been completed
to date in 1998. The Company believes there is a strong and growing
demand for investment banking and financial consulting services for
emerging growth companies in Germany, from the early financing through
the initial public offering stage.
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THE OFFERING
COMMON STOCK OFFERED BY THE
COMPANY IN THIS OFFERING.... 1,733,334(1)
COMMON STOCK TO BE OUTSTANDING
AFTER THIS OFFERING......... 8,551,295(1)(2)(3)
PREFERRED STOCK TO BE
OUTSTANDING AFTER THIS
OFFERING.................... None(2)
USE OF PROCEEDS............... To fund the Company's expanded marketing and
promotional activities; to provide the reserves
necessary to satisfy the German net capital
requirements; to finance the cost of capital
expenditures in the U.S. and Europe, including
the additional cost of software development; to
fund the Company's planned expansion and
acquisitions; for general corporate purposes;
and to pay all expenses incurred in connection
with this Offering.
RISK FACTORS.................. The Common Stock offered hereby should be
considered a speculative investment, including
the possible loss of the entire investment. See
"Risk Factors."
DILUTION...................... Purchaser will be subject to immediate and
substantial dilution in the per share tangible
book value of the Common Stock offered hereby,
and may be subject to further and substantial
dilution as a result of additional securities
offerings in the future. See "Dilution."
NASDAQ NATIONAL MARKET SYMBOL
(RESERVED).................. AMDV
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(1) Assumes no exercise of the Underwriters' Over-Allotment Option. See
"Underwriting."
(2) The Company previously had outstanding 5,000,000 shares of Series A
Preferred Stock, par value $1.00 per share (the "Series A Preferred Stock"),
all of which were converted into 1,666,611 shares of Common Stock (the
"Converted Shares") in October 1998.
(3) Does not include up to 173,333 shares of Common Stock reserved for issuance
upon exercise of the Representative's Warrants (199,333 if the Underwriters'
Over-Allotment Option is exercised in full).
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RISK FACTORS
In addition to the other information contained in this Prospectus, the
following risk factors should be carefully considered in evaluating the Company
and its business before purchasing any of the Units offered hereby. This
Prospectus contains forward-looking statements within the meaning of Section 27A
of the Securities Act. Discussions containing such forward-looking statements
may be found in the material set forth under the captions "Prospectus Summary,"
"Use of Proceeds," "Management Discussion and Analysis of Financial Condition
and Results of Operations" and "Description of Business," as well as within the
Prospectus generally. Actual results could differ materially from those
described in the forward-looking statements as a result of the risks and
uncertainties set forth below and within the Prospectus generally.
LIMITED OPERATING HISTORY AND LOSSES FROM OPERATIONS CREATES UNCERTAINTY ABOUT
FUTURE RESULTS
The Company is a development stage enterprise which was formed on February
5, 1997, for the purpose of engaging in the financial services business through
its subsidiaries in Europe and the United States. Except for the merged
operations of ADAM, the Company has a limited operating history and is in the
process of implementing an aggressive business expansion strategy involving the
development and distribution of sophisticated financial products and services in
Europe and the United States. No assurance can be given that the Company will be
able to develop successfully and market its proposed products and services in
any of its targeted market sectors.
In addition, from its inception through August 31, 1998, the Company
devoted the bulk of its resources to raising capital and implementing the first
phase of its business plan and has experienced aggregate losses of $4,658,516.
See the "Unaudited Pro Forma Consolidated Statement of Operations" of the
Company for an analysis of the losses of the Company and the merged operations
of ADAM on a pro forma basis. The Company and its subsidiaries are expected to
have further and substantial losses during its start-up phase primarily due to
the high costs associated with the formation of a new financial services
institution and the marketing and promotion of mutual funds and other financial
services in its market area. Results of operations in the future will be
influenced by numerous factors including, among others, expansion, the ability
of the Company to manage its growth and maintain the quality of its personnel,
and the ability of the Company to implement its strategic plan. There is no
assurance that the Company will ever operate profitably. Any future success that
the Company might enjoy and its results of operations in the future will also
depend upon many factors which may be beyond the control of the Company or which
cannot be predicted at this time. These factors may include changes in the
securities and banking industries, technological advances or product
obsolescence, increased levels of competition including the entry of additional
competitors and increased success by existing competitors, changes in general
economic conditions, increases in operating costs including costs of personnel
and equipment, reduced margins caused by competitive pressures and other
factors. These conditions may have a materially adverse effect upon the Company
or may force the Company to reduce or curtail operations.
DELAY IN COMMENCING OPERATIONS
ADAG has applied for a full banking license in Germany to engage in its
planned securities brokerage business. The Company cannot provide any assurance
or guarantee that the regulatory approvals necessary for ADAG to commence its
planned securities brokerage operations will be given in a timely manner or at
all. Any delay in commencing operations will increase pre-opening expenses and
postpone realization of potential revenues by ADAG and the Company. Absent the
receipt of revenues and commencement of profitable operations, the Company's
accumulated deficit will continue to increase (and book value per share
decrease) as operating expenses such as salaries and other administrative
expenses continue to be incurred.
REGULATION
The Company's ability to implement its business strategies successfully is
dependent on obtaining a full banking license in Germany from regulatory
authorities and approval from regulatory authorities, including the NASD, for
conducting expanded brokerage activities in the U.S. There can be no assurance
that the
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Company will be successful in obtaining the regulatory approvals that are
necessary to achieve its operational goals. The Company's inability to obtain
such regulatory approvals in a timely manner could have a material adverse
effect on the Company's ability to implement its business strategies as
contemplated in this Prospectus.
In addition, the international investment management and broker-dealer
operations of the Company and its subsidiaries are subject to extensive
regulation, supervision and licensing under various U.S. federal and state laws
and regulations and under the securities and corporate laws and regulations of
the European countries under which it will market its financial services. As a
registered broker-dealer and a registered investment advisor in the United
States, ADAM is subject to the regulatory authority of the National Association
of Securities Dealers, Inc. ("NASD") and the Securities and Exchange Commission
(the "Commission"). ADAM must comply with applicable provisions of the
Securities Exchange Act of 1934 (the "Exchange Act") and the Investment Advisers
Act of 1940. See "Description of Business -- Government Regulation." One of the
most important regulations with which ADAM must comply with as a registered
broker-dealer is the Commission's rule 15c3-1 (the "Net Capital Rule") which
requires the broker-dealer subsidiaries of the Company to maintain a minimum
amount of net capital, as defined under such regulations. See "-- Effect of Net
Capital Requirements." After the transfer of ADAM's broker-dealer functions to
ASI is completed, ASI will be subject to regulation as a broker-dealer,
including the Net Capital Rule.
The Company and its German subsidiary, ADAG, will also be subject to
securities regulation in Germany and the various EU jurisdictions where they
establish business operations or distribute financial services products.
Compliance with many of the regulations applicable to the Company involves a
number of risks, particularly in areas where applicable regulations may be
subject to interpretation. In the event of non-compliance with an applicable
regulation, governmental regulators and self-regulatory organizations, such as
the NASD, may institute administrative or judicial proceedings that may result
in censure, fine, civil penalties (including treble damages in the case of
insider trading violations), issuance of cease-and-desist orders, deregistration
or suspension of the non-compliant broker-dealer or investment adviser,
suspension or disqualification of the broker-dealer's officers or employees or
other adverse consequences. The imposition of any such penalties or orders on
the Company could have a material adverse effect on the Company's operating
results and financial condition. See "Description of Business -- Government
Regulation."
The regulatory environment in which the Company operates is subject to
change. The Company may be adversely affected as a result of new or revised
legislation or regulations imposed by the Commission, other United States or
foreign governmental regulatory authorities or the NASD. The Company also may be
adversely affected by changes in the interpretation or enforcement of existing
laws and rules by these governmental authorities and the NASD.
NEED FOR ADDITIONAL CAPITAL
The Company believes that the net proceeds of this Offering will be
sufficient to finance the cost of its operations through December 31, 2002.
However, additional capital will be required to support operations effectively
and to otherwise implement the Company's overall business strategy. The Company
has no commitments for any such additional capital at this time and there can be
no assurance that financing will be available when needed on terms that are
acceptable to the Company. In addition, if the costs and expenses to be incurred
for commencing marketing and product development exceed the net proceeds of this
Offering, the need for additional working capital may arise earlier than
expected. Any inability to obtain additional capital when needed will restrict
the Company's ability to grow and may reduce the Company's ability to continue
as a going concern.
DEPENDENCE ON COMPUTER SYSTEMS
The Company will receive and process trade orders through the Internet and
personal terminals. These methods of trading will be heavily dependent on the
integrity of the electronic systems supporting them. Extraordinary trading
volumes could cause the Company's computer systems to operate at an unacceptably
low speed or even fail. Any significant degradation or failure of the Company's
computer systems or any other
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systems in the trading process (e.g., online service providers, record keeping
and data processing functions performed by third parties and third-party
software such as Internet browsers) could cause customers to suffer delays in
trading. Such delays could cause substantial losses for customers and could
subject the Company to claims from customers for losses, including litigation
claiming fraud or negligence. There can be no assurance that the Company's
network structure will operate appropriately in the event of a computer systems
failure or that, in the event of an earthquake, fire or any other natural
disaster, power or telecommunications failure, act of God or war, the Company
will be able to prevent an extended computer systems failure. Any computer
systems failure that causes interruptions in the Company's operations could have
a material adverse effect on the Company's business, financial condition and
operating results. See "Description of Business -- Systems."
DEPENDENCE ON INTELLECTUAL PROPERTY RIGHTS
The Company's success and ability to compete are dependent to a significant
degree on its proprietary technology. The Company relies primarily on copyright,
trade secret and trademark law to protect its proprietary technology. The
Company has registered and unregistered trademarks, various registered and
unregistered copyrights and certain licenses of technology with third parties.
The Company has no patents. The Company relies on German common law and trade
secret laws for protection of its proprietary software, technology and systems,
and currently is developing non-competition and confidentiality agreements with
its associates and consultants. It is possible that third parties may copy or
otherwise obtain and use the Company's proprietary technology without
authorization or otherwise infringe on the Company's proprietary rights. It is
also possible that third parties may independently develop technologies similar
to those of the Company. Policing unauthorized use of the Company's intellectual
property rights may be difficult, particularly because it is difficult to
control the ultimate destination or security of information transmitted over the
Internet. In addition, the laws of foreign countries may afford inadequate
protection of intellectual property rights. Failure of the Company to adequately
protect its intellectual property rights could have a material adverse effect on
the Company's financial condition and results of operations.
VOLATILE NATURE OF SECURITIES BUSINESS
A substantial portion of the Company's revenues will be derived from
securities brokerage services. The securities business is volatile and is
directly affected by national and international economic conditions, broad
trends in business and finance and fluctuations in volume and price levels of
securities transactions, all of which are beyond the control of the Company.
Reduced trading volume generally results in reduced transaction revenues and
decreased profitability. Severe market fluctuations in the future could have a
material adverse effect on the Company's business, financial condition and
operating results. The securities business is also subject to various other
risks, including customer default, employees' misconduct, and errors and
omissions and litigation. Losses associated with these risks could have a
material adverse effect on the Company's business, financial condition and
operating results. The securities industry has undergone many fundamental
changes during the last two decades, including regulation and deregulation at
federal and state levels, the emergence of discount brokers, the dominance of
institutional investors and consolidation. Several current trends are also
affecting the securities industry, including increased use of technology and
greater self-reliance of individual investors. See "Description of Business."
There can be no assurance that these trends or future changes in the securities
business will not have a material adverse effect on the Company's business,
financial condition and operating results. In addition, commissions charged to
customers of discount brokerage services have steadily decreased over the past
several years, and the Company expects such decreases to continue. There can be
no assurance that such decreases will not have a material adverse effect on the
Company's business, financial condition and operating results. See
"-- Competition."
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
A principal portion of the Company's operations will consist of providing
securities brokerage and related financial and banking services in Germany and
other EU countries. The Company's international operations are subject to a wide
variety of general and specific business risks, including, by way of
illustration and not by way of limitation: fluctuations in currency exchange
rates; the introduction of the Euro currency in Europe;
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unexpected changes in legal and regulatory requirements; political and economic
instability; restrictions on repatriation of funds or profits from foreign
markets; longer payment cycles or problems in collecting accounts receivable;
difficulties in protecting the Company's intellectual property; potentially
adverse tax consequences, including limitations on the Company's ability to
claim a foreign tax credit against its U.S. federal income taxes; and regulation
by foreign regulatory authorities. These and other factors associated with the
Company's international operations may have a material adverse effect on the
Company's financial condition and may substantially reduce the Company's income
and result in operating losses. See "-- Risks Associated with Foreign Exchange
Rate Fluctuations and the Introduction of the Euro" and "-- Dependence on
Intellectual Property Rights."
RISK ASSOCIATED WITH FOREIGN EXCHANGE RATE FLUCTUATIONS AND INTRODUCTION OF THE
EURO
The Company conducts business through its operating subsidiaries in the
U.S. and Germany, and anticipates conducting business in other EU countries.
Accordingly, the Company's results of operations are subject to currency
translation risk and currency transaction risk. With respect to currency
translation risk, the results of operations of each of the Company's non-U.S.
operating subsidiaries is reported in the relevant local currency and then
translated into U.S. dollars at the applicable currency exchange rate for
inclusion in the Company's financial statements. The appreciation of the U.S.
dollar against the respective local currencies of the operating subsidiaries
will have a negative impact on the Company's sales and operating margin.
Conversely, the depreciation of the U.S. dollar against such currencies will
have a positive impact. Fluctuations in the exchange rate between the U.S.
dollar and the other currencies in which the Company conducts its operations may
also affect the book value of the Company's assets and the price of the Common
Stock. In addition, to the extent indebtedness of the Company is denominated in
different currencies, changes in the values of such currencies relative to other
currencies in which the Company conducts its operations may have a negative
impact on the Company's ability to meet principal and interest obligations in
respect of such indebtedness.
In addition to currency translation risk, the Company incurs currency
transaction risk to the extent that the Company's operations involve
transactions in differing currencies. Fluctuations in currency exchange rates
will impact the Company's results of operations to the extent that the expenses
incurred by the operating subsidiaries are denominated in currencies that differ
from the currencies in which the related sale proceeds are denominated. To
mitigate such risk, the Company may enter into futures contracts and forward
purchase contracts or other hedging transactions relating to the relevant local
currencies, including the U.S. dollar, the Deutsche Mark, the Irish Punt, the
Dutch Guilder and the pound Sterling. The Company has no plans to enter into
forward purchase agreements for speculative purposes. Given the volatility of
currency exchange rates, there can be no assurance that the Company will be able
effectively to manage its currency transaction risks or that any volatility in
currency exchange rates will not have a material adverse effect on the Company's
business, financial condition or results of operations.
Under the treaty on the European Economic and Monetary Union (the
"Treaty"), to which the Federal Republic of Germany is a signatory, on January
1, 1999, and subject to the fulfillment of certain conditions, a European single
currency (the "Euro") may replace all or some of the currencies of the member
states of the EU, including the Deutsche Mark. If, pursuant to the Treaty, the
Deutsche Mark or other local currencies are replaced by the Euro, transactions
formerly denominated in the Deutsche Mark or other such local currencies,
including the payment of certain obligations by the Company's German
subsidiaries, will be effected in Euro in conformity with legally applicable
measures taken pursuant to, or by virtue of, the Treaty.
Following introduction of the Euro, the existing sovereign currencies (the
"legacy currencies") of the eleven participating member countries of the EU (the
"participating countries") who have agreed to adopt the Euro as their common
legal currency on January 1, 1999 are scheduled to remain legal tender in the
participating countries as denominations of the Euro between January 1, 1999 and
January 1, 2002 (the "transition period"). The participating countries' pursuit
of a single monetary policy through the European Central Bank may affect the
economies of significant markets of the Company. The Company will also need to
prepare for the transition period by modifying information systems software to
(1) convert legacy currency amounts to the Euro; (2) convert one legacy currency
to another; (3) perform prescribed rounding
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calculations to effect currency conversions; and (4) permit transactions to take
place in both legacy currencies and the Euro during the transition period. Since
the Company will be conducting extensive business operations in several of the
participating countries, there can be no assurance that the conversion to the
Euro will not have a material adverse effect on the Company's business,
financial condition or results of operations. Similarly, in the event that the
Company materially underestimates the costs, timeliness and adequacy of
modifications to its information systems software, there could be a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company is reviewing Euro implementation and its pricing strategy in
the countries where the Company will operate. In addition, the Company is
reviewing existing legacy currency accounting and business systems and other
business assets for compliance with the Treaty and assessing the risks posed by
non-compliance by third parties. Despite these efforts, it is possible that the
Company or third parties on whom the Company depends will not have in place in a
timely manner the systems necessary to process Euro-denominated transactions.
Such a failure could adversely affect the Company's business, financial
condition and results of operations (e.g., by causing delays in order
processing). Moreover, increased price transparency or disruption of activity in
the markets in which the Company will operate resulting from the conversion to
the Euro could hurt the Company's business in those markets, resulting in lost
revenues.
RAPIDLY EVOLVING MARKETS
The market for electronic discount brokerage services is at an early stage
of development and is rapidly evolving. As is typical for new and rapidly
evolving markets, demand and market acceptance for recently introduced services
and products are subject to a high level of uncertainty. The Company's planned
services over the Internet involve alternative approaches to securities
transactions and, as a result, intensive marketing and sales efforts may be
necessary to educate prospective customers regarding the uses and benefits of
the Company's electronic discount brokerage services and products. Consumers who
already obtain brokerage services from more traditional full-commission
brokerage firms, or even discount brokers, may be reluctant or slow to change to
obtaining brokerage services over the Internet, automated touch tone telephone
and personal computer. Moreover, the security and privacy concerns of existing
and potential users of the Company's services may inhibit the growth of
electronic discount brokerage trading. There can be no assurance that the market
for electronic brokerage services will continue to grow.
Sales of some of the Company's services and products will depend upon the
broader adoption of the Internet by consumers as a medium for commerce and
communication. Use of the Internet depends on the development of the necessary
infrastructure and complementary services and products, such as high speed
modems and high speed communication lines. As the number of users and amount of
traffic on the Internet continues to increase, there can be no assurance that
the Internet infrastructure will continue to be able to support the demands
placed on it. In addition, delays in the development or adoption of new
standards and protocols to handle increased levels of Internet activity or
increased governmental restrictions could impede further use of the Internet.
Moreover, consumer concerns about the Internet (including security, reliability,
cost, ease of use, accessibility and quality of service) remain unresolved and
may negatively affect the growth of Internet use. As a result, there can be no
assurance that the number of the Company's transactions generated over the
Internet will continue to increase.
RISKS ASSOCIATED WITH NEW PRODUCTS AND NEW MARKETS
The market for financial services, particularly the market for electronic
discount brokerage services, is characterized by rapid technological change,
changing customer requirements, frequent service and product enhancements and
introductions and emerging industry standards. The introduction of services or
products embodying new technologies and the emergence of new industry standards
can render existing services or products obsolete and unmarketable. The
Company's future success will depend, in part, on its ability to develop and use
new technologies, respond to technological advances, enhance its existing
services and products and develop new services and products on a timely and
cost-effective basis. There can be no assurance that the Company will be
successful in effectively developing or using new technologies, responding to
technological advances or developing, introducing or marketing service and
product enhancements or new
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services and products. In addition, the Company may enter into new markets in
connection with enhancing its existing services and products and developing new
services and products. There can be no assurance that the Company will be
successful in pursuing new opportunities or will compete successfully in any new
markets. See "-- Risks Associated with Strategic Acquisitions and
Relationships."
DEPENDENCE ON KEY MANAGEMENT AND PRINCIPAL CONSULTANTS
The Company will rely on the business and technical expertise of its
executive officers and certain other key employees, particularly its Chairman of
the Board and Vice President-International Development, Peter Hartmann, and its
President and Chief Executive Officer, James Buchanan Rea, Jr. The Company is
also dependent upon the advisory services of its principal consultants, Ladas &
Hulings, Inc., and that firm's founder, Mr. William R. Hulings. The Company does
not maintain key man life insurance on any of these individuals. The loss of the
services of any of these executives or consultants could have a material adverse
affect on the Company and no assurance can be given that their services will be
available in the future. The Company's success will also be dependent on its
ability to attract and retain additional qualified management personnel. See
"Directors, Executive Officers and Significant Employees."
MANAGEMENT OF GROWTH
The Company plans to expand its business with the formation of subsidiaries
in Austria, Spain, Ireland and Switzerland. To a significant extent, the
Company's future success will be dependent upon its ability to engage in a
successful expansion program and will be dependent, in part, upon its ability to
secure regulatory approvals in its chosen markets, attract customers for its
financial products, maintain adequate financial controls and reporting systems,
manage its growth, and obtain additional capital upon favorable terms. There can
be no assurance that the Company will be able to implement successfully its
planned expansion, finance its growth or manage a larger operation.
RISKS ASSOCIATED WITH STRATEGIC ACQUISITIONS AND RELATIONSHIPS
The Company is planning to pursue strategic acquisitions of complementary
businesses and technologies. Acquisitions entail numerous risks, including
difficulties in the assimilation of acquired operations and products, diversion
of management's attention to other business concerns, amortization of acquired
intangible assets and potential loss of key employees of acquired companies.
There can be no assurance that the Company will be able to integrate
successfully any operations, personnel, services or products that might be
acquired in the future or that any acquisition will enhance the Company's
business, financial condition or operating results.
LACK OF TRADEMARK PROTECTION
The Company has registered "AMERICAN DIVERSIFIED" as a servicemark in the
U.S. and in Germany, and has applied for, but has not been issued, any
registered servicemarks for its "amdiv.net," "amdiv.pronet" and "eu-trade"
service-names in Germany. No assurance can be given that the Company will be
successful in obtaining these marks, or that the servicemarks, if obtained, will
afford the Company any competitive advantages. See "Description of
Business -- Servicemark Application."
IMMEDIATE AND SUBSTANTIAL DILUTION
The Price to Public is significantly higher than the net tangible book
value per share of the Company's Common Stock. Purchasers in the Offering will
experience immediate and substantial dilution in the net tangible book value of
their investment in the Common Stock. See "Dilution."
POTENTIAL FOR SECURITY COMPROMISES
The secure transmission of confidential information over public networks
will be a critical element of the Company's operations. The Company will be
required to rely on encryption and authentication technology, including public
key cryptography technology, to provide the security and authentication
necessary to effect
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secure transmission of confidential information over the Internet. There can be
no assurance that advances in computer capabilities, new discoveries in the
field of cryptography or other events or developments will not result in a
compromise of the technologies or other algorithms which may be used by the
Company to protect customer transaction and other data. Any such compromise of
the Company's security could have a material adverse effect on the Company's
business, financial condition and operating results.
EFFECT OF NET CAPITAL REQUIREMENTS
The Commission, the NASD and various other regulatory agencies have
stringent rules with respect to the maintenance of specific levels of net
capital by securities brokers, including the Commission's Uniform Net Capital
Rule (the "Net Capital Rule"), which govern the Company's U.S. broker-dealer
subsidiary. The Company's German subsidiary, ADAG, will be subject to similar
net capital requirements under the German Banking Supervisory Act. Failure to
maintain the required net capital may subject a firm to suspension or revocation
of registration by the Commission and suspension or expulsion by the NASD and
other regulatory bodies and ultimately could require the firm's liquidation. In
addition, a change in the applicable net capital rules, the imposition of new
rules or any unusually large charge against net capital could limit those
operations of the Company that require the intensive use of capital, such as the
financing of customer account balances, and also could restrict the Company's
ability to withdraw capital from its brokerage subsidiaries, which in turn could
limit the Company's ability to pay dividends, repay debt and repurchase shares
of its outstanding stock. A significant operating loss or any unusually large
charge against net capital could adversely affect the ability of the Company to
expand or even maintain its present levels of business, which could have a
material adverse effect on the Company's business, financial condition and
operating results. See "Description of Business -- Net Capital Requirements;
Liquidity" for a discussion of the applicable net capital requirements in the
U.S. and Germany.
BROAD DISCRETION IN THE USE OF PROCEEDS
The Company expects to use the net proceeds primarily to fund its
operations, planned expansion and for other general corporate purposes.
Consequently, the Board and management of the Company will have broad discretion
in allocating the net proceeds of the Offering, which creates uncertainty for
shareholders and could adversely affect the Company's financial condition and
future results of operations. See "Use of Proceeds."
NO ASSURANCE OF PUBLIC TRADING MARKET OR CONTINUED LISTING ON NASDAQ; POSSIBLE
VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Common
Stock. The Company has been approved for quotation of the Common Stock on the
NASDAQ National Market under the trading symbol "AMDV." There can be no
assurance that an active public market will develop or be sustained for the
Common Stock. The initial public offering price will be determined through
negotiations between the Company and the representative of the Underwriters and
may not be indicative of the market price for the Common Stock after the
completion of the Offering. The market price of the Common Stock after
completion of the Offering could be subject to significant fluctuations in
response to quarterly variations in operating results, announcements of
technological innovations or new services or products by the Company or its
competitors, changes in financial estimates by securities analysts or other
events or factors, many of which are beyond the Company's control. In addition,
the stock market has experienced significant price and volume fluctuations that
have particularly affected the market prices of equity securities of many
technology companies and that often have been unrelated to the operating
performance of such companies. These broad market fluctuations may adversely
affect the market price of the Common Stock. There can be no assurance that
purchasers of Common Stock will be able to resell their Common Stock at prices
equal to or greater than the initial public offering price. See "Underwriting."
Moreover, if for any reason, the Company's Common Stock is not eligible for
continued listing on NASDAQ or another public trading market, purchasers of the
Common Stock may have difficulty selling their securities should they desire to
do so. Under newly adopted rules of the National Association of Securities
Dealers, Inc. ("NASD"), in order to qualify for initial quotation of securities
on NASDAQ, a
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company, among other things, must have at least $18.0 million in net tangible
assets, 1.1 million in public float shares, $18.0 million in market value of
public float and a minimum bid price of $5.00 per share. For continued listing,
a company, among other things, must have $4.0 million in net tangible assets,
750,000 in public float shares, $5.0 million in market value of public float and
a minimum bid price of $1 per share. If the Company is unable to satisfy the
requirements for quotation on NASDAQ, trading, if any, in the Common Stock could
be conducted in the over-the-counter market in what are commonly referred to as
the "pink sheets" or on the NASD OTC Electronic Bulletin Board. As a result, an
investor may find it more difficult to dispose of, or to obtain accurate
quotations as to the price of, the Common Stock offered hereby. The above-
described rules may materially adversely affect the liquidity of the market of
the Company's securities.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have approximately
8,551,295 shares of Common Stock outstanding out of a total of 20,000,000 shares
of Common Stock authorized, after conversion of the previously outstanding
5,000,000 shares of Series A Preferred Stock into 1,666,611 shares of Common
Stock, but assuming no exercise of the Representative's Warrants and excluding
up to 260,000 shares of Common Stock that may be issued to cover
over-allotments, if any. See "Underwriting." The shares of Common Stock offered
hereby will be freely tradeable without restriction or further registration
under the Securities Act of 1933, as amended (the "Securities Act"), by persons
other than "affiliates" of the Company within the meaning of Rule 144
promulgated under the Securities Act. The remaining shares of Common Stock
outstanding will be "restricted" shares that may be sold in the public
securities market without registration under the Securities Act to the extent
permitted by Rule 144 (or Rule 145, as applicable) promulgated under the
Securities Act or any exemption under the Securities Act. Of the 6,817,961
restricted shares which have been issued (including the 1,666,611 Converted
Shares), 500,000 shares of Common Stock are currently eligible for sale under
Rule 144 and 6,317,961 shares of Common Stock will be eligible for sale under
Rule 144 beginning in March 1999, subject to the restriction on transfer of
stock held by the Company's officers and directors. See "Underwriting."
Additionally, the Company intends to file a registration statement on Form S-8
with respect to the shares of Common Stock issuable upon exercise of options
under the 1998 Stock Option and Incentive Plan, which shares may thereafter be
available for sale without restriction. See "Remuneration of Directors and
Officers -- 1998 Stock Option and Incentive Plan."
Shares of Common Stock not issued or reserved for issuance may be issued
without any action or approval of the Company's shareholders. Any such issuance
could be used as a means of discouraging, delaying or preventing a change in
control of the Company or could dilute the public ownership of the Company.
Future sales of a substantial amount of Common Stock in the public market, or
the perception that such sales may occur, could adversely affect the market
price of the Common Stock prevailing from time to time in the public market. See
"Shares Eligible for Future Sale."
LITIGATION AND POTENTIAL SECURITIES LAWS LIABILITY
Many aspects of the Company's business involve substantial risks of
liability. An underwriter is exposed to substantial liability under federal and
state securities laws, other federal and state laws and court decisions,
including decisions with respect to underwriters' liability and limitations on
indemnification of underwriters by issuers. For example, a firm that acts as an
underwriter may be held liable for material misstatements or omissions of fact
in a prospectus used in connection with the securities being offered or for
statements made by its securities analysts or other personnel. In recent years
there has been an increasing incidence of litigation involving the securities
industry, including class actions that seek substantial damages. The Company
also will be subject to the risk of litigation from its other business
activities, including litigation that may be without merit. As the Company
intends actively to defend any such litigation, significant legal expenses could
be incurred. An adverse resolution of any future lawsuits against the Company
could materially adversely affect the Company's future operating results and
financial condition.
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DEPENDENCE ON CASH INFLOWS TO MUTUAL FUNDS
A slowdown or reversal of cash inflows to mutual funds and other pooled
investment vehicles could lead to lower underwriting and brokerage revenues for
the Company since mutual funds purchase a significant portion of the securities
offered in public offerings and traded in the secondary markets. Recent periods
of heavy demand for new equity offerings has been driven in part by
institutional investors, particularly large mutual funds, seeking to invest cash
received from the public. The public may withdraw additional cash from mutual
funds as a result of a decline in the market generally or as a result of a
decline in mutual fund net asset values. To the extent that a decline in cash
inflows into mutual funds or a decline in net asset values of these funds
reduces demand by fund managers for initial public or secondary offerings, the
Company's business and future results of operations could be materially
adversely affected. Moreover, a slowdown in investment activity by mutual funds
may have an adverse effect on the securities markets generally.
DEPENDENCE ON SYSTEMS AND THIRD PARTIES
The Company's international investment management and broker-dealer
operations will be highly dependent on third-party communications and
information systems, including certain systems provided by clearing brokers. Any
failure or interruption of the Company's future clearing broker or third party
trading systems, could cause delays or other future problems in the Company's
securities trading activities, which could have a material adverse effect on the
Company's operating results. Such failures and interruptions may result from the
inability of certain computing systems (including those of the Company's
clearing broker, and other third party vendors) to recognize the year 2000.
There can be no assurance that the year 2000 issue can be resolved prior to the
upcoming change in the century. Although the Company may incur substantial
costs, particularly costs resulting from charges by its third party service
providers, in correcting year 2000 issues, such costs are not sufficiently
certain to estimate at this time. See "Management's Discussion and Analysis of
Financial Condition and Results of Operation -- Year 2000 Compliance." In
addition, there can be no assurance that such third party trading systems will
not suffer any systems failure or interruption, including one caused by an
earthquake, fire, or any other natural disaster, power or telecommunications
failure, act of God or war, or that the Company's back-up procedures and
capabilities in the event of any such failure or interruption will be adequate.
COMPETITION
The investment management business is highly competitive. The Company will
compete with a large number of investment management firms, commercial banks,
insurance companies, broker-dealers and other financial services providers,
which have greater resources, assets under management, administration capability
and a better developed operating infrastructure. A large number of the Company's
competitors also offer a broader range of investment products and services than
the Company, and have better name recognition and a more extensive customer base
as compared to the Company.
The Company encounters significant competition in connection with the
operation of its business in the U.S., and expects to encounter substantial
competition for brokerage services and the distribution of U.S. mutual funds to
its targeted potential clientele in its primary marketing area in Germany. These
services are typically provided in Germany today through banks and savings
institutions, which are not primarily engaged in providing these services to
individual investors. Many competitors devote substantial resources to
advertising and marketing their mutual funds, a practice that may adversely
affect the ability of the Company's mutual funds and other new funds to grow.
The Company's competitors in the U.S. include numerous enterprises with
extensive experience in the financial services sector. These competitors may in
the future be able to respond more quickly to new or changing opportunities,
technologies and customer requirements than the Company and may be able to
undertake more extensive promotional activities, offer more attractive terms to
customers and adopt more aggressive pricing policies than the Company. Moreover,
current and potential competitors have established or may establish cooperative
relationships among themselves or with third parties or may consolidate to
enhance their services and products. The Company expects that new competitors or
alliances among competitors will emerge and may acquire significant market
share. These competitive conditions may have a material adverse effect on the
Company's revenues, profitability and ability to meet its business objectives.
See "Description of Business -- Competition."
14
<PAGE> 21
THE COMPANY
GENERAL
The Company, through its subsidiaries in the U.S. and Germany, develops and
markets financial services and products to a new and growing market in Germany
and the EU. The Company has developed proprietary technology, systems and
software, which are designed to make the Company a true global on-line brokerage
firm with multi-lingual access to leading stock exchanges and trading markets
from one account. See "Risk Factors -- Dependence on Intellectual Property
Rights." The Company's services can be accessed under the domain names
"amdiv.de" and "eu-trade.de." In addition to earning commission revenues from
securities trading transactions, the Company plans to sponsor and distribute
mutual funds, underwrite and participate in selling group syndications of
initial public offerings by EU and U.S. companies, and engage in other
securities brokerage-related services.
ORGANIZATIONAL STRUCTURE
The Company was incorporated in the State of Nevada on February 5, 1997. In
December 1998, the Company changed its name to amdiv.com, inc. from American
Diversified Holdings, Inc. The holding company's primary function is the
management of its subsidiaries, ADAG, ADAM, ASI, ATEC, APUB, and other
subsidiaries, which may be formed.
LOGO
ADAG: American Diversified AG, is a German corporation located in Berlin,
Germany. ADAG will provide global on-line brokerage and financial services to
retail and professional investors. ADAG will also underwrite and participate in
the selling group of corporate securities of EU and U.S. companies. ADAG is a
licensed distributor of financial products in Germany and is expected to receive
a full banking license in Germany in the first quarter of 1999, which will
enable it to engage in securities brokerage and underwriting activities. ADAG
has applied for membership on the Frankfurt Stock Exchange located in Frankfurt,
Germany. The registration process has been completed and ADAG's membership will
become effective upon approval of ADAG's full banking license. ADAG has
completed all technical preparations necessary to commence operations, including
installation of network links to stock exchanges and trading markets.
ADAM: American Diversified Asset Management, Inc., a Nevada corporation
located in Los Angeles, California, was formed in October 1997, merged with
James Buchanan Rea, Inc. ("JBRI") in March 1998, and succeeded to the business
of JBRI as a registered investment adviser and licensed NASD broker/dealer,
underwriter and distributor of mutual funds. ADAM serves as the advisor,
underwriter and distributor for the American Diversified series funds, which
includes the U.S. Global Value Fund and will include the American Diversified
International Value Fund. The Company is in the process of separating its
investment management and broker-dealer businesses by forming ASI (see below) to
assume the broker-dealer and underwriting functions of ADAM, including the
distribution of mutual funds. ADAM will remain as the investment advisor to the
Funds and will continue to provide asset management services.
ASI: amdiv securities, inc., a Nevada corporation located in Los Angeles,
California, was formed in November 1998 to assume the broker-dealer and
underwriter functions of ADAM. ADAM's broker-dealer registration is being
transferred to ASI, which will also enter into a new distribution agreement with
American Diversified Funds, Inc. for distribution of the Funds. ASI will be the
broker for web-based brokerage trading and execution in the U.S. markets for
securities transactions routed through ADAG from Germany and other EU countries.
The Company intends to expand the broker-dealer operations of ASI and to
establish a branch office in New York.
15
<PAGE> 22
ATEC: American Diversified Technologies, Inc., a Nevada corporation located
in Los Angeles, California, was formed in November 1998, as a technology
development subsidiary to hold the proprietary technology, systems and software
of the Company and its subsidiaries. ATEC develops, owns and maintains the
trading and back office systems and software for the on-line brokerage services
provided under the trade names of EU TRADE(TM) and AMDIV.PRONET. See
"Development of Products and Services -- Securities Brokerage Services."
APUB: AMDIV Publications, GmbH, a German corporation located in Berlin,
Germany, was formed in 1998 to publish financial books and magazines, primarily
translations of financial publications from English to German. APUB has the
German language rights for a number of books, including "The Electronic Day
Trader," a best selling financial publication in the U.S., and owns the reprint
rights for FORBES Global Business & Finance Magazine. APUB will act as a content
provider for the Company's website.
16
<PAGE> 23
USE OF PROCEEDS
If all 1,733,334 shares of Common Stock offered by this Prospectus are
sold, the Company will receive net proceeds of approximately $
(assuming the public offering price is $ , and assuming the
Underwriters' Over-Allotment Option is not exercised). If the Underwriters'
Over-Allotment Option is exercised in full, the Company would receive
approximately an additional $ . Net proceeds are determined after
deduction of all commissions, discounts and expenses paid to the underwriters
(estimated to be $ , if the Underwriters' Over-Allotment Option is
exercised in full) and after all expenses of the Offering (estimated to be
$242,000).
RESTRICTED PROCEEDS
The Company has agreed with the Underwriters that $15,000,000 of the
initial net proceeds of the Offering will be restricted (the "Restricted
Proceeds") and will not be applied to the business purposes of the Company
(except that up to $6,000,000 of the Restricted Proceeds may be applied to the
Net Capital Lock-up account referenced below) until the earliest to occur of the
following: (i) the date on which the Company has commenced its EU brokerage
business (evidenced by the consummation of one transaction in one account),
which date shall not be less than 90 days after the closing of this Offering, or
(ii) upon the Company having generated at least $5,000,000 in gross revenue from
securities brokerage activities in Germany and other EU countries, as determined
in accordance with Generally Accepted Accounting Principles as applied in the
U.S. The Restricted Proceeds will be deposited into an escrow account
established with City National Bank, Los Angeles (the "Escrow Agent") pursuant
to an Escrow Agreement. The Escrow Agent will release up to $6,000,000 of the
Restricted Proceeds upon receipt of an officer's certificate of the Company that
such Restricted Proceeds will be deposited into the Net Capital Lock-up account
referenced below. The Escrow Agent will release the balance of the Restricted
Proceeds upon receipt of a written notice in the form required by the Escrow
Agreement completed and executed by McGladery & Pullen, LLP, independent
auditors to the Company, indicating that the requisite conditions have been
satisfied. In any event, the Restricted Proceeds will be released to the Company
one year after the closing of this Offering, or earlier, upon the consent of the
Representative, and will be available for the business purpose of the Company.
Pending the satisfaction of either of the conditions described above, the
Escrow Agent will invest all amounts in escrow only in short-term, investment
grade securities.
The Company intends, in the following order of priority, to apply the net
proceeds of this Offering to:
<TABLE>
<CAPTION>
PERCENTAGE OF
AMOUNT NET PROCEEDS
-------- -------------
<S> <C> <C>
Marketing Activities........................................ $ %
- -- Advertising expenses, production of TV-Commercials and
marketing programs to expand the Company's customer base
Net Capital Lock-up......................................... $ %
- -- Funds to be deposited in a special account to satisfy the
German net capital requirement
Capital Investments......................................... $ %
- -- Expenditures for computer equipment and other technology,
furniture and fixtures for the new office premises in
Europe and the U.S.
Software Development........................................ $ %
The remainder of the net proceeds will be used for the
development and acquisition of new forms of technology to be
used in the Company's business and for other general
corporate purposes, which may include the acquisition of
complementary businesses and the increase of the Company's
net capital position. The Company does not currently have
any agreements with respect to any such acquisitions. Prior
to the application of the net proceeds to the Company as
described above, such funds will be invested in short-term
investment grade securities................................. $ %
</TABLE>
17
<PAGE> 24
The amount and timing of working capital expenditures may vary
significantly depending upon numerous factors, including the progress of the
Company's development and marketing efforts, the timing and costs involved in
obtaining regulatory approvals, competing technological and market developments,
the costs associated with commercialization of the Company's services and
products. See "Risk Factors -- Broad Discretion in the Use of Proceeds."
The Company believes that its available cash and existing sources of
funding, together with the proceeds of this Offering and interest earned
thereon, will be adequate to maintain its current and planned operations through
December 31, 2002. Thereafter, the Company may be required to obtain additional
capital to continue operations. There can be no assurance of the availability or
terms of any such additional capital financing. See "Risk Factors -- Need for
Additional Capital."
Until used, in the manner described above, the Company intends to invest
the net proceeds of this Offering in interest-bearing, investment-grade
securities. While the net proceeds are so invested, the interest earned by the
Company on such proceeds will be limited by available market rates. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation -- Plan of Operation."
18
<PAGE> 25
DILUTION
As of August 31, 1998, there were 6,817,961 shares of Company Common Stock
outstanding, with a net tangible book value per share of approximately $1.68
adjusted on a pro forma basis to reflect the 1:2 reverse split of the
outstanding shares of the Company's Common Stock which was declared effective
August 20, 1998, and the conversion of the 5,000,000 shares of the Series A
preferred Stock into 1,666,611 shares of Common Stock. Net tangible book value
per share represents the amount of the Company's total tangible assets less the
Company's total liabilities, divided by the number of shares the Company's
Common Stock outstanding.
After giving effect to the sale of the 1,733,334 shares of Common Stock
under this Offering at a price of $ per share and the application of the net
proceeds therefrom, and after giving effect to the 1:2 reverse stock split
effective August 20, 1998 and the conversion of the 5,000,000 shares of Series A
Preferred Stock into 1,666,611 shares of Common Stock (assuming no exercise of
the Underwriters' Over-Allotment Option, no exercise of the Representative's
Warrants and no exercise of any options granted pursuant to the 1998 Stock
Option and Incentive Plan) there would be a total of 8,551,295 shares of Company
Common Stock outstanding with a net tangible book value of approximately $
per share. This would represent an immediate increase in pro forma net tangible
book value of $ per share to existing shareholders and an immediate dilution
of $ per share to new investors. Dilution is determined by subtracting net
tangible book value per share after the Offering from the amount paid by new
investors per share of Common Stock. The following table illustrates the per
share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $
Pro forma net tangible book value per share as of
August 31, 1998(1).................................... $1.68
Increase attributable to new investors................. $
-----
Adjusted pro forma net tangible book value per share after
this Offering............................................. $
-----
Dilution per share to new investors (assuming no exercise of
the Underwriters' Over-Allotment Option, no exercise of
the Representative's Warrants and no exercise of any
options granted under the 1998 Stock Option and Incentive
Plan)..................................................... $
=====
</TABLE>
- ---------------
(1) After giving effect to the conversion of the previously outstanding
5,000,000 shares of Series A Preferred Stock into 1,666,611 shares of Common
Stock.
The following table summarizes, on a pro forma basis, as of August 31,
1998, the difference between the existing shareholders and the new investors
with respect to the number of shares of Common Stock (assuming no exercise of
the Underwriters' Over-Allotment Option or the Representative's Warrants and no
exercise of any options granted under the 1998 Stock Option and Incentive Plan)
purchased from the Company, the total consideration paid and the average price
per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders............... 6,817,961(1) 79.7% $16,586,931(2) % $2.43
New Investors....................... 1,733,334 20.3% $ % $
Total..................... 8,551,295 100.0% $ $100.0%
</TABLE>
- ---------------
(1) After giving effect to the conversion of the 5,000,000 outstanding shares of
Series A Preferred Stock into the 1,666,611 Converted Shares, but assuming
no exercise of any of the options granted pursuant to the 1998 Stock Option
and Incentive Plan.
(2) Reflects the capital contributions of the existing holders of the Company's
shares of Common Stock.
19
<PAGE> 26
DIVIDEND POLICY
Holders of shares of Common Stock are entitled to dividends when, as and if
declared by the Board of Directors, out of funds legally available therefor.
Holders of the previously outstanding shares of Series A Preferred Stock were
entitled to an annual cumulative preferential dividend of $.09 per share, when
and as declared by the Board of Directors. On July 2, 1998, the Company declared
dividends of $.045 per share on the Series A Preferred Stock. Before any
dividends may be paid or declared with respect to the Common Stock, the Company
is required to pay dividends which had accrued and have not been paid with
respect to the Series A Preferred Stock for any period prior to the conversion
of the Series A Preferred Stock. The Company does not expect to pay any
dividends on the Common Stock in the foreseeable future. The Company intends to
use all retained earnings, if any, for working capital and to finance the
anticipated growth and expansion of its business enterprise.
20
<PAGE> 27
CAPITALIZATION
The following table sets forth the Company's capitalization (i) as of
August 31, 1998; and (ii) on a Pro Forma basis as adjusted to reflect the
conversion of the 5,000,000 shares of Series A Preferred Stock into 1,666,611
shares of the Company's Common Stock and the receipt of net proceeds from the
sale of 1,733,334 shares of Common Stock offered hereby, after deducting
underwriting discounts and commissions and estimated Offering expenses:
<TABLE>
<CAPTION>
AUGUST 31, 1998
---------------------
PRO FORMA
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Stockholders' equity:
Preferred Stock, no par value, 10,000,000 shares
authorized, of which 5,000,000 have been designated
shares of Series A Preferred Stock, par value $1.00,
and which have been issued and are outstanding; Pro
Forma As Adjusted: 10,000,000 shares authorized; no
shares issued and outstanding.......................... $ 4,726 -0-
Common Stock, no par value, 20,000,000 shares authorized;
5,151,350 shares issued and outstanding(1)(2); Pro
Forma As Adjusted: 20,000,000 shares authorized;
8,551,295 shares issued and outstanding................ 12,237
------- -------
Deficit Accumulated during Development Stage.............. (4,884) (4,884)
Accumulated Other Comprehensive Income (Loss)............. (84) (84)
Total stockholders' equity........................ $11,995 $
======= =======
</TABLE>
- ---------------
(1) Assumes the sale of 1,733,334 in the Offering and that neither the
Underwriters' Over-Allotment Option nor any of the Representative's Warrants
are exercised. Excludes all options granted to officers, directors and
employees of the Company pursuant to the 1998 Stock Option and Incentive
Plan. See "Remuneration of Directors and Officers -- 1998 Stock Option and
Incentive Plan."
(2) After giving effect to the 1:2 reverse stock split, effective August 20,
1998. Excludes the 1,666,611 Converted Shares issued upon the conversion of
the Series A Preferred Stock.
21
<PAGE> 28
DESCRIPTION OF BUSINESS
GENERAL
The Company is a development stage enterprise formed to capitalize on the
growing demand for financial services and products in Germany and other EU
countries. The Company will provide financial services consisting mainly of full
service securities brokerage, Internet discount brokerage, securities
underwriting, mutual fund distribution and asset management services to
individual and institutional investors in Germany and other EU countries, and
the United States. The Company has developed proprietary technology, systems and
software to provide retail and professional investors with a multi-lingual,
multi-currency, non-intrusive, cost effective, and secure state-of-the-art
electronic trading platform that will, usually within seconds, execute trades on
leading European and U.S. stock exchanges and trading markets from a desktop
terminal using one account from most locations throughout the world. See "Risk
Factors -- Dependence on Intellectual Property Rights." In addition to on-line
brokerage services available under the domain names "amdiv.de" and
"eu-trade.de," the Company is developing a family of mutual funds and plans to
underwrite and be a selling group participant in initial public offerings by EU
and U.S. companies. The Company and its subsidiaries have assembled a staff of
management, brokerage, asset management and marketing personnel, including
former employees of major German banks. See "Risk Factors -- Dependence on Key
Management and Principal Consultants."
The Company's management believes that an international financial services
group with management and offices in both Europe and the U.S. can attract a
clientele of institutional investors, banks, businesses and individuals. The
Company's business strategy is to provide individuals and small- to medium-sized
European banks with direct access to American financial markets and an
opportunity to invest in value-based mutual funds. The Company believes there is
a new and growing market in Germany and the EU for on-line securities brokerage
services and the distribution of U.S.-style investment products, as European
investors discover that other financial products are available as an alternative
to traditional savings account deposits in commercial banks. In addition, the
planned transition to the EURO in January 1999, is expected to increase the
demand for investments denominated in U.S. dollars.
The Company and its subsidiaries intend to market their services and
products in Europe through a systematic program of direct marketing to
prospective customers and through referral sources such as banks, insurance
providers, attorneys, accountants and, to a lesser extent, personal business
contacts. Over the next two years, the Company's expansion plans include the
formation of subsidiaries and commencement of financial services businesses in
Vienna, Austria; Madrid, Spain; Dublin, Ireland; and Zurich, Switzerland. See
"Risk Factors -- Management of Growth."
The Company intends to finance its business expansion through sales of
equity capital in Europe and the U.S. On March 31, 1998, the Company completed a
$5,000,000 private placement of its Series A Preferred Stock at a price of $1
per share in Germany, in an offering that was exempt from U.S. securities laws
under Regulation S. The 5,000,000 shares of Series A Preferred Stock were
converted into 1,666,611 shares of Common Stock in October 1998. Since its
inception in February 1997, the Company has sold approximately 4,500,000 (post
1:2 reverse split) shares of Common Stock for an aggregate consideration of
approximately $11,600,000 in private transactions pursuant to applicable
exemptions from registration under U.S. state and federal securities laws.
SECURITIES BROKERAGE AND RELATED SERVICES
Through its German subsidiary, ADAG, the Company will begin providing
securities brokerage services to individual investors and institutions in Europe
through the Internet and ADAG's registered representatives after ADAG has
received a full banking license in Germany, which is expected to occur in the
first quarter of 1999. The Company will offer trade execution for stocks, mutual
funds, options and bonds, as well as market data and research tools to investors
in Europe. The Company's U.S. broker-dealer subsidiary will act as the
introducing broker for all transactions involving U.S. securities that are
executed through the Company in the U.S. The electronic infrastructure and
primary systems necessary to operate the Company's securities brokerage business
are currently in place and are substantially operational. In addition to
executing trades, the
22
<PAGE> 29
Company plans to engage in underwriting initial public offerings of small to
medium-sized European companies, especially in Germany.
The Company believes it has developed substantial name recognition through
the aggressive advertisement of ADAG's services during the last six months. ADAG
has received over 10,000 applications for new accounts during the last six
months through the aggressive advertisement of its services in Germany, although
ADAG does not intend to take orders or otherwise commence its brokerage business
in Germany until it has received a full banking license. The Company cannot
provide any assurance or guarantee that the regulatory approvals necessary for
the Company to commence its planned securities brokerage business will be given
in a timely manner or at all, nor can the Company assure the number of accounts
that will be opened and maintained with it at any time or from time to time. See
"Risk Factors -- Delay in Commencing Operations."
The Company has developed a market segmentation approach to the planned
delivery of brokerage and advisory services in Europe. ADAG will provide retail
and institutional financial services under three distinct brand names, each of
which will offer a range of services and commission rates designed to attract
investors within specific demographic categories. See "-- Development of
Products and Services." This branding strategy will allow ADAG to align the cost
structures of its brokerage business with the level of services desired by its
customers. By providing clearing and execution services, ADAG will be able to
expand its customer base, provide synergies to its retail brokerage business,
enhance mutual fund distribution and diversify its revenues.
- EU TRADE(TM) will provide discount on-line securities brokerage services,
research and investment analysis tools exclusively through the Internet
using advanced electronic systems. EU TRADE(TM) also will provide
European investors interested in the U.S. securities market with
multi-lingual and multi-market and cross border on-line brokerage
services, including toll-free telephone access from seven EU countries.
This Internet-based system is targeted at European investors who seek an
efficient trading platform and require less personal advice.
- AMDIV.PRONET(TM) is a technologically advanced financial system that will
provide ADAG's correspondent European brokerage firms and financial
institutions with special terminals to access the major European and U.S.
stock markets through the Company's integrated computer network.
AMDIV.PRONET(TM) is expected to provide securities clearing and execution
services to up to approximately 700 independent broker-dealers,
depository institutions, registered investment advisers and financial
planners in Germany. AMDIV.PRONET(TM) offers a direct "Dial-In" terminal
based system, which is targeted at European registered representatives
who service the retail customers of correspondent institutional clients.
- AMERICAN DIVERSIFIED(R) will provide ADAG's high-net-worth customers with
a full range of brokerage services, private asset management and mutual
fund products, and is expected to engage in underwriting initial public
offerings of fast growing smaller companies. AMERICAN DIVERSIFIED(TM) is
targeted at high-net-worth customers who are willing to pay more for all
of the benefits of a full service firm, including personal support,
extensive research reports and complete product services.
INVESTMENT MANAGEMENT AND MUTUAL FUNDS
Through its U.S. subsidiaries, ADAM and ASI, the Company is engaged in the
management and distribution in the U.S. of the American Diversified Global Value
Fund, a value based equity fund that is a series portfolio of American
Diversified Funds, Inc., an open-end investment company registered under the
Investment Company Act of 1940. The Company currently has a new mutual fund
series portfolio in registration, the American Diversified International Value
Fund, (collectively with the Global Value Fund, the "Funds"). The Funds are
managed by ADAM, based on Benjamin Graham's "value investment" principles. Mr.
Graham authored "Security Analysis" and "The Intelligent Investor," which are
recognized texts on the fundamental value of common stocks. Mr. Graham and James
Buchanan Rea, Sr. affiliated in the early 1970's and started a private limited
partnership in 1976, which was organized as a mutual fund in 1982 and was
subsequently renamed and became American Diversified Funds, Inc. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation -- ADAM's Historical Operations." Ladas &
23
<PAGE> 30
Hulings, a leader in global value investing with over 25 years of experience,
became sub-advisor to the Global Value Fund in April 1998 and provides
day-to-day investment management (sub-advisory services) for the Funds.
The Company is in the process of registering an umbrella fund, American
Diversified Funds plc, in Ireland under the UCITS directive for distribution in
the EU, which will offer three sub-fund portfolios: the Global Value,
International Value, and SmallCap Value portfolios. Marketing and distribution
services are expected to be provided in Germany and other EU countries through
ADAG and contemplated alliances with medium-sized banks, broker-dealers and
insurance agents. See "The Company -- Organizational Structure."
The Company's U.S. subsidiary has hired additional executives and support
staff in the areas of asset management and brokerage services and retained
experts in the areas of technology, marketing, public relations, and management.
New computer systems, office equipment, phone systems, and technology are being
added to insure that efficient, cost effective, and customer oriented,
investment products and services are available in both the U.S. and EU markets.
THE BUSINESS OPPORTUNITY
The Company believes that there is a new and growing market in the EU for
multi-lingual and cross-border financial services and products primarily due to
the following factors: (i) the planned transition in 1999 to a single European
currency, the EURO; (ii) implementation of regulatory reforms in Germany and
other EU countries, which have removed substantial barriers to entry into the
securities brokerage market; (iii) implementation of the UCITS directive in
October 1989, which was designed to create a single EU mutual funds market and
has expanded the range of available funds for distribution in Europe; (iv) the
continuing growth of the mutual fund market; and (v) the Xetra(R) electronic
trading system of the Frankfurt Stock Exchange, which has expanded the number of
tradeable instruments and execution possibilities for electronic securities
trading. The integration of other major European stock exchanges into this
system and NASDAQ's reported interest in participating, creates the possibility
of a Pan-European stock market for the future. Additionally, regulatory reforms
in Germany and other EU countries have enabled smaller financial services
companies to compete for investment dollars traditionally flowing to savings
account deposits at commercial banks.
The services offered by the Company are typically provided in Germany today
through banks and savings institutions, which cater primarily to large
institutional investors rather than to individuals. Management of the Company
believes it has identified a niche market in Germany and the EU for providing
discount securities brokerage services to individual and small institutional
investors, including the marketing of U.S. mutual fund products. Brokerage
services offered by German banks are targeted for large institutional customers,
are expensive and do not address the needs of individual investors. German banks
typically encourage private clients to maintain savings accounts, and bank
personnel typically lack the incentives and expertise to provide individual
customers with U.S. style investment services. The large U.S. investment firms
operating in Germany typically prefer to market only to large institutional
clients and require minimum account balances in the $1,000,000 range. On the
investment banking side, there were approximately 31 public equity securities
offerings in Germany during 1997, and 71 have been completed to date in 1998.
The Company believes there is a strong and growing demand for investment banking
and financial consulting services for emerging growth companies in Germany, from
the early financing through the initial public offering stage.
Management believes that an international financial services group with
offices in both the United States and Europe can attract a diverse clientele,
including institutional investors, banks and individuals. The Company is
particularly focusing on Germany. The interest of German investors in foreign
securities and equity investments is growing rapidly, as are the German capital
markets. Germany's sole clearing organization, Deutsche Boerse Clearing has
reported a rise in deposits of foreign securities from 53.4 billion German Marks
to 100.8 billion German Marks, an increase of 47.4 billion German Marks (+88.8%)
during the years 1996 to 1997. During the first six months of 1998, the deposits
of foreign securities totaled 136.5 billion
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German Marks. Management believes that these favorable conditions have created a
strong demand for the implementation of advanced electronic trading systems with
direct access to the worldwide equity markets.
SECURITIES INDUSTRY DEVELOPMENTS IN GERMANY
Before January 1998, the German market for financial products was
traditionally dominated by a group of large banks and insurance companies
marketing savings-oriented investment vehicles to their depositors. Companies
interested in expanding their asset base through capital investment or
acquisitions have been generally required to fund the undertaking through cash
flow generated from operations or bank loans.
In an effort to harmonize financial services regulations within the EU,
German policies were changed with the revision of existing banking laws (6.
Novelle des KwGs) which became effective on January 1, 1998. These changes
allowed for the unbundling of investment services in Germany and have brought
small and medium-sized distributors of financial products under the regulation
and supervision of the "Bundesaufsichtsamt fur das Kreditwesen (BaKred)," the
authority that regulates the German banking industry.
At the same time, the demand for equity financing in Germany has steadily
grown after the initial public offering of Deutsche Telekom in 1996. The "Neuer
Markt" was created in March 1997 on the Frankfurt Stock Exchange to provide a
market for technologically innovative companies. The market growth potential in
Germany is significant. Prior to opening the "Neuer Markt", only 10 to 20
companies annually registered on the established exchanges in Germany. Since
March 1997 the number of initial public offerings has increased by approximately
230%. The Company believes that the market will continue to expand as more
entrepreneurs realize the competitive advantage associated with a higher capital
base.
These developments brought about the advent of regulated brokerage and
financial services firms, which provide financial advisory services and trade
execution services at a lower price than the banking institutions. Although
investors have been able to use discount brokerage services provided by
subsidiaries of major banks, the Company believes that many investors will
prefer to use the Internet discount brokerage services to be provided by the
Company, which will offer faster execution and are expected to be more efficient
and competitively priced as compared to traditional bank brokerage services.
The unbundling of brokerage services from the banking industry has
permitted investors to pick and choose among various financial service providers
for specified services. As a result, firms have emerged which provide the
services usually provided by banking institutions. Firms now specialize in
providing investment advice, financial information, and financial planning
services. Other firms specialize in providing underwriting services and discount
securities brokerage.
Consumers now have greater access to powerful, yet inexpensive technology
and are becoming more comfortable with and proficient in the use of this
technology. The use of this new technology to sort and deliver vast amounts of
information, to facilitate inexpensive communication of data and for the
completion of financial transactions has been growing at an accelerating rate.
Specifically, the Internet has produced thousands of new cyber-investors every
day, primarily through the World Wide Web.
Investors are becoming more self-reliant and value conscious in the pursuit
of their financial goals. Investors are increasingly willing to acquire the
information and understanding of investment alternatives and have become
increasingly sophisticated and knowledgeable about investing. Access to a broad
range of financial information and advice has decreased the necessity for
full-service brokers. These investors make their own decisions about their
financial future and tend to seek greater value, often in the form of lower
transaction costs. As a result, management believes the use of discount brokers
and directly marketed no-load mutual funds has increased in Germany.
Management believes the convergence of these trends is creating a new
marketplace for financial services. It is also creating a "new investor," who is
self-reliant, comfortable with the use of technology and value oriented. The
Company seeks to be the leading provider of financial services in Germany, and
eventually the EU, to this "new investor."
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BUSINESS STRATEGIES
The Company's ability to implement its business strategies successfully is
dependent on obtaining a full banking license in Germany and approval for
conducting expanded brokerage activities in the U.S., successfully establishing
customer accounts, fully integrating its international systems and links to the
major European and U.S. stock exchanges and trading markets, and a variety of
other internal and external factors. See "Risk Factors." The Company is a
development-stage enterprise and the success of the business strategies cannot
be fully known until the Company has commenced full operations. There can be no
assurance that the Company will successfully implement its business strategies
or achieve its operational goals.
The Company seeks to exploit the opportunities created primarily as a
result of regulatory reforms and changing conditions in the financial services
industry generally, and particularly in Germany and other EU countries, and to
expand its market share by pursuing the following key strategies:
- Market Distinct Brands. ADAG will market distinct brands with a range of
services and commission rates designed to appeal to specific groups of
investors within the financial services market. The Company believes
that, by tailoring products and services for customers within specific
demographic categories, ADAG can attract a broader range of investors
seeking brokerage services at discount prices. ADAG will offer discount
on-line brokerage services in Europe under the EU TRADE(TM) brand name,
which has been created for European investors seeking simple and
efficient execution services at the lowest possible transaction cost, and
European investors who are comfortable with the Internet and prefer to
trade exclusively through electronic communications in exchange for
low-priced trade executions. EU TRADE(TM) is designed to be the first
global on-line brokerage system and will provide European clients with
access to multiple securities markets using a single account. The
tradename AMERICAN DIVERSIFIED(R) has been created to designate ADAG's
system that provides high-net-worth customers with a full range of
brokerage services, private asset management and mutual fund products,
and underwriting services. AMDIV.PRONET(TM) is the tradename of a
technologically advanced financial system that will provide ADAG's
correspondent European brokerage firms and financial institutions with
special terminals to access the major European and U.S. stock exchanges
and trading markets through the Company's integrated computer network.
Through this market segmentation approach, management believes that the
Company and its subsidiaries will be able to deliver products and
services tailored to meet the specific needs of its customers in the most
cost efficient manner. See "-- Development of Products and Services."
- Create Technologically Innovative Solutions to Investor Needs. Since
April 1997, the Company has worked on the development of its integrated
electronic systems, which combine the Company's newly developed software
with existing electronic services in the U.S. and Europe. EU TRADE(TM)
and AMDIV.PRONET(TM) each comprise a single-source trading system for
U.S. and European stocks, which offer immediate execution services. The
"Dial-In" feature of AMDIV.PRONET(TM) provides institutional
correspondents with a secure link to Europe's and the U.S.'s major stock
markets using special terminals, which enable direct access through the
Company's integrated computer network. The Company is actively pursuing
additional technologies to service the rapidly evolving financial
services industry. See "-- Development of Products and Services." The
Company believes it has adequate protection for the proprietary
technology it has developed under German law, but is developing
confidentiality and non-competition agreements and other internal
security measures to protect its developed technology in the U.S. and the
other EU countries. See "-- Development of Products and Services" and
"Risk Factors -- Dependence on Intellectual Property Rights."
- Provide Transaction Value to Investors. The Company strives to offer
investors transaction value by providing specified services at prices
that are among the lowest in the discount brokerage industry. EU
TRADE(TM) will be offered generally at a flat commission rate on
Internet-only trades for equity orders having a market value of up to
EURO 11,000. AMERICAN DIVERSIFIED(R) will provide investors with access
to trained registered representatives and other customized services for a
fee equal to .44% of the order volume, for each equity order. Through
more efficient operations, synergies of strategic alliances, an
increasing number of transactions and the use of advanced technology, the
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Company strives to minimize costs, which are designed to allow the
Company to offer what it believes are some of the best transaction values
in the industry. See "-- Development of Products and Services" and
"-- Competition".
- Expand Mutual Fund Products and Distribution. ADAM has been expanding its
sponsorship and distribution of mutual funds by developing a new mutual
fund series portfolio in the U.S., the International Value Fund. In
addition, ADAM is in the process of registering an umbrella fund in
Dublin, Ireland, under the UCITS directive for European distribution,
which will offer three sub-fund portfolios: the Global Value,
International Value and SmallCap Value portfolios. The Ireland-based
funds will be distributed initially in Germany and thereafter in other EU
countries through ADAG's distribution network and other channels in
Europe.
- Expand the Underwriting of Initial Public Offerings. ADAG will engage in
underwriting initial public offerings for small and medium-sized EU
companies that plan to be listed on either a leading European or U.S.
stock exchange or trading market. ADAG has commenced due diligence review
of a few companies in connection with proposed initial public offerings.
ADAG intends to expand its underwriting business to take advantage of the
increased demand for equity financing among small and medium-sized
companies in the EU, commencing with activities in Germany. There were
approximately 31 public equity securities offerings in Germany during
1997, and 71 have been completed to date in 1998. The Company believes
there is a strong and growing demand for investment banking and financial
consulting services for emerging growth companies in Germany, from the
early financing through the initial public offering stage.
DEVELOPMENT OF PRODUCTS AND SERVICES
The Company has developed a broad range of products and services designed
to address specific consumer needs and the Company is actively pursuing
opportunities to improve and increase the products and services offered to
customers. The development of products and services by the Company and its
subsidiaries will continue to require substantial capital expenditures. See "Use
of Proceeds." The Company expenses all research and development costs as they
are incurred. The Company regularly monitors the costs and projected benefits of
its product and service developments to determine their continued viability. The
Company does not believe that the failure of any of its products and services
would have a material adverse effect on the Company's future business, financial
condition or operating results. See "Risk Factors -- Rapidly Evolving Markets"
and "Risk Factors -- Risks Associated with New Products and New Markets."
Securities Brokerage Services
ADAG will provide Internet-discount brokerage services in Europe under the
brand name EU TRADE(TM) and traditional full-service brokerage services for its
high-net-worth clients under the brand name AMERICAN DIVERSIFIED(R). See
"-- Servicemark Application." ADAG has also developed AMDIV.PRONET(TM), a brand
of services for European brokerage firms, banking institutions and other
institutional correspondents to access the major U.S. and European stock markets
on special terminals through the Company's integrated computer network. Through
this market segmentation approach, ADAG will offer a variable range of services
and competitive rate structures designed to attract specific groups of
individual and institutional investors in Europe.
LOGO
EU TRADE(TM) will provide discount brokerage services through a
state-of-the-art trading platform utilizing technologically advanced processing
and delivery systems for sophisticated on-line investors via the Internet. EU
TRADE(TM) customers in Germany and other EU countries will be able to place
trades, obtain quotes and review pertinent account information electronically
using the Internet. EU TRADE's(TM) web site will allow customers to enter orders
for stocks, mutual funds and options, to view their balances, positions, order
status, quotes and transaction history and to use research provided by various
data service providers. The
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<PAGE> 34
research and market data available for EU TRADE(TM) customers will include
historical and intra-day charts, company reports, earnings estimates, stock
screening and general market information.
EU TRADE(TM) will offer an advanced program trading feature, which will
allow customers to create conditions under which orders will be placed and then
have their personal computer monitor the market to automatically place the
order. Customers will be able to design baskets of stocks to track and trade.
Investors also will be able to place spread, straddle and buy/write orders using
the EU TRADE(TM) features no other competing on-line-brokerage in Europe offers.
In addition, the system will provide investors access to multiple news and
research services. Customers will be able to access company highlights or
detailed company reports and earnings estimates from a variety of data banks. A
prototype system offering the above-described features is in the final stage of
development and is undergoing testing at this time.
In addition, EU TRADE(TM) will offer a wide range of third-party research
services to assist its customers in selecting the best trading strategy. Stock
research will include professional reports on over 20,000 listed companies on
the major U.S. and European exchanges, qualitative and quantitative analyses on
all major industry sectors and ranking tables, including performance ratios for
large, middle and small cap stocks. EU TRADE's(TM) stock alerts will notify
clients of earnings announcements, dividend reports, price changes of more than
three percent and other significant events affecting investments.
EU TRADE(TM) will cater to investors who are comfortable with the Internet
and prefer to trade exclusively through electronic communications in exchange
for low priced trade executions. Customer inquiries will be accepted via e-mail
and representatives are required to respond within two hours, although responses
usually are sent by return e-mail promptly. Although EU TRADE(TM) will maintain
toll-free telephone numbers for customer inquiries, these inquiries will be
limited to technical support and customer inquires during specified time
intervals. EU TRADE(TM) expects to charge a commission of EURO 12.00 for equity
orders having a market value of up to EURO 11,000. Management believes that EU
TRADE(TM) will offer one of the lowest commission rates in the industry in
Germany, especially on U.S. securities.
LOGO
AMDIV.PRONET(TM) will be a wholesale provider, in Germany and other EU
countries, of discount brokerage and other financial services to independent
broker-dealers, registered investment advisors and financial planners, including
smaller banks, who serve their own retail customers. AMDIV.PRONET(TM) will act
as the discount brokerage arm of correspondent institutional clients by
providing their retail customers with access to equity and bond markets. ADAG
will maintain a staff of registered representatives to service the retail
customers of correspondent institutional clients using AMDIV.PRONET(TM).
The Company will also provide traditional full-service securities brokerage
and advisory services through its U.S., German and Irish subsidiaries under the
AMERICAN DIVERSIFIED(TM) brand name. AMERICAN DIVERSIFIED(TM) has been designed
to provide the benefits of a full service firm, including personal support,
extensive research reports and complete product sets.
The Company may, in the future, also engage in margin lending to customers
collateralized by customers' securities, although it is not presently prepared
to do so. Margin lending is subject to the margin rules of the Board of
Governors of the Federal Reserve System, NASD margin requirements, as well as
margin rules established by banking regulatory authorities in Germany. By
permitting customers to purchase on margin, the Company will take the risk of a
market decline that could reduce the value of the collateral held by the Company
to below the customers' indebtedness before the collateral can be sold. Under
applicable NASD rules, in the event of a decline in the market value of the
securities in a margin account, the Company will be obligated to require the
customer to deposit additional securities or cash in the account so that at all
times the customer's equity in the account is at least 25% of the value of the
securities in the account. Margin lending to customers is also expected to
constitute a major portion of the basis on which net capital requirements of the
Company are determined under the Net Capital Rule and the net capital rule
established by the banking
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regulatory authorities in Germany. To the extent these activities expand, the
Company's net capital requirements will increase. See "Risk
Factors -- Regulation" and "-- Effect of Net Capital Requirement." The Company
does not plan to engage in any margin lending activities except in full
compliance with the applicable requirements. Should it determine to do so,
substantial additional capital will be required, the availability and terms of
which cannot be assured. See "Use of Proceeds" and "Risk Factors -- Need for
Additional Capital."
Moreover, the continued development of the Company's products and services
will continue to require substantial capital expenditures. See "Use of
Proceeds."
The following chart summarizes by brand these planned services and the
average commission per trade that ADAG expects to charge its customers:
<TABLE>
<CAPTION>
AMERICAN DIVERSIFIED(R) EU TRADE(TM) AMDIV.PRONET(TM)
----------------------- ------------ ----------------
<S> <C> <C> <C>
WAYS TO TRADE
Internet......................... -- EURO 12.00* EURO 10.00 *
Personal terminal................ EURO 20.00 -- --
Professional Terminal............ -- -- EURO 14.00 *
Registered representative........ EURO 22.00** -- --
PRODUCTS
U.S.-Stocks...................... x x x
European-Stocks.................. x x x
Foreign-Stocks................... x x x
Mutual funds..................... x x x
Options.......................... x x x
Bonds............................ x x x
Foreign securities............... x x x
SERVICES OFFERED
Live quotes...................... x*** -- x
10 Minute delayed quotes......... -- x --
Research tools................... x*** x x
Credit card...................... x -- --
Debit card....................... -- x --
Check writing.................... x -- --
News search...................... x*** x x
Program investing................ x x x
Day trading...................... x*** x x
</TABLE>
- ---------------
* For equity orders having a market value of up to EURO 11,000.
** 0.20% of the market value or a minimum charge of EURO 22.00.
*** With personal terminal only.
MUTUAL FUND PRODUCTS
ADAM's mutual fund families in the U.S. will consist of value-oriented
mutual funds, including:
- American Diversified Global Value Fund
- American Diversified International Value Fund*
ADAM's mutual fund families established in Ireland for distribution in the
EU will consist of value-oriented mutual funds, including:
- American Diversified Global Value Fund*
- American Diversified International Value Fund*
- American Diversified SmallCap Value Fund*
- ---------------
* In registration.
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The Funds are managed by ADAM, based on Benjamin Graham's "value
investment" principles. Mr. Graham authored "Security Analysis" and "The
Intelligent Investor," which are recognized texts on the fundamental value of
common stocks. Ladas & Hulings, a leader in value investing with over 25 years
of experience, will serve as investment sub-advisor to the Funds and will
provide their day-to-day management. Portfolios managed by Ladas & Hulings have
been rated by Nelson's Information as among the "Top 20" Money Managers -- 10
year returns. There can be no assurance, however, as to the future performance
of the Funds or any mutual funds managed by the Company or with a sub-advisor.
A principal component of the Company's planned expansion involves marketing
the Funds to institutional investors. The Company plans to develop a special
class of institutional series or shares for distribution to institutional
investors. As the Funds grow in size, the revenues and profitability of ADAM are
expected to increase because ADAM's revenues and income will be based on the net
assets of the Funds and with other mutual funds that it may manage in the
future. Currently, the Funds are small, and their growth cannot be assured.
MARKETING
The Company and its subsidiaries seek to increase their market share
through direct-response advertising, advertising on their own and other Web
sites, a public relations program and co-marketing programs. ADAG has recently
completed an aggressive marketing campaign in Germany designed to bring brand
name recognition to ADAG's product lines. The Company intends to increase
significantly its spending on print, television, radio, direct mail,
telemarketing and online advertising during the next fiscal year. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Plan of Operation" and "Use of Proceeds." From time to time, the
Company may choose to increase spending on advertising to target specific groups
of investors or to decrease advertising expenditures in response to market
conditions.
ADAG's marketing focus in Germany is on advertising its discount brokerage
services as a less expensive and more efficient way of initiating transactions,
building awareness of the Company's product lines and the benefits of the
Company's services. Print advertisements are placed in a broad range of the
leading business, technology and financial publications, including HANDELSBLATT,
WIRTSCHAFTSWOCHE, CAPITAL, FOCUS and in the financial section of major daily
newspapers in Germany. ADAG also employs online advertising through Yahoo!,
America Online, CompuServe and other popular Web sites such as, FOCUS-Online.
ADAG's commercials are featured regularly on N-TV, Germany's leading channel for
stock exchange reports and during business programs of other major television
networks. ADAG also uses telemarketing and direct mail to advertise its products
and services. ADAG's aggressive advertising program in Germany has significantly
contributed to the increase in new account applications, which may be utilized
by ADAG after it has commenced its broker-dealer operations. ADAM plans to
expand the advertising of its mutual fund products in the U.S., and to build
awareness of the Funds' value investment approach.
At the Company's Web sites, prospective customers both in the U.S. and
Europe will be able to obtain detailed information on the services offered by
the Company and its subsidiaries, use an interactive demonstration system,
request additional information and complete an account application online.
Visitors to the Company's German Web site can obtain detailed information about
the U.S.-equity markets, NASDAQ and all major European stock exchanges. The
Company's programmers have developed a search engine which provides financial
information from over 800 sources. See "Risk Factors -- Dependence on
Intellectual Property Rights." Visitors to ADAM's U.S.-based Web site will be
able to obtain performance information on the funds, request literature and
prospectuses online, download reports and get basic information about ADAM's
value investment approach. Based on the increased number of visits to the
Company's Web sites, the Company believes that on-line advertising is a
significant factor in increasing brand awareness and generating leads, as
consumers increasingly look to the Internet as a key source of information and
commercial activity.
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The Company also pursues public relations opportunities to build brand
awareness, which has resulted in interview appearances on television and radio
stations in Germany, profiles in the business section of a variety of daily
national newspapers, and attendance at trade conferences for the brokerage
industry in Germany. The Company also actively seeks speaking opportunities at
industry conferences and events in Europe.
CUSTOMER SERVICE
The Company and its subsidiaries strive to optimize the level of customer
service provided to their clients by (i) expanding their use of technology to
handle most typical inquiries generated in the course of customers' securities
trading and related activities, (ii) ensuring adequate staffing with properly
trained and motivated personnel in their customer service departments, enabling
prompt response to customer inquiries and (iii) tailoring customer service to
the particular expectations of the clients of each of their respective services.
In order to optimize the level of service provided to European customers,
ADAG has installed advanced call handling capabilities and provides 24 hours,
365-day live customer service through an 800-number. The new phone-systems
provide automated answering, departmental call forwarding, information on
expected wait times, summary market data while on hold and integrated voice-mail
and response capabilities. The new telephone systems also allow linkage between
the caller identification units and the customer database to provide customer
service representatives with immediate access to customer's account data. It is
expected that these telephone systems will increase call-handling efficiency and
enhance the customers' experience when calling for service, particularly during
periods of heavy market activity.
The Company and its subsidiaries have also developed software and Web sites
which provide basic information on how to use the Company's services. For those
inquiries that cannot be answered through one of the Company's automated
systems, customers are encouraged to use e-mail for matters that are not time
sensitive. The Company's operating standards require a response within two hours
of receipt of the e-mail for such matters; however, the Company strives to
respond within 30 minutes of the original message. The Company also maintains
electronic bulletin boards where customers and potential customers can ask
questions and exchange information about the Company's services.
The Company plans to monitor the level of overall customer satisfaction
through use of customer response cards sent with trade confirmations or through
periodic surveys. Written comments, e-mails and electronic postings by customers
will be regularly reviewed by the Company's senior officers. The Company has
established a policy to respond to all customer questions or complaints,
regardless of their mode of transmission.
COMPETITION
All aspects of the Company's investment management business are intensely
competitive. The Company competes with U.S. brokerage firms which have
affiliates in Germany and other EU countries and with German banking
institutions which are authorized, under German law, to offer both traditional
brokerage functions and investment advisory services. The Company encounters
significant competition in connection with the operation of its business in the
U.S. for its mutual fund products. The Company's competitors in the U.S. include
numerous enterprises with extensive experience in the financial services sector.
Therefore, the Company intends to use the bulk of its marketing resources to
promote its investment products in Europe, where it expects initially to
encounter only limited competition for its discount brokerage services and the
distribution of mutual funds to its targeted potential clientele in Germany, its
primary marketing area. The services offered by the Company are typically
provided in Germany today through banks and savings institutions, which cater
primarily to large institutional investors rather than to individuals.
Management of the Company believes it has identified a niche market in Germany
and the EU for providing discount securities brokerage services to individual
and small institutional investors, including the marketing of U.S. mutual fund
products. Brokerage services offered by German banks are targeted for large
institutional customers, are expensive and do not address the needs of
individual investors. German banks typically encourage private clients to
maintain savings accounts, and bank personnel typically lack the incentives and
expertise to provide individual customers with U.S. style investment services.
The large U.S. investment firms
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operating in Germany typically prefer to market only to large institutional
clients and require minimum account balances in the $1,000,000 range. On the
investment banking side, there were approximately 31 public equity securities
offerings in Germany during 1997, and 71 have been completed to date in 1998.
The Company believes there is a strong and growing demand for investment banking
and financial consulting services for emerging growth companies in Germany, from
the early financing through the initial public offering stage.
The Company expects competition to continue and intensify in the future.
There are currently approximately ten discount brokerage firms in Germany, all
of them wholly owned subsidiaries of German commercial banks. These discount
brokerage firms include Comdirect Bank, ConSors Dicount Broker, Advance Bank,
Brokerage24 and Direkt Anlage Bank. The Company also encounters competition from
the established banks, which provide full-commission brokerage services as well
as mutual fund sponsors and other organizations, some of which provide
electronic services. Although these competitors are well established, they
generally lack the ability to provide prospective customers with the desired
capabilities in international securities trading. None of these competitors
offer direct execution of U.S. securities after 5:30 P.M., when the German
exchanges stop trading and, during the trading session, fast order execution for
U.S. securities is limited to the stock of the U.S. companies listed on one of
the German exchanges.
The Company believes that providing investors with the ability to buy, sell
and execute trades in U.S. securities until the close of the trading session in
the U.S., 10 P.M. German time, will give the Company's Internet brokerage a
significant advantage over all its competitors. This will give ADAG's on-line
customers the ability for day trading in U.S. securities during the entire
period from 8:30 A.M. to 10 P.M. German time.
The Company believes that the principal competitive factors affecting the
market for its discount brokerage services are price, customer service, quality
and speed of trade execution, delivery platform capabilities, ease of use,
graphical user interface, breadth of services and innovation. Firms compete on
the elements of price, technology, financial strength and customer service.
Based on management's experience, preliminary market research and the success
the Company's marketing campaign has enjoyed to date, the Company believes that
it can compete effectively with respect to each of these factors.
In addition, factors affecting the Company's business expansion success
include: 1) the abilities, performance records and reputations of its investment
managers; and, 2) its ability to develop new investment products and implement
marketing strategies in the U.S. and Europe. The marketability of the Company's
investment products, primarily mutual funds, is also dependent, in part, on the
relative attractiveness of their investment strategies and practices under
prevailing market conditions. There are relatively few barriers to entry by new
investment management firms or distributors of U.S. mutual funds in the EU
markets. This lack of entry barriers may facilitate the introduction of new
investment products by the Company, although it may also lead to increased
competition from other securities firms.
The general financial success of companies within the securities industry
over the past several years has strengthened existing and emerging competitors.
The Company believes that such success will continue to attract new competitors
to the industry such as large U.S. discount brokers such as E*TRADE, Charles
Schwab, AmeriTrade and similarly structured groups. Charles Schwab has already
commenced operations in Great Britain and is monitoring the German and European
markets closely. "E*TRADE" has signed a licensing agreement with E trade Central
Europe, Inc, which is owned by two emerging German financial services firms.
Commercial banking institutions and other financial institutions have become a
competitive factor in the securities industry by offering their customers
discounted financial services. While it is not possible to predict the type and
extent of competitive services that the banking institutions and other newly
emerging financial institutions ultimately may offer, the Company may be
adversely affected by such competition.
There can be no assurance that the Company will be able to compete
effectively with current or future competitors or that the competitive pressures
faced by the Company will not have a material adverse effect on the Company's
business, financial condition and operating results. See "Risk
Factors -- Competition."
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GOVERNMENT REGULATION
The international investment management and broker-dealer operations are
subject to extensive regulation, supervision and licensing under various U.S.
federal and state laws and regulations and under the securities and corporate
laws and regulations of the European countries under which it will market its
financial services.
ADAM's operations in the U.S. are subject to extensive regulation under
U.S. federal and state securities laws. The Commission is the federal agency
responsible for administering the federal securities laws in the U.S. In
general, broker-dealers are required to register with the Commission under the
Exchange Act. Under the Exchange Act, every registered broker-dealer that does
business with the public is required to be a member of and is subject to the
rules of the NASD. The NASD has established Rules of Fair Practice, which are
subject to the Commission's approval, for all securities transactions among
broker-dealers and private investors, trading rules for the over-the-counter
markets, and operational rules for its member firms. The NASD conducts
examinations of member firms, investigates possible violations of the federal
securities laws and its own rules, and conducts disciplinary proceedings
involving member firms and associated individuals. The NASD administers
qualification testing for all securities principals and registered
representatives for its own account and on behalf of the state securities
authorities.
In addition, broker-dealers are subject to extension regulations under
state laws. A recent amendment to the federal securities laws prohibits the
states from imposing substantive requirements on broker-dealers, which exceed
those imposed under federal law. The recent amendment, however, does not
preclude the states from imposing registration requirements on broker-dealers
that operate within their jurisdiction or from sanctioning such broker-dealers
for engaging in misconduct.
ASI is being established to assume the broker-dealer and underwriting
functions of ADAM. After the transfer is completed, ASI will be subject to
regulation as a broker-dealer. ADAM will continue as a registered investment
advisor under the Investment Advisers Act of 1940, as amended. ASI will also
succeed to ADAM's broker-dealer registration in the State of California.
ADAG, the Company's German subsidiary, is subject to regulation under
German law and in the various EU jurisdictions it may operate under in the
future. Germany recently revised its banking laws and for the first time,
financial service providers and broker-dealers are subject to rules and
regulation and supervision of the various regulatory agencies, mainly the
Bundesaufsichtsamt fuer das Kreditwesen ("BaKred"), the body regulating the
banking industries, as well as the Bundesaufsichtsamt fuer Wertpapierhandel
("BAWH"), the body regulating the securities transactions and stock exchanges
and the Bundesbank, Germany's Central Bank. The revision of the banking law was
adopted in October 1997 and became effective on January 1, 1998. ADAG currently
has a license which permits it to engage in product distributions, underwriting
and asset management activities. Due to the uncertainties regarding
interpretation of the new laws, ADAG has filed an application with the "BaKred"
to extend its current license to a full banking license. Upon approval of its
full banking license, ADAG will commence operations as a fully licensed bank and
brokerage firm. The Company cannot provide any assurance or guarantee that the
regulatory approvals necessary for ADAG to commence its planned securities
brokerage operations will be given in a timely manner or at all. See "Risk
Factors -- Delay in Commencing Operations."
All marketing activities by ADAG regulated by the BaKred, and all such
marketing materials are required to be reviewed by the Company's compliance
officer prior to release. If ADAG were to engage in soliciting orders or making
investment recommendations, it would become subject to additional rules and
regulations governing, among other things, the suitability of recommendations to
customers and sales practices.
ADAG will be engaged in clearing and settling transactions and maintaining
customer accounts. In its capacity as a depository bank, ADAG has to be a member
of the "Einlagensicherungsfond", the depository trust fund of the German Banking
Association. There can be no assurance that ADAG will be accepted as a member in
the future. As a depository bank, ADAG will be further required to comply with
the rules of
33
<PAGE> 40
banking institutions, including rules relating to possession and control of
customer funds and securities, margin lending and execution and settlement of
transactions.
NET CAPITAL REQUIREMENTS; LIQUIDITY
As a registered broker-dealer and member of the NASD, ADAM, the Company's
U.S. subsidiary, is subject to the Net Capital Rule. The Net Capital Rule, which
specifies minimum net capital requirements for registered brokers-dealers, is
designed to measure the general financial integrity and liquidity of a broker-
dealer and requires that at least a minimum part of its assets be kept in
relatively liquid form. As the planned successor to ADAM's broker-dealer
functions, ASI will be subject to the same rules and requirements as a
broker-dealer. ADAM is in compliance with applicable net capital requirements.
Currently ADAM is required to maintain a minimum net capital of $5,000, although
with the anticipated expansion of its broker-dealer activities, it will be
required to maintain a minimum net capital of $100,000, or $250,000, if the
business is further expanded to include margin lending and other activities. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation -- ADAM's Historical Operations."
As a depository bank, ADAG will be subject to the net capital requirements
of the "Kreditwesengesetz." The law presently requires a minimum net capital of
10 million German Marks (approximately $5.6 million), for the operations planned
by ADAG. The BaKred can increase the net capital requirement at any time.
In general, net capital is defined as net worth (assets minus liabilities),
plus qualifying subordinated borrowings and certain discretionary liabilities,
and less certain mandatory deductions that result from excluding assets that are
not readily convertible into cash and from valuing conservatively certain other
assets. Among these deductions are adjustments (called "haircuts"), which
reflect the possibility of a decline in the market value of an asset prior to
disposition.
Failure to maintain the required net capital by either subsidiary may
subject a firm to suspension or revocation of registration by the Commission or
BaKred, and suspension or expulsion by the NASD and other regulatory bodies and
ultimately could require the firm's liquidation. The Net Capital Rule prohibits
payments of dividends, redemption of stock, the prepayment of subordinated
indebtedness and the making of any unsecured advance or loan to a stockholder,
employee or affiliate, if such payment would reduce the firm's net capital below
a certain level. The Net Capital Rule also provides that the Commission may
restrict for up to 20 business days any withdrawal of equity capital, or
unsecured loans or advances to stockholders, employees or affiliates ("capital
withdrawal") if such capital withdrawal, together with all other net capital
withdrawals during a 30-day period, exceeds 30% of excess net capital and it is
determined that the capital withdrawal may be detrimental to the financial
integrity of the broker-dealer. In addition, the Net Capital Rule provides that
the total outstanding principal amount of a broker-dealer's indebtedness under
certain subordination agreements, the proceeds of which are included in its net
capital, may not exceed 70% of the sum of the outstanding principal amount of
all subordinated indebtedness included in net capital, par or stated value of
capital stock, paid in capital in excess of par, retained earnings and other
capital accounts for a period in excess of 90 days.
A change in the Net Capital Rule, the imposition of new rules or any
unusually large charge against net capital could limit those operations of the
Company that require the intensive use of capital, such as the financing of
customer account balances, and also could restrict the Company's ability to
withdraw capital from its brokerage subsidiaries, which in turn could limit the
Company's ability to pay dividends, repay debt and repurchase shares of its
outstanding stock. A significant operating loss or any unusually large charge
against net capital could adversely affect the ability of the Company to expand
or even maintain its present levels of business, which could have a material
adverse effect on the Company's business, financial condition and operating
results. The Company's broker-dealer subsidiary is expected to maintain a
minimum net capital well in excess of the present minimum net capital
requirement.
ADAM is a member of Securities Investor Protection Corporation ("SIPC"),
which provides, in the event of the liquidation of a broker-dealer, protection
for customers' accounts held by each of them of up to $500,000 for each customer
account, subject to a limitation of $100,000 for claims for cash balances.
ADAM's SIPC membership will be transferred to ASI.
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<PAGE> 41
EMPLOYEES
As of August 31, 1998, the Company employed a total of 24 full-time
associates, including management, and 12 part-time associates. The Company
believes that its future success will depend on its continued ability to attract
and retain highly skilled and qualified employees. The Company believes that its
relations with its employees are good.
The Company's employment assessment process is a critical factor in
identifying candidates whose abilities and potential create the opportunity to
be a successful associate with the Company. The assessment process includes an
in-person interview, a work-related behavioral trait profile, a cognitive
reasoning assessment test, a telephone structured interview to measure
communication skills, and a data entry "keyboarding" or computer skills test
when appropriate. The Company believes based on its experience to date that its
employment assessment process has a positive impact on the Company's success.
The Company has approved a policy of paying cash bonuses to its management
and non-management employees out of a pool based on a percentage of annual
income. Bonuses are based upon the success of the Company and the individual job
performance of the employee.
The Company believes that the continuous training of its management,
employees and part-time associates is a key factor for the Company's ability for
rapid growth. The Company has established a training facility in Berlin and
implemented a training schedule.
SYSTEMS
The Company will use a variety of systems to support investors and the
Company's correspondents. The Company currently is developing a sophisticated
proprietary computer network that will link the various trading applications to
the proprietary core system, the AMDIV Operating System ("AMDOS"). All of the
customer trading applications will interface and feed data through standardized
messaging and formatting into AMDOS. AMDOS will deliver quotes and information
to the investor and route trades to the market. AMDOS will then update account
balances and positions via multiple lines of communication. AMDOS also will
support other operations such as clearing functions, account administration and
record keeping.
The Company's technology relies on a scalable computer system connected to
the Internet backbone. To enhance the reliability of the system and integrity of
data, the Company maintains multiple backup systems. A backup power supply
supports the operations facility. Tape backups are made nightly to prevent a
loss of data. See "Risk Factors -- Dependence on Computer Systems" and
"-- Dependence on Intellectual Property Rights."
The Company's technology is supported by an internal staff of programmers,
developers and operators 24 hours a day, seven days a week. The programming
staff is supplemented by a team of quality control analysts, Web page
developers, technical writers and design specialists who ensure the final
product is user-friendly and dependable. In addition to supporting the systems,
the staff continually enhances software and hardware and develops new services.
Software is designed to be versatile and easily adaptable to new and emerging
technologies.
The secure transmission of confidential information over public networks is
a critical element of the Company's operations. The Company relies on encryption
and authentication technology, which is in part provided by outside sources,
including public key cryptography technology provided by Veresign to provide the
security and authentication necessary to effect secure transmission of
confidential information over the Internet. See "Risk Factors -- Potential for
Security Compromises."
A major advantage is the Company's direct fiberoptic connections to the
Internet through a main backbone of UUNET. ADAG is connected to the fiberoptic
network COLT Telecom, one of Europe's most progressive providers of commercial
fiberoptic networks. COLT Telecom is servicing the majority of the German
banking industry and stock exchanges. ADAG has signed agreements to receive
unlimited network capacity for its data and telecommunication needs on a
scalable basis at competitive prices. The Company plans to connect the premises
in Berlin and Los Angeles by a direct line by the end of 1998.
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<PAGE> 42
All proprietary technology, systems and software of the Company and its
subsidiary will be transferred to American Diversified Technologies, Inc., which
is being established as a wholly-owned subsidiary of the Company in the U.S. The
Company believes that it has adequate protection for its proprietary technology,
systems and software under German law, but is developing confidentiality and
non-competition agreements, and other internal security measures to further
protect its proprietary interests. See "Risk Factors -- Dependence on
Intellectual Property Rights."
SERVICEMARK APPLICATION
The Company has registered "AMERICAN DIVERSIFIED" as a servicemark in the
U.S. and in Germany, and has applied for, but not been issued, any registered
servicemarks for its or "amdiv.net," "amdiv.pronet" and "eu-trade" service-names
in Germany. ADAG is planning to register its trademarks in Germany and other
European countries. No assurance can be given that the Company will be
successful in obtaining these marks, or that the servicemarks, if obtained, will
afford the Company any competitive advantages. ADAG owns the "AMERICAN
DIVERSIFIED" trademark for Germany, which was registered on February 26, 1998
with the German Patent and Trademark Office in Munich, registration No.
39745648.
LEGAL PROCEEDINGS
The Company is not a party to, nor is the Company's property the subject of
any pending legal proceeding.
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<PAGE> 43
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated financial statements have
been prepared by the Company's management from its historical financial
statements, which are contained elsewhere in this prospectus. The Unaudited Pro
Forma Statement of Operations presented below reflects the Company's results of
operations adjusted for the acquisition of James Buchanan Rea, Inc. ("JBRI") as
of March 31, 1998, and the related issuance of common stock as described in the
accompanying notes. The pro forma adjustments have been applied to the
historical consolidated statement of operations for the fiscal year ended August
31, 1998, and the unaudited results of operations of JBRI for the seven months
ended March 31, 1998, as if the acquisition occurred on September 1, 1997. The
results of operations of JBRI for the five months ended August 31,1998, are
included in the historical consolidated statement of operations. The acquisition
has been accounted for using the purchase method of accounting. For purposes of
the pro forma financial statements, the purchase price of JBRI has been
allocated to the acquired net assets based on information currently available
with regard to the values of such net assets. Final adjustments to recorded
amounts may differ from the pro forma adjustments presented herein. The pro
forma statements should be read in connection with the notes thereto.
AMDIV.COM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED AUGUST 31, 1998
<TABLE>
<CAPTION>
HISTORICAL JBRI PRO FORMA
AMDIV.COM NOTE(1) ADJUSTMENTS PRO FORMA
----------- ------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue....................................... $ 45,585 $95,678 -- $ 141,263
----------- ------- -------- -----------
Expenses:
Travel and entertainment.................... 120,222 -- -- 120,222
Employee compensation and benefits.......... 1,010,213 66,786 -- 1,076,999
Professional fees........................... 633,977 3,133 -- 637,110
Advertising and promotion................... 1,974,044 3,070 -- 1,977,114
Administrative.............................. 727,196 20,762 -- 747,958
Other Operating Expenses.................... 130,718 -- -- 130,718
Depreciation and amortization............... 88,004 2,071 31,065(2) 121,140
Interest.................................... 19,789 -- -- 19,789
----------- ------- -------- -----------
4,704,163 95,822 31,065 4,831,050
----------- ------- -------- -----------
Operating (loss)............................ (4,658,578) (144) (31,065) (4,689,787)
Nonoperating income......................... 139,589 -- -- 139,589
----------- ------- -------- -----------
(Loss) before income taxes.................. (4,518,989) (144) (31,065) (4,550,198)
Income taxes................................ -- -- --(3) --
----------- ------- -------- -----------
Net (loss).................................. $(4,518,989) $ (144) $(31,065) $(4,550,198)
=========== ======= ======== ===========
Average common shares outstanding........... 5,085,838 -- 69,271 5,155,109
=========== ======= ======== ===========
Basis and diluted (loss) per common share... $ (0.93) $ -- $ -- $ (0.93)
=========== ======= ======== ===========
</TABLE>
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<PAGE> 44
AMDIV.COM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The unaudited pro forma consolidated statement of operations for the year
ended August 31, 1998 was prepared as if the acquisition had occurred on
September 1, 1997.
These pro forma financial statements are not necessarily indicative of the
results of operations that might have occurred had the acquisition and financing
taken place at the beginning of the period or as of August 31, 1998, or to
project the Company's financial position or results of operations at any future
date or for any future period.
Adjustments were made as follows:
<TABLE>
<S> <C>
(1) Represents JBRI unaudited results of operations for the
seven months ended March 31, 1998. JBRI results for the
five months ended August 31, 1998 are included with the
historical results......................................
(2) Record amortization of goodwill on a straight line basis
over a period of 7 years for the seven months ended
March 31, 1998 (amortization from March 31, 1998 through
August 31, 1998 has been included with historical
amounts)
Amortization expense................................... $31,065
-------
(3) The tax benefit for the pro forma adjustments has been
offset by an equal increase in the valuation allowance
for deferred taxes resulting in no income tax expense or
benefit reflected in the purchase accounting
adjustments.............................................
</TABLE>
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<PAGE> 45
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
The following discussion is based upon and should be read in conjunction
with the Company's financial statements, including the notes thereto, and the
cautionary statements regarding forward-looking statements.
The Company was organized on February 5, 1997 as a provider of financial
services in the United States and Europe. As a development-stage enterprise, the
Company has devoted most of its resources since inception to raising capital and
implementing the first stages of its business plan.
PLAN OF OPERATION
The Company and its subsidiaries will offer financial services consisting
mainly of full service securities brokerage, Internet discount brokerage, asset
management, sponsoring and distributing mutual funds, underwriting and related
financial services. The Company is a development stage enterprise and, has not
generated any significant revenue from operations to date since its inception on
February 5, 1997.
The Company has financed its development activities through the sale of
equity securities to its existing stockholders in private transactions. As of
August 31, 1998, the Company had approximately $309,000 in cash to conduct
operations. At the current expense rate, the Company anticipates that such
funds, together with $11,621,000 received by the Company in October 1998 from
the sale of the "Bearer Note" contributed by certain founding Shareholders, will
be sufficient to continue operations until December 31, 1999. Thereafter, the
Company will be dependent upon the receipt of additional capital to sustain
operations. WITHOUT ADDITIONAL CAPITAL, THERE IS SUBSTANTIAL UNCERTAINTY ABOUT
THE ABILITY OF THE COMPANY TO ACHIEVE ITS BUSINESS PLAN. See "Interest of
Management and Others in Certain Transactions."
The Company intends to commence its financial services business in Germany
and the EU in early 1999, and to continue on-going development of its products
and services to the extent permitted by available financing. The Company and its
subsidiaries do not anticipate any significant sale of equipment during the
fiscal year ending August 31, 1999, but do expect to purchase technology and
various equipment and technology for development purposes at an anticipated cost
of $3.5 million.
The Company has recently expanded staffing at both executive and employee
levels and does not currently anticipate any additional significant changes in
the number of employees or compensation payable to employees. See "Description
of Business -- Employees" and "Directors, Executives and Significant Employees."
ADAM'S HISTORICAL OPERATIONS
ADAM merged with and into James Buchanan Rea, Inc., a California
corporation ("JBRI"), effective March 31, 1998, to acquire an existing mutual
fund operation and establish a presence for the Company in the U.S. JBRI served
as the investment advisor and distributor to the Rea-Graham Balanced Fund
(renamed the American Diversified Global Value Fund; interchangeably, the
"Fund"), a series mutual fund of American Diversified Funds, Inc. (formerly
named the "Rea-Graham Funds, Inc."), a diversified open-end investment company
registered under the Investment Company Act of 1940. ADAM has succeeded JBRI as
a registered broker-dealer and registered investment advisor and the
shareholders of the Fund have approved ADAM as investment advisor to the Fund.
The Fund was originally organized as a private limited partnership in 1976.
The Fund was subsequently incorporated in Maryland and on August 19, 1982,
effected a public offering of its shares as an open end diversified investment
company registered under the Investment Company Act of 1940. The Fund continued
to operate as a separate series mutual fund of Rea-Graham Funds, Inc., which was
succeeded by American Diversified Funds, Inc., following the merger.
Pursuant to the revised investment advisory agreement, the Fund pays ADAM a
monthly advisory fee equal on an annual basis to one percent of the first
$20,000,000 of the Fund's net assets as of the close of business on the last
business day of each calendar month during the Fund's fiscal year; reduced to
0.75% of
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<PAGE> 46
such net assets in excess of $20,000,000 up to $100,000,000; 0.5% of such net
assets in excess of $100,000,000 up to $200,000,000; and 0.45% of all such net
assets in excess of $200,000,000. One half of such advisory fees earned by ADAM
are paid to Ladas & Hulings under a sub-advisory agreement. See "Directors,
Executive Officers and Significant Employees -- Principal Advisors."
The Fund also pays ADAM a distribution fee payable monthly equal on an
annual basis to .35% of the Fund's average daily net assets.
The following discussion is based upon and should be read in conjunction
with JBRI's financial statements for the period ended December 31, 1996 and
December 31, 1997, and the Company's financial statements for the period ended
August 31, 1998 together with the notes related thereto.
JBRI'S OPERATIONS FOR THE PERIOD ENDED DECEMBER 31, 1996 COMPARED TO THE
PERIOD ENDED DECEMBER 31, 1997
Results of Operations. Revenues for fiscal year ended December 31, 1997
were $145,119 as compared to revenues of $166,059 for the fiscal year ended
December 31, 1996, representing a cumulative decrease of approximately 12.6%.
The decrease in revenues was primarily due to a reduction of advisory and
distribution fees from the Fund, as the Fund's net assets declined from
$11,377,574 to $10,154,957 during this period.
Operating expenses consist of salary expenses, communications costs,
occupancy and equipment rental expenses and other operating expenses. Operating
expenses were $214,973 for the fiscal year ended December 31, 1997 as compared
to operating expenses of $214,386 for the fiscal year ended December 31, 1996.
However, operating expenses as a percentage of revenues increased approximately
19% to 148% for fiscal 1997 as compared to 129% for fiscal 1996, as a result of
the decline in revenues due to the decline in the Fund's net assets.
Net losses from operations for the fiscal year ended December 31, 1997 were
$69,854 as compared to $48,327 for the prior fiscal year, representing an
increase in net losses of approximately 44.5%. This increase in operating losses
is directly attributable to the decrease in revenues resulting from the
reduction in advisory and distribution fees generated during 1997, as the Fund's
net assets declined.
Liquidity and Capital Resources. As of December 31, 1997, JBRI had no
outstanding long term obligations. Short term obligations consisted of dealer
service fees payable, accounts payable and accrued expenses totaling $11,946.
JBRI has historically funded operations through cash flows from operations.
JBRI was subject to the net capital rule (Rule 15c3-l) promulgated under
the 1934 Act, which prohibits a broker-dealer from engaging in securities
transactions when its aggregate indebtedness exceeds 15 times its net capital,
as those terms are defined in Rule 15c3-1. The net capital, required net capital
and net capital ratio for JBRI as of December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
---------- -------
<S> <C> <C>
Net Capital............................................ $ 10,199 $58,920
Required Net Capital................................... $ 5,000 $ 5,000
Net Capital Ratio...................................... 1.17 to 1 17 to 1
========== =======
</TABLE>
THE COMPANY'S OPERATIONS FOR THE FISCAL YEAR ENDED AUGUST 31, 1997 COMPARED
TO THE FISCAL YEAR ENDED AUGUST 31, 1998
Results of Operations. The Company was incorporated on February 5, 1997.
Therefore, a comparison of the 1997 and 1998 fiscal years is not meaningful
because fiscal 1997 was a partial year and the Company commenced the bulk of its
development and marketing activities after recruiting certain key executives and
personnel in fiscal 1998. For the fiscal year ended August 31, 1998, the Company
reported operating revenue of $45,585, as compared to no operating revenue for
the fiscal year ended August 31, 1997. The increase in revenue is substantially
attributable to the merged operations of ADAM. ADAM reported revenues and
operating expenses of $39,585 and $248,400, respectively during the year ended
August 31, 1998. ADAG is
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<PAGE> 47
still in the developmental stage and did not commence any significant business
operations during the 1998 fiscal year.
On May 29, 1998, the Company sold a bearer note originally contributed by
certain founding shareholders to a group of unrelated investors for DM 20.2
million. In connection with the sale, the Company realized an economic gain of
$1,517,000, which for U.S. accounting purposes was reported as an adjustment to
the issuance price of share capital. See Note 2 of the Notes to Consolidated
Financial Statements at F-9.
The Company's total operating expenses for the fiscal year ended August 31,
1998, were $4,704,163, as compared to operating expenses of $139,527 for the
fiscal year ended August 31, 1997. The increase was substantially attributable
to an increase in advertising, promotion, employee compensation and benefits,
professional fees and other expenses relating to the Company's ongoing
development and expansion activities. The costs incurred for employee
compensation and advertising increased from $20,841 and $7,220 during the fiscal
year ended August 31, 1997, to $1,010,213 and $1,974,044 for the fiscal year
ended August 31, 1998. Expenses for professional fees increased from $66,474 for
the fiscal year ended August 31, 1997 to $633,977 for the fiscal year ended
August 31, 1998. The increase in professional fees was substantially
attributable to legal and accounting fees relating to the registration of the
Company's Common Stock under the Exchange Act and the Company's proposed initial
public offering. The Company's administrative expenses increased from $22,506
for the fiscal year ended August 31, 1997, to $727,196 for the fiscal year ended
August 31, 1998.
Liquidity and Capital Resources. Initial promotional costs associated with
marketing efforts in Germany and costs associated with operating ADAG in Germany
increased the Company's monthly cash requirements to approximately $160,000
during the fiscal year ended August 31, 1998 as opposed to, $20,000 during the
fiscal year ended August 31, 1997. Cash inflows from the sale of 5,000,000
shares of Series A Preferred Stock sold during the period provided the working
capital.
ADAM is subject to the Net Capital Rule (Rule 15c3-1) promulgated under the
Exchange Act, which prohibits a broker-dealer from engaging in securities
transactions when its aggregate indebtedness exceeds 15 times its net capital,
as those rules are defined in Rule 15c3-1. The net capital, required net capital
and net capital ratio for ADAM as of August 31, 1998 were $110,461, $5,000, and
0.16 to 1, respectively.
YEAR 2000 COMPLIANCE
The Company and its subsidiaries will rely upon a significant number of
computer software programs and operating systems in conducting their operations,
including systems and software utilized by third party service providers. The
Company has reviewed its computer systems, including information technology
("IT") and non-IT systems, and has determined that they are in compliance with
the requirements of the Year 2000. The Year 2000 problem, however, is pervasive
and complex as virtually every computer operation will be affected in some way
by the rollover of the two digit year to 00. Failure of any of the Company's
third party service providers to adequately address this issue could result in a
substantial interruption of the Company's normal plan of operation and business
affairs, and could result in significant losses from operations. To the extent
that the Company relies upon non-U.S. third party service providers who may be
less capable or prepared than their U.S. counterparts to address and resolve the
Year 2000 problem, the Company's operations may be subject to a greater level of
risk with respect to Year 2000 compliance. Although the Company could incur
substantial costs in connection with the failure of third party computing
systems and software, such costs are not sufficiently certain to estimate at
this time. The Company also has not developed any plan to address these
contingencies. Consequently, no assurance can be given that the potential
failure of third party systems will not increase the Company's operating costs
or create uncertainties that may have an adverse effect on the Company's
operating results or financial condition. See "Risk Factors -- Dependence on
Third Party Systems."
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<PAGE> 48
DESCRIPTION OF PROPERTY
The Company and its subsidiaries currently has three business offices under
lease. The Company has a one-year lease expiring in March 1999, from CB
Commercial, Inc., for office space located at 12100 Wilshire Boulevard, Suite
680, Los Angeles, California 90025, at $2,370 per month, which is the office
space formerly occupied by JBRI. The Company recently sub-leased new office
space from Froley Revy Investment Company, Inc., for a term of three years at
$8,561 per month, and has moved its principal business address to the newly
sub-leased premises located at 10900 Wilshire Boulevard, 9th floor, Los Angeles,
California 90024. ADAG has entered into a five-year lease expiring January 2003
for office space in Berlin from 58 Grundstucksverwaltungsgesellschaft -- Bull
and Liedtke, Hamburg, at $3,700 per month. All three premises are in good
condition and are adequately insured. It is anticipated that the Company will
enter into new office leases as additional subsidiaries are formed and the
business activities of the Company and its subsidiaries are expanded into
additional EU countries.
DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES
MANAGEMENT
The Company is assembling an international team of managers and
entrepreneurs with experience in the initial market area and a shared commitment
to its future growth and success.
Peter Hartmann, age 43, has been Chairman of the Board since February 5,
1997, and Executive Vice-President of International Development since March 31,
1998. From February 5, 1997 to March 31, 1998, Mr. Hartmann also served as the
Company's President and CEO. Mr. Hartmann has over 20 years of experience with
international business development and project management. Between 1992 and
January 1997, Mr. Hartmann served as President and Chief Executive Officer of
EMDC, an international consulting company specializing in project development
with clients in Europe, Russia, Singapore and Vietnam. Although Mr. Hartmann has
only limited experience in the financial services industry, he has extensive
experience in the development of international companies and in mergers and
acquisitions. He was engaged by the Company to structure and develop its
business. Mr. Hartmann speaks five languages. Mr. Hartmann received his MBA
degree from Glasgow College of Technology in Scotland.
James Buchanan Rea Jr., age 43, has served as the Company's President and
Chief Executive Officer since March 1998, and has been a Director since December
1997. Mr. Rea has over 20 years experience in the mutual fund industry,
especially in financial, accounting and operating positions. Mr. Rea is
President and Chief Executive Officer of ADAM, the Company's U.S. investment
advisory and brokerage subsidiary. He served as President of JBRI, the
predecessor of ADAM, since 1986. He is also Chairman of the Board of ADAM, and
has managed Rea-Graham Funds, Inc. (renamed American Diversified Funds, Inc.)
since 1986 as President, Chief Executive Officer and Chairman of the Board. From
1980 to November 1995 he was Vice President of James Buchanan Rea, Inc., the
company founded by his father, Dr. James Buchanan Rea. He is a registered
investment advisor and broker-dealer with the Commission, NASD, and State of
California. Mr. Rea received his Bachelor of Science degree from the University
of Southern California.
Joel Epstein, age 38, has served as the Company's Executive Vice President,
Chief Financial Officer and Treasurer since September 1998. Mr. Epstein has over
11 years of professional experience as a CPA. Since April 1995, Mr. Epstein has
been providing financial consulting services for companies, including start-ups,
in various industries. From 1987 to 1995, Mr. Epstein served as Senior Vice
President and Chief Financial Officer of the Pilgrim Group, Inc., a mutual fund
group. Prior to that time, Mr. Epstein was employed as an auditor with Peat
Marwick Main & Co. in Los Angeles for over three years. Mr. Epstein received his
Bachelor of Science degrees in Marketing and Accounting from California State
University, Northridge in 1982 and 1984, respectively.
T. Michael Graf, age 61, was appointed as the Company's Executive Vice
President of Asset Management in September 1998. Mr. Graf has over 28 years of
experience in portfolio management, new business development and client
servicing. Mr. Graf has six years of experience managing an investment
42
<PAGE> 49
management organization. From 1986 to August 1998, Mr. Graf served as First Vice
President of Schroder Capital Management, Inc. ("Schroder"). Schroder merged
Wertheim Schroder Investment Services into Schroder Capital Management in July,
1995. Mr. Graf's primary responsibilities at Schroder included business
development for endowments, foundations and high net worth individuals in the
western half of the U.S. Mr. Graf was also responsible for servicing Schroder's
institutional and individual clients on the west coast. Mr. Graf received his
MBA degree from Harvard Business School in 1962 and his Bachelor of Science
degree in Petroleum Engineering from Stanford University in 1960. Mr. Graf is a
chartered investment counselor ("CIC") and a chartered financial analyst
("CFA").
Roland Kuettner, age 44, has been a Director of the Company since December
1997. Mr. Kuettner is also Managing Director of American Diversified
Emissionsberatungs GmbH (ADAG's German subsidiary) and previously served as the
Company's Chief Financial Officer and Treasurer. Mr. Kuettner qualified as a CPA
in 1983 and served with the accounting firm of Arthur Andersen & Co. in Toronto,
Seattle and Berlin from 1980 to 1993. Mr. Kuettner moved to Germany in 1991 and
has been practicing as an independent CPA since 1993. As a Manager in the
Accounting and Audit Division of Arthur Andersen & Co., Mr. Kuettner gained
extensive experience in dealing with matters affecting financial reporting and
control.
Thomas C. Corcovelos, age 47 has been a Director of the Company since
November 1997. Mr. Corcovelos is a partner in the law firm of Corcovelos & Forry
LLP in Manhattan Beach, California. Since 1985, Mr. Corcovelos has served as
Corporate Counsel and Federal Securities Compliance Officer to JBRI, which was
merged with and into ADAM, effective March 31, 1998. Mr. Corcovelos received his
Bachelor of Science degree from Loyola University of Los Angeles in 1973, and
his law degree from Boalt Hall School of Law, University of California at
Berkeley in 1976.
Thomas H. Fitzgerald, Jr., age 65, has been a Director of the Company since
August 1998. Mr. Fitzgerald is President of T.H. Fitzgerald & Co., a Wall Street
asset management firm, and a member of the American Finance Association. Mr.
Fitzgerald is also an advisor to the management of the American Institution of
Management and the Market Technician Association. For more than 18 years Mr.
Fitzgerald published the "Money Market Directory," a world renowned reference
book regarding investors and their portfolio managers.
Arthur Gray, Jr., age 75, was appointed as an Advisory Director in October
1998. Mr. Gray is expected to be nominated for election to the Board after the
Bylaws are amended to authorize an expansion of the Board. As an Advisory
Director, Mr. Gray is invited to attend Board meetings, but is not a member of
the Board. Since 1993, Mr. Gray has been a Managing Director of SG Cowen
Investment Counselors in New York City. He currently serves as the Chairman of
the Board of Seventh Generation, Inc., the President of Lerner-Gray Foundation
and is a director of Genelabs Technology, Inc. Mr. Gray is an Honorary Trustee
of the American Museum of Natural History, a Director of the Smithsonian Museum
of Natural History and an Honorary Director of Pathways for Youth. Mr. Gray has
extensive experience in the financial services sector. From 1984 to 1993, Mr.
Gray served as the President and CEO of Dreyfus Personal Management. Mr. Gray
attended the Massachusetts Institute of Technology for two years before entering
military service in World War II.
John Barrier, age 41, was appointed as the Company's Chief Technical
Officer in October 1998. Mr. Barrier has over 24 years of experience in network
engineering, software development and project planning and implementation. Prior
to joining the Company, from 1996 to 1997, Mr. Barrier was the Vice President of
Software and Technology with NTN Communications, Inc., a Carlsbad, California
provider of Interactive programs, where he was responsible for the management of
50 Windows NT servers, all technology requirements for Hospitality and Online
networks and the development of front-end and back-end software for AOL. In 1995
he was the lead network Administrator for Premis software in Houston where he
developed the Quick Comp software for Texas Workers' Compensation, client
database. From 1992 to 1995, Mr. Barrier was the Supervisor of Systems
Engineering at King Khaled International Airport located in Riyadh, Saudi
Arabia, where he was responsible for systems design, network interface and the
development of Windows based hypertext help system. Mr. Barrier received his
Bachelor of Science degree in Electrical Engineering Technology from Northern
Arizona University. Mr. Barrier joined the Company on November 1, 1998.
43
<PAGE> 50
Messrs. Rea, Hartmann, Corcovelos, Epstein, Graf, Gray, Fitzgerald and
Barrier reside in the U.S. Mr. Kuettner resides in Berlin, Germany.
PRINCIPAL ADVISORS
Ladas & Hulings, Inc. ("Ladas & Hulings"), a registered investment advisor
founded in 1970 and headquartered in Scottsdale, Arizona, with regional offices
in Austin, Texas, and Palm Beach, Florida, has been investment sub-advisor to
the Fund since April 1998. Ladas & Hulings is also expected to serve as
investment sub-advisor to the new small-cap and international funds to be
offered by ADAM in the future. Ladas & Hulings currently has approximately
$270.0 million in assets under management, including $180.0 million in domestic
managed accounts and $90.0 million in non-domestic managed accounts. Ladas &
Hulings' investment style is substantially similar to that of the Company's,
involving the use of fundamental investment analysis applied and adapted to the
global equity markets.
Mr. William R. Hulings, age 62, President and Chief Investment Officer of
Ladas & Hulings, had over 25 years of experience in investment management. Mr.
Hulings has Masters of Science and MBA degrees from the University of Southern
California.
Mr. Stanley Lanzet, age 54, was retained by the Company in July 1998 as its
investment banking advisor and consultant in the Company's New York office. Mr.
Lanzet is President and Chairman of Lanzet Global Securities Corp., an
investment research firm founded in 1993 specializing in small and medium cap
stocks and emerging market investing. Mr. Lanzet has been an investment analyst
since 1967. From 1992 to mid-1993, Mr. Lanzet was a Managing Director/Principal
of Bear Stearns and Co. and the Director of Research for Emerging Markets. Prior
to joining Bear Stearns, Mr. Lanzet was a Senior Vice-President and the
Associate Director of Research at Arnhold and S. Bleichroeder, Inc. from 1988 to
1992. Mr. Lanzet is a member of the New York Society of Security Analysts and
holds a B.B.A. degree in Economics from the City College of New York and an
M.B.A. in Investments from New York University.
ADAG'S EXECUTIVE TEAM
ADAG's executive team includes a young group of experienced managers with
an average age of 38 and 17 years practical experience in the banking sector.
The German educational system provides graduates an opportunity to literally
"learn on the job" with a potential employer after completing high school. The
apprenticeship program, which leads to a Diploma in Commercial Banking, consists
of theoretical and practical instruction over a 2 to 3 year period. The employer
who is satisfied with a student's performance will generally offer that
individual a full-time position after completion of his studies. ADAG's Board of
Management consists of the following executives:
Bernward J. Rohmann, age 47, was appointed as Chief Executive Officer
(Vorstand) in November 1998. Mr. Rohmann has over 22 years of international
experience in the banking industry, in leading positions with major financial
institutions during the last 7 years. Mr. Rohmann studied at the
Ruhr-University, Bochum, Germany where he graduated in 1975 with a degree as
economist (Diplom Okonom). From 1987 through 1991, Mr. Rohmann was the Head of
DM-Treasury Department at JP Morgan, Frankfurt where he also served as a member
of the JP Morgan Investment Committee for pension funds. Between 1991 and 1992
he was the General Manager responsible for reorganizing the London Branch of
Hessische Landesbank. From July 1992 through December 1993 Mr. Rohmann was a
member of the Executive Management Board in charge of Capital Markets,
Securities and the UBS Investment Division of Schweizerische Bankgesellschaft in
Frankfurt. From February 1994 through December 1996 Mr. Rohmann was a member of
the Executive Management Board in charge of Securities, Treasury, Controlling
and DATA Processing of National Westminster Bank plc, in Frankfurt. Mr. Rohmann
received a diploma for participating in the Advanced Management Program for
Overseas Bankers of the Wharton School in Philadelphia. He joined the Company on
September 1, 1998.
Dernst-Henning Graf von Hardenberg, age 57, was appointed as Senior
Executive in November 1998. Count von Hardenberg has more than 30 years of
experience in banking and has held leading positions with major German banks.
Count von Hardenberg began as an apprentice with Commerzbank AG, Hamburg in
44
<PAGE> 51
1962, where he was assigned to the corporate credit department. In 1968, he
joined IKB Deutsche Industriebank AG, Dusseldorf, and was promoted in 1973 to
head the credit department of the bank's Berlin branch, of which he was
appointed General Manager in 1981. Count von Hardenberg has also served on the
Executive Management Board of Berliner Industriebank AG, Berlin. He was later
appointed to the Executive Management Board of Deutsche Handelsbank AG, Berlin,
where he was responsible for Corporate Lending and Treasury. Since 1994, Count
von Hardenberg has been advising start-up companies on raising equity and on
organizing their respective finance and controlling functions. He is also the
Managing Partner of J. Strauss Verlag GmbH, Potsdam. He joined the Company on
November 1, 1998.
MANAGEMENT COMMITTEES
The Company expects to formally establish management committees in Germany
and in the U.S. that institute policies and procedures regarding the Company's
daily operations regarding risk, expense and operations. The committee in
Germany will include Messrs. Rohmann, von Hardenberg, Kuettner, and assigned
executives from each of the Company's subsidiaries. The committee in the U.S.
will include James Buchanan Rea Jr., Joel Epstein, Michael Graf and Peter
Hartmann. The committees provide oversight and assist the subsidiaries in
achieving their goals. The committees may suggest the establishment of, or
changes to, policies and procedures of the subsidiaries to strengthen controls
in areas of risk, expense and operations. The committees, however, do not take
the place of the decision-making authority vested in each of the subsidiaries.
LIMITATION OF DIRECTORS AND OFFICERS' LIABILITY AND INDEMNIFICATION
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. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers and controlling persons of the small business
issuer pursuant to the foregoing provisions, or otherwise, the small business
issuer has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
45
<PAGE> 52
REMUNERATION OF DIRECTORS AND OFFICERS
EXECUTIVE COMPENSATION
As a newly formed entity, the Company has no prior history of executive
compensation. Mr. Rea received aggregate compensation of $91,765 during 1997, as
President and Chief Executive Officer of JBRI.
The following table sets forth information concerning the compensation
received for the fiscal year ended August 31, 1998 for services to be rendered
to the Company in all capacities by the Company's Chief Executive Officers and
other highly compensated executive officers. The Company had no executive
officers under employment during 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
---------------------------------
AWARDS
ANNUAL COMPENSATION ----------------------- PAYOUTS
------------------------------ RESTRICTED SECURITIES -------
OTHER ANNUAL STOCK UNDERLYING LTIP ALL OTHER
NAME AND SALARY BONUS COMPENSATION AWARD(S) OPTIONS/ PAYOUTS COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) ($) ($) SARS(#) ($) ($)
------------------ ---- ------- ----- ------------ ---------- ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
James B. Rea, Jr. ................. 1998 76,667 -0- -0- -0- 35,000 -0- -0-
Director, CEO and President(1)
Peter Hartmann..................... 1998 120,000 -0- -0- -0- -0- -0- -0-
Chairman, Executive Vice
President -- International
Development(1)
Roland Kuettner.................... 1998 66,667 -0- -0- -0- -0- -0- -0-
Director(1)(2)
</TABLE>
- ---------------
(1) See "Employment Agreements" below for a description of Mr. Rea's, and Mr.
Hartmann's benefits entitlements. All other compensation in the form of
perquisites and other personal benefits has been omitted because the
aggregate amount of such perquisites and other personal benefits constituted
the lesser of $50,000 or 10% of the total annual salary and bonus of the
named executive for such year.
(2) Mr. Kuettner was the Company's Chief Financial Officer and received
compensation in that capacity during the fiscal year ended August 31, 1998
pursuant to an employment agreement. Mr. Kuettner has since resigned as the
Company's Chief Financial Officer and is employed as Managing Director of
American Diversified Emissionsberatungs GmbH, a subsidiary of ADAG in
Germany. His employment agreement with the Company has been terminated.
Directors of the Company who are also employees do not receive cash
compensation for their services as directors or members of committees of the
Board of Directors, but are reimbursed for their reasonable expenses incurred in
connections with attending meetings of the Board of Directors or management
committees. Non-employee directors are expected to be paid a fee of $1,000 per
Board meeting attended, and reimbursement for expenses.
EMPLOYMENT AGREEMENTS
Mr. Rea has a three-year employment agreement with ADAM and the Company to
perform the duties of President and Chief Executive Officer of the Company and
ADAM at an annual salary of $125,000 per year, and an annual discretionary
benefits fund of $40,000, and the Company provides personal and family medical
insurance coverage. Mr. Rea will also be the designated financial principal of
ADAM (and of ASI). If Mr. Rea is terminated without cause or the employment
agreement is not renewed, he would receive a severance payment equal to
one-quarter of the average annual base salary during the term of his employment
plus an amount equal to one-quarter of the highest annual bonus or
profit-sharing received during his employment. The discretionary benefits
includes life and disability insurance, business automobile expenses, and
business-associated memberships and expenses. Any portion of the benefits fund
not expended is paid as additional compensation. Mr. Rea is also entitled to
participate in all employee plans and benefits that may be established for
executive employees. Bonuses are expected to be determined in the future by the
Board based
46
<PAGE> 53
upon an evaluation of performance against the Company's strategic business plan
and operating budget. Mr. Rea's employment agreement also includes a buyout
provision, pursuant to which Mr. Rea is entitled, at any time during the term of
his employment agreement, to require the Company to repurchase all of his shares
of the Company's Common Stock at a purchase price equal to the greater of the
consideration paid for or the fair market of such shares, in the event that Mr.
Rea is no longer employed with the Company, in the event of a change in control
(as defined in the employment agreement) or sale of substantially all of the
Company's assets, or at such time as the Company is no longer a registered
broker-dealer. The buyout provision terminates in the event that the Company has
effected a registered public offering of its Common Stock under the Securities
Act in an amount of at least $5.0 million and there exists a public trading
market for the Common Stock.
The Company has also entered into an employment agreements with Mr.
Hartmann. Mr. Hartmann's employment agreement provides for a thirty-month term
commencing July 1, 1998, pursuant to which Mr. Hartmann has agreed to perform
the duties of Chairman of the Board and Executive Vice President
- -- International Development at an initial annual base salary of $180,000 and an
annual discretionary benefits funds of $40,000, generally on the same terms as
Mr. Rea's employment agreement described above, including severance and bonus
provisions (but not including any buyout rights).
1998 STOCK OPTION AND INCENTIVE PLAN
General. The Company's 1998 Stock Option and Incentive Plan (the "1998
Stock Option and Incentive Plan") provides for the Incentive Stock Options of
("ISO's") and Non-qualified Stock Options ("NQSO's").
Purpose. The 1998 Stock Option and Incentive Plan is intended to provide
incentive to key employees, officers, directors and others expected to provide
significant services to the Company, to encourage proprietary interest in the
Company, to encourage such key employees to remain in the employ of the Company,
to attract new employees with outstanding qualifications, and to afford
additional incentive to others to increase their efforts in providing
significant services to the Company.
Administration. The 1998 Stock Option and Incentive Plan will be
administered by a committee, established by the Board of Directors (the
"Committee"), which will at all times be composed of "non-employee directors;"
provided, however, that the Board of Directors may abolish the Committee at any
time and revest administration of the 1998 Stock Option and Incentive Plan in
the Board of Directors or a reconstituted Committee. No member of the Committee
will vote on any matter affecting his or her own compensation.
The value of one share of Common Stock, is determined as follows: (i) If
the shares are traded on an exchange, the price at which Share traded at the
close of business on the date of valuation; (ii) If the shares are traded
over-the-counter on the NASDAQ System, the closing price if one is available, or
the mean between the bid and asked prices quoted on the NASDAQ System at the
close of business on the date of valuation; and (iii) If neither (i) or (ii)
applies, the fair market value as determined by the Board or the Committee in
good faith. Such determination will be conclusive and binding on all persons.
Vesting of Options and Awards. The stock options and award granted under
the 1998 Stock Option and Incentive Plan will vest as determined by the
Committee or the Board of Directors.
Eligible Persons. Officers and directors and employees of the Company and
other persons expected to provide significant services to the Company are
eligible to participate in the 1998 Stock Option and Incentive Plan. ISO's may
be granted to the officers and key employees of the Company. NQSO's and other
awards may be granted to the directors, officers, key employees, agents and
consultants of the Company or any of its subsidiaries, provided that the
Committee finds that the value of services rendered or to be rendered to the
Company is at least equal to the value of the awards being granted.
Under current law, ISO's may not be granted to any director of the Company
who is not an employee, or to directors, officers and other employees of
entities unrelated to the Company.
47
<PAGE> 54
Shares Subject to the Plan. Subject to anti-dilution provisions for stock
splits, stock dividends and similar events, the 1998 Stock Option and Incentive
Plan authorizes the grant of stock options to purchase up to 1,000,000 shares of
the Company's Common Stock, provided that at no time shall options be granted to
purchase an aggregate of more than five percent of the outstanding shares of the
Company's Common Stock.
Term of the Plan. Unless previously terminated by the Board of Directors,
the 1998 Stock Option and Incentive Plan will terminate on May 26, 2008, and no
options may be granted under the 1998 Stock Option and Incentive Plan
thereafter, but existing options will remain in effect until the options are
exercised or terminated by their terms.
Term of Options. Each stock option must terminate no more than ten years
from the date it is granted (or five years in the case of ISO's granted to an
employee who is deemed to win an excess of ten percent of the combined voting
power of the Company's outstanding equity stock). Stock options may be granted
on terms providing for exercise either in whole or in part at any time or times
during their restrictive terms, or only in specified percentages at the stated
time periods or intervals during the term of the stock option.
Option Exercise. The exercise price of any stock option granted under the
1998 Stock Option and Incentive Plan is payable in full in cash, or its
equivalent as determined by the Committee. The Company may make loans available
to option holders to exercise stock options evidenced by a promissory note
executed by the option holder and secured by a pledge of Common Stock with fair
value at least equal to the principal of the promissory note, unless otherwise
determined by the Committee.
Amendment and Termination of Stock Option Plan. The Board of Directors may,
without affecting any outstanding stock options, from time to time revise or
amend the 1998 Stock Option and Incentive Plan, and may suspend or discontinue
it at any time. However, no such revision or amendment may, without stockholder
approval, increase the number of shares subject to the 1998 Stock Option and
Incentive Plan, modify the class of participants eligible to receive options
granted under the 1998 Stock Option and Incentive Plan or extend the maximum
option term under the 1998 Stock Option and Incentive Plan.
Outstanding Options. The Company has granted options to acquire 100,000
shares of Common Stock pursuant to the 1998 Stock Option and Incentive Plan. Of
these stock options, 40,000 have been granted to the two independent directors
and will vest six months from the date on which the options were granted. All
stock options granted pursuant to the 1998 Stock Option and Incentive Plan are
exercisable at a price of $3.00 per share. The 1998 Stock Option and Incentive
Plan provides that, in connection with any reorganization, merger,
consolidation, recapitalization, stock split or similar transaction, the
Committee will appropriately adjust the number of shares of Common Stock subject
to outstanding stock options and the total number of shares for which stock
options may be granted under the Plan.
STOCK OPTION GRANTS
The following table sets forth information concerning stock options granted
to date in 1998 to each member of the Board of Directors and Executive Officers,
the corporate secretary and an employee of ADAM.
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
PERCENT OF TOTAL OPTIONS EXERCISE PRICE
GRANTED TO EMPLOYEES OR BASE PRICE
NAME GRANT DURING THE YEAR(1) ($/SHARE) DATE
---- ------ ------------------------ -------------- -------
<S> <C> <C> <C> <C>
James B. Rea, Jr. .................. 35,000 35% $3.00 6/17/08
Thomas H. Fitzgerald, Jr. .......... 20,000 20% $3.00 6/17/08
Thomas C. Corcovelos................ 20,000 20% $3.00 6/17/08
Michael B. Jeffers.................. 20,000 20% $3.00 6/17/08
Isabel Bautista..................... 5,000 5% $3.00 6/17/08
</TABLE>
48
<PAGE> 55
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN SECURITYHOLDERS
The Company declared a 1:10 reverse stock split of its Common Stock,
effective May 26, 1998. The Company recently declared another 1:2 reverse stock
split of its Common Stock, effective August 20, 1998. All amounts of Common
Stock outstanding reflected herein give effect to both reverse stock splits.
Except as otherwise indicated, the following table sets forth certain
information regarding the beneficial ownership of the Company's capital stock as
of October 30, 1998, after giving effect to the conversion of the Series A
Preferred Stock, by: (i) each of the Company's directors and officers, (ii) each
person who beneficially owned more than five percent of the Company's capital
stock, and (iii) all directors and executive officers of the Company as a group.
Unless otherwise indicated, the address of each named beneficial owner is the
same as that of the Company's principal office located at 10900 Wilshire
Boulevard, 9th Floor Los Angeles, California 90024.
<TABLE>
<CAPTION>
PERCENTAGE
BENEFICIALLY
SHARES OWNED(1)
BENEFICIALLY OWNED -------------------
------------------ BEFORE AFTER
NUMBER OFFERING OFFERING
------------------ -------- --------
<S> <C> <C> <C>
Dr. Michael Klug............................................ 489,500 7.2% 5.7%
Pfalzburger Strasse 20, 10717 Berlin, Germany
Eureka Consulting, Inc...................................... 422,000 6.2% 4.9%
1350 E. Flamingo Road #742, Las Vegas, NV 89119
Prodevco, Inc............................................... 406,000 6.0% 4.7%
7135 Pintale Drive, Carlsbad, CA 92009
Peter Hartmann.............................................. 451,750 6.6% 5.3%
James Buchanan Rea, Jr...................................... 156,250 2.3% 1.8%
Thomas Corcovelos........................................... 45,000 * *
Ronald Kuettner............................................. 25,000 * *
Kurfurstendamm 15, Berlin, D-10719, Germany
Thomas H. Fitzgerald, Jr.................................... 20,000 * *
Bernward J. Rohmann......................................... 15,000 * *
Kurfurstendamm 15, Berlin, D-10719, Germany
Officers and Directors as a group (6 individuals)........... 713,000 10.3% 8.3%
</TABLE>
- ---------------
* Less than one percent
(1) Beneficial ownership is determined in accordance with the applicable rules
under the Exchange Act. In computing the number of shares beneficially owned
by a person and the percentage ownership of that person, shares of Common
Stock subject to options held by that person that are currently exercisable,
or become exercisable within 60 days from the date hereof, are deemed
outstanding. However, such shares are not deemed outstanding for purposes of
computing the percentage ownership of any other person. Percentage ownership
is based on 6,817,961 shares of Common Stock outstanding prior to this
Offering and 8,551,295 shares of Common Stock outstanding after this
Offering (assuming the sale of all of the shares of Common Stock offered
hereby), and conversion of the 5,000,000 shares of Series A Preferred Stock.
PREFERRED STOCK
As of August 31, 1998, the Company had 5,000,000 shares of Series A
Preferred Stock issued and outstanding, held by approximately 320 individual
preferred shareholders. All of the Series A Preferred Stock was converted into
1,666,661 shares of Common Stock in October 1998.
49
<PAGE> 56
INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS
The merger of JBRI into ADAM was completed and became effective on March
31, 1998. On January 12, 1998, the shareholders of the Fund approved a new
investment advisory agreement with ADAM. Under the terms of the merger, Mr. Rea
received 2,375,000 shares (pre-reverse splits) of the Company's common stock at
the closing in exchange for his 50,500 shares of JBRI stock, and the other JBRI
shareholders received aggregate cash payments of $160,875 in consideration for
their 49,500 shares of JBRI stock, at a value of $3.25 per share. The 2,375,000
shares of the Company's Common Stock issued in connection with the JBRI-ADAM
Merger were converted into 118,750 shares, after giving effect to the Company's
1:10 reverse stock split, effective May 26, 1998, and the 1:2 reverse stock
split, effective August 20, 1998. Mr. Rea acquired the Company shares without
registration in reliance on the exemption provided by Section 4(2) under the
Securities Act. Mr. Rea is a sophisticated investor knowledgeable in the
securities business. He will continue to serve as President of ADAM, the
successor to JBRI. The Company shares issued to Mr. Rea are "restricted
securities" and may not be publicly resold except pursuant to a registration
promulgated under the Securities Act, Rule 144 or other exemption under the
Securities Act that may be applicable.
On August 28, 1997, the Company issued 90,000,000 (pre-reverse splits)
shares of Common Stock to American Diversified Corporation ("ADC"), a Delaware
corporation controlled by certain founding shareholders of the Company, in
exchange for its contribution of a "Bearer Note" issued by Immofin
Grundstuecksverwaltungsgessellschaft Conradi & Hilger GbRmbH, a partnership
consisting of Messrs. Klaus Conradi and Josef Hilger, two of the Company's
founding shareholders. The shares issued to ADC were converted into 4,500,000
shares, after giving effect to the Company's 1:10 reverse stock split of the
Common Stock, effective May 26, 1998, and 1:2 reverse stock split of the Common
Stock, effective August 20, 1998. The shares previously held by ADC have since
been transferred to various individual investors, pursuant to applicable
exemptions from registration under U.S. state and federal securities laws. On
May 28, 1998, the Company sold the Bearer Note to unrelated third parties for
20,200,000 Deutche Marks (approximately $11,584,186, including accrued
interest). Cash proceeds from the sale of the Bearer Note were released from
escrow and transferred to the Company's German bank account on October 12, 1998.
(See Note 2 to "Consolidated Financial Statements," page F-9).
DESCRIPTION OF SECURITIES
Upon the closing of this Offering, the authorized capital stock of the
Company will consist of 20,000,000 shares of Common Stock, no par value, of
which 8,551,295 will be outstanding after the closing of this Offering (assuming
all of the shares offered hereby are sold, but assuming that the Underwriter's
Over-Allotment Option is not exercised) and 10,000,000 shares of the Company's
Preferred Stock, no par value, none of which will be outstanding. There is no
public trading market for the Company's common or preferred stock and there is
no assurance that a trading market will develop.
The following is a brief description of the material terms of the Company's
capital stock. This description does not purport to be complete and is subject
in all respects to applicable Nevada law and to the provisions of the Company's
Articles of Incorporation and Bylaws, copies of which are on file with the
Commission are incorporated by reference herein.
GENERAL
The shares of Preferred Stock may be issued from time to time in one or
more series. The Board of Directors is authorized to fix the number of shares of
any series of preferred stock and to determine the designation of any such
series. The Board of Directors is also authorized to determine or alter the
rights, preferences, privileges and restrictions granted to or imposed upon any
wholly unissued series of Preferred Stock and, within the limits and
restrictions stated in any resolution or resolutions of the Board of Directors
originally fixing the number of shares constituting any series, to increase or
decrease (but not below the number of shares of such series then outstanding)
the number of shares of any such series subsequent to the issue of shares of
that series.
50
<PAGE> 57
COMMON STOCK
Holders of common stock are entitled to receive dividends when, as and if
declared by the Board of Directors, out of funds legally available therefor.
Dividends on any outstanding shares of preferred stock may be required to be
paid in full before payment of any dividends on the common stock. Upon
liquidation, dissolution or winding up of the Company, holders of common stock
are entitled to share ratably in assets available for distribution after payment
of all debts and other liabilities and subject to the prior rights of any
holders of any preferred stock then outstanding.
Holders of common stock are entitled to one vote per share with respect to
all matters submitted to a vote of shareholders and do not have cumulative
voting rights. Accordingly, holders of a majority of the common stock entitled
to vote in any election of directors may elect all of the directors standing for
election, subject to the voting rights (if any) of any series of preferred stock
that may be outstanding from time to time. The Company's Articles of
Incorporation and Bylaws contain no restrictions on the repurchase by the
Company of shares of the common stock or preferred stock. All the outstanding
shares of common stock are, and additional shares of common stock will be, when
issued, validly issued, fully paid and nonassessable.
Effective May 26, 1998, the Company declared a 1:10 reverse stock split of
its Common Stock. The Company subsequently declared a 1:2 reverse stock split of
its Common Stock, effective August 20, 1998. Based upon the number of shares
outstanding as of the date of this Prospectus, and after giving effect to the
sale of the Common Stock offered hereby and the conversion of the Series A
Preferred Stock, there will be 8,551,295 shares of Common Stock outstanding
(assuming no exercise of outstanding options, warrants or the Underwriter's
Over-Allotment Option).
PREFERRED STOCK
As of March 31, 1998, the Company sold 5,000,000 shares of Series A
Preferred Stock, par value $1 per share, pursuant to a private placement
conducted in Germany in reliance upon the exemption from U.S. securities laws
under Regulation S. The Series A Preferred Stock was entitled to an annual
cumulative preferential dividend of $.09 per share, when and as declared by the
Board of Directors. All of the Series A Preferred Stock were converted into
1,666,611 Shares of Common Stock in October 1998, and there are no shares of
Series A Preferred Stock currently outstanding. The Series A Preferred Stock
ranked prior to the common stock as to dividends and as to distributions in the
event of liquidation, dissolution or winding up of the Company. The Company is
required to pay dividends on the Series A Preferred Stock which had accrued and
have not been paid for any period prior to the conversion the Series A Preferred
Stock, before any dividends may be paid or declared with respect to the Common
Stock.
The Board of Directors is authorized to designate with respect to each
series of preferred stock the number of shares in each such series, the dividend
rates and dates of payment, voluntary and involuntary liquidation preferences,
redemption prices, if any, whether or not dividends shall be cumulative and, if
cumulative, the date or dates from which the same shall be cumulative, the
sinking fund provisions, if any, and the terms and conditions on which shares
can be converted into or exchanged for shares of another class or series, and
the voting rights, if any. As of the date hereof, there are no shares of
Preferred Stock issued and outstanding. The Series A Preferred Stock is
non-voting. Any series preferred stock issued will rank prior to the common
stock as to dividends and as to distributions in the event or liquidation,
dissolution or winding up of the Company. The ability of the Board of Directors
to issue preferred stock, while providing flexibility in connection with
possible acquisitions and other corporate purposes, could, among other things,
adversely affect the voting powers of holders of common stock. The preferred
stock will, when issued, be fully paid and nonassessable. Such provisions
relating to the issuance of preferred stock could have the effect of delaying,
deferring or preventing a change in control of the Company, including without
limitation, discouraging a proxy contest or making more difficult the
acquisition of a substantial block of the Company's Common Stock.
51
<PAGE> 58
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have approximately
8,551,295 shares of Common Stock outstanding after giving effect to the
conversion of the 5,000,000 shares of Series A Preferred stock and assuming the
sale of all of the 1,733,334 shares offered hereby (but assuming no exercise of
the Representative's Warrants or the Underwriters' Over-Allotment-Option). Of
these shares the 1,733,334 shares sold to the public in this Offering will be
freely tradable without restrictions or further registration under the
Securities Act, except for any shares purchased by affiliates of the Company
within the meaning of the Securities Act, which will be subject to the resale
limitations of Rule 144. Of the remaining 6,817,916 shares, 5,151,350 shares are
held by existing shareholders and were issued by the Company in private
transactions in reliance upon one or more exemptions under the Securities Act
and are "Restricted Securities" as that term is defined in Rule 144 promulgated
under the Securities Act, and 1,666,611 shares were issued upon conversion of
the previously outstanding 5,000,000 shares of Series A Preferred Stock, which
were previously issued in a private placement completed as of March 31, 1998.
See "Description of Capital Stock -- Preferred Stock." The holders of restricted
shares generally will be entitled to sell these shares in the public securities
market without registration under the Securities Act to the extent permitted by
Rule 144 (or Rule 145, as applicable) or any exemption under the Securities Act.
Generally, under Rule 144, each person holding restricted securities for a
period of one year may, every three months after such one year holding period,
sell in ordinary brokerage transactions or to market makers an amount of shares
equal to the greater of one percent of our then outstanding Common Stock or the
average weekly trading volume during the four weeks prior to the proposed sale.
In addition, sales under Rule 144 may be made only through unsolicited "broker's
transactions" or to a "market maker" and are subject to various other
conditions. The limitation on the number of shares which may be sold under Rule
144 and the "broker's transaction" requirement do not apply to restricted
securities sold for the account of a person who is not and has not been the
Company's "affiliate" (as that term is defined in the Act) during the three
months prior to the proposed sale and who has beneficially owned the securities
for at least two years. Of the 6,817,961 restricted shares, 500,000 shares of
Common Stock are currently eligible for resale under Rule 144, and 6,317,961
shares of Common Stock will be eligible for resale under Rule 144 beginning in
March 1999.
In addition, the Company intends to file a registration statement on Form
S-8 with respect to the shares of Common Stock issuable upon exercise of options
under the 1998 Stock Option and Incentive Plan (the "Plan"). The Plan authorizes
the issuance of options relating to up to 1,000,000 shares of Common Stock.
Currently, there are options covering 100,000 shares of Common Stock that have
been issued under the Plan which generally vest over three years. See
"Remuneration of Directors and Officers -- 1998 Stock Option and Incentive
Plan." Upon filing of such registration statement, the holders of such options
may, subject to vesting requirements, exercise and sell their shares immediately
without restriction, except affiliates who are subject to certain volume
limitations and manner of sale requirements of Rule 144. Upon registration, such
shares may be sold in the market without limitation. Sales of such shares may
decrease the market price for the Company's Common Stock.
Future sales of a substantial amount of Common Stock in the public market,
or the perception that such sales may occur, could adversely affect the market
price of the Common Stock prevailing from time to time in the public market. See
"Risk Factors -- Shares Eligible for Future Sale."
52
<PAGE> 59
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting agreement
(the "Underwriting Agreement"), the Company has agreed to sell to each of the
underwriters named below (the "Underwriters"), and each of the Underwriters, for
whom Nutmeg Securities, Ltd. is acting as representative (the "Representative"),
has severally agreed to purchase, the number of shares of Common Stock set forth
opposite the name of each such Underwriter named below.
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
----------- ----------------
<S> <C>
Nutmeg Securities, Ltd......................................
--------
Total.............................................
========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters thereunder to pay for and accept delivery of the shares are subject
to approval of certain legal matters by counsel and to various other conditions.
The nature of the Underwriters' obligations is such that they are committed to
purchase and pay for all of the above shares of Common Stock offered hereby
(other than those covered by the Underwriters' Over-Allotment Option described
below) if any are purchased. The Underwriters propose to offer the shares of
Common Stock directly to the public at the public offering price set forth on
the cover page of this Prospectus.
The Company has been advised by the Representative that the Underwriters
propose to offer the Common Stock in part to the public at the Price to Public
set forth on the cover page of this Prospectus, and in part to certain
securities dealers (who may include Underwriters) at such price less a
concession not in excess of $ per share, and that the Underwriters and such
securities dealers may reallow to certain other dealers, a discount not in
excess of $ per share under the Price to Public. After commencement of this
Offering, the Price to Public, concessions to certain securities dealers and the
discount to other dealers may be changed by the Representative.
The Company granted to the Underwriters an option, exercisable during the
45-day period after the date of the closing of this Offering, to purchase up to
260,000 additional shares of Common Stock at a purchase price per share equal to
the Price to Public less the underwriting discount set forth on the cover page
of this Prospectus. The Underwriters may exercise such option only to cover
over-allotments made in connection with the sale of the shares of Common Stock
offered hereby (the "Underwriters' Over-Allotment Option").
The Company has also agreed to issue to the Representative warrants (the
"Representative's Warrants") to purchase the number of shares of the Company's
Common Stock equal to ten percent of the total number of shares of Common Stock
placed by and sold through the Underwriters in this Offering at a price per
share equal to 20% over the Price to Public. The Representative's Warrants will
be exercisable for a period of five years commencing one year after the
effective date of this Offering and will contain certain demand and "piggyback"
registration rights with respect to the Common Stock issuable upon the exercise
of the Representative's Warrants. The Warrants are not transferable (except to
members of the syndicate and their affiliates). The exercise price and the
number of shares issuable upon exercise may, under certain circumstances, be
subject to adjustment pursuant to antidillution provisions.
The Company has agreed to allow the Underwriters a discount equal to eight
percent of the Price to Public of the shares of Common Stock. Additionally, the
Company will pay the Representative, following the closing of this Offering, a
non-accountable expense allowance equal to three percent of the aggregate
proceeds from the sale of Common Stock offered hereby, less any applicable
deposits. Additionally, the Company and all of its shareholders owning at least
five percent of the Company's Common Stock immediately prior to the closing of
this Offering have granted to the Representative a right of first refusal to act
as lead manager, placement agent or investment banker, with respect to any
proposed underwritten public or private offering of the Company's securities of
at least $10,000,000, or any merger, acquisition, or disposition of the
Company's
53
<PAGE> 60
assets and any fairness opinions or valuations, which may be consummated within
the 24-month period commencing on the date of this Prospectus.
The Company has further agreed to indemnify the Underwriters against
certain liabilities, losses and expenses that may be incurred in connection with
the Offering, including liabilities under the Securities Act, or to contribute
to payments that the Underwriters may be required to make in respect thereof.
The Company also has agreed to reimburse the Underwriters for certain
out-of-pocket expenses incurred in connection with the Offering.
The Underwriters have advised the Company that they do not intend to
confirm sales to accounts over which they exercise discretionary authority.
The Company's officers, directors and holders of five percent or more of
the Company's Common Stock have agreed not to, directly or indirectly, sell,
offer, contract to sell, make any short sale, pledge or otherwise dispose of any
such shares for a period of twenty-four months after the date of the closing of
this Offering.
Prior to the Offering, there has not been a public trading market for the
Common Stock. The public offering price of the Common Stock and the terms of the
Representatives' Warrants (including the exercise price) have been determined by
arms-length negotiation between the Company and the Representative. The initial
public offering price of the Common Stock does not necessarily bear any
relationship to the Company's assets, book value, net worth or other established
criteria of value. Among the factors considered by the Company and the
Representative in pricing the Common Stock were the results of operations, the
current financial condition and future prospects of the Company, the experience
of management, the amount of ownership to be retained by present shareholders,
the general condition of the economy and the securities markets, and the demand
for similar securities of companies considered comparable to the Company.
The Price to Public set forth on the cover page of this Prospectus should
not necessarily be considered an indication of the actual value of the Common
Stock. Such price is subject to change as a result of market conditions and
other factors and no assurance can be given that a public market for the Common
Stock will develop after the close of the Offering, or if a public market in
fact develops, that such public market will be sustained, or that the Common
Stock can be resold at the Price to Public of the Common Stock or any other
price at any time after the closing of this Offering.
The Representative, on behalf of the Underwriters, may engage in
over-allotment, stabilizing transactions, syndicate covering transactions,
penalty bids and "passive" market making in accordance with Regulation M under
the Exchange Act. Over-allotment involves syndicate sales in excess of the
offering size, which creates a syndicate short position. Stabilizing transaction
permit bids to purchase the underlying security so long as the stabilizing bids
do not exceed a specified maximum. Syndicate covering transactions involve
purchases of the shares of Common Stock in the open market after the
distribution has been completed in order to cover syndicate short positions.
Penalty bids permit the Representative to reclaim a selling concession from a
syndicate member when the shares of Common Stock originally sold by such
syndicate member are purchased in a syndicate covering transaction to cover
syndicate short positions. In "passive" market making, market makers in the
Common Stock who are Underwriters or prospective Underwriters may, subject to
certain limitations, make bids for or purchases of the Common Stock until the
time, if any, at which a stabilizing bid is made. Such stabilizing transactions,
syndicate covering transactions and penalty bids may cause the price of the
Common Stock to be higher than it would otherwise be in the absence of such
transactions. These transactions may be effected on the NASDAQ National Market
or otherwise and, if commenced, may be discontinued at any time.
54
<PAGE> 61
LEGAL MATTERS
The validity of the Common Stock offered hereby and certain tax matters
will be passed on by Jeffers, Wilson, Shaff & Falk, LLP, Irvine, California. Mr.
Michael B. Jeffers, a partner at Jeffers, Wilson, Shaff & Falk, LLP, serves as
the Company's Corporate Secretary and has been granted options to purchase
20,000 shares of Common Stock. See "Remuneration of Directors and
Officers -- Individual Grants." Certain legal matters will be passed upon for
the Underwriters by Cadwalader, Wickersham & Taft, New York, NY. Counsel for the
Company and counsel for the Underwriters will rely, as to matters of German law,
on the law firm of Wessing & Berenberg - Gossler in Frankfurt, Germany.
EXPERTS
The financial statements of the Company and JBRI included in this
Prospectus have been audited by McGladrey and Pullen, LLP, independent auditors,
as stated in their reports appearing in this Prospectus. Such financial
statements have been included in reliance upon the reports of McGladrey &
Pullen, LLP, and upon the authority of such firm as experts in accounting and
auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission, Washington, D.C. 20549, a
Registration Statement (the "Registration Statement") under the Securities Act,
with respect to the Common Stock offered hereby. This Prospectus, filed as part
of the Registration Statement, omits certain information contained in the
Registration Statement in accordance with the rules and regulations of the
Commission. Copies of the Registration Statement and the exhibits thereto are on
file at the offices of the Commission in Washington, D.C. and may be obtained at
rates prescribed by the Commission upon request to the Commission and inspected,
without charge, at the offices of the Commission. For further information,
reference is hereby made to the Registration Statement. Statements contained
herein concerning the provisions of any document are not necessarily complete
and in each instance, reference is made to the copy of such document filed as an
exhibit to the Registration Statement or otherwise filed with the Commission.
Each such statement is qualified in its entirety by such reference.
The Company has previously filed with the Commission, a registration
statement on Form 10-SB under the Exchange Act, which was declared effective on
March 2, 1998. As of the effective date of the Company's registration statement
on Form 10-SB, the Company became a "reporting company" under the Exchange Act.
The Company is a "small business issuer" and has filed reports pursuant to the
Exchange Act or forms applicable to small business issues.
Such reports and other information can be inspected and copied at the
public reference facilities maintained by the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the Commission's regional offices at
Northwestern Atrium Center, 500 West Madison Street (Suite 1400), Chicago,
Illinois 60661 and 7 World Trade Center, New York, New York 10048. Copies of
such material can also be obtained from the Commission at prescribed rates
through its Public Reference Section at 450 Fifth Street, N.W., Washington, D.C.
20549. The Commission maintains a Web site that contains reports, proxy,
information statements and other information regarding registrants that file
electronically with the Commission. The Web site is located at
http://www.sec.gov. Statements contained in this Prospectus as to the contents
of any contract or any contract or other document referred to are not
necessarily complete, and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respect by such reference.
55
<PAGE> 62
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditor's Report................................ F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Stockholders' Equity............. F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
JAMES BUCHANAN REA, INC.
<TABLE>
<S> <C>
Independent Auditor's Report................................ F-13
Balance Sheets as of December 31, 1997 and 1996............. F-14
Statements of Operations For the Years Ended December 31,
1997 and 1996............................................. F-15
Statements of Changes in Stockholders' Equity for the Years
ended December 31, 1997 and 1996.......................... F-16
Statements of Cash Flows For the Years Ended December 31,
1997 and 1996............................................. F-17
Notes to Financial Statements............................... F-18
</TABLE>
F-1
<PAGE> 63
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
American Diversified Holdings, Inc.
Los Angeles, California
We have audited the accompanying consolidated balance sheets of American
Diversified Holdings, Inc. and subsidiaries as of August 31, 1998 and 1997, and
the related consolidated statements of operations, stockholders' equity and cash
flows for the year ended August 31, 1998 and the periods from February 5, 1997
(inception) to August 31, 1997 and 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of American
Diversified Holdings, Inc. and subsidiaries as of August 31, 1998 and 1997, and
the result of their operations and their cash flows for the periods indicated in
conformity with generally accepted accounting principles.
McGLADREY & PULLEN, LLP
New York, New York
October 16, 1998, except for
Note 10 as to which the date
is December 3, 1998
F-2
<PAGE> 64
AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
AUGUST 31, AUGUST 31,
1998 1997
----------- ----------
<S> <C> <C>
Cash and cash equivalents................................... $ 309,053 $ 2,264
Cash held in escrow (Note 2)................................ 11,621,493 --
Fees receivable............................................. 9,682 --
Capital stock subscriptions receivable (Note 6)............. -- 117,000
Marketable equity securities (cost $308,282)................ 281,117 --
VAT receivable (Note 9)..................................... 350,358 --
Prepaid expenses and other.................................. 139,378 4,220
Deferred offering costs..................................... 72,847 --
Other....................................................... 60,243 --
Goodwill, net of accumulated amortization of $21,636........ 351,143 --
Equipment, net of accumulated depreciation of $88,004 1998;
1997 -0-.................................................. 249,292 14,320
----------- ---------
$13,444,606 $ 137,804
=========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses.................. $ 975,220 $ 63,577
Note payable (Note 3).................................. 387,597 --
Other.................................................. 86,439 --
----------- ---------
Total liabilities................................. 1,449,256 63,577
=========== =========
Stockholders' Equity (Note 6 and 7):
Preferred stock, 10,000,000 shares authorized:
Series A 9% convertible redeemable cumulative
preferred stock, $1.00 par value; 5,000,000
shares designated:
Issued and outstanding, 5,000,000 and no shares,
respectively; preference in liquidation
$5,000,000...................................... 4,725,766 --
Subscribed for but not paid for and not issued,
162,495 shares.................................. -- 150,545
Common stock, no par value; 20,000,000 shares
authorized; issued and outstanding 5,151,350 and
10,000,000 shares, respectively (1997 prior to reverse
stock splits)......................................... 12,236,710 96,754
Unpaid subscriptions as of December 22, 1997........... -- (33,545)
Deficit accumulated during the development stage....... (4,883,516) (139,527)
Accumulated other comprehensive income (loss).......... (83,610) --
----------- ---------
Total stockholders' equity........................ 11,995,350 74,227
----------- ---------
$13,444,606 $ 137,804
=========== =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE> 65
AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
FEBRUARY 5, FEBRUARY 5,
1997 1997
(INCEPTION) (INCEPTION)
TO YEAR ENDED TO
AUGUST 31, AUGUST 31, AUGUST 31,
1998 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Revenue.............................................. $ 45,585 $ 45,585 $ --
----------- ----------- ---------
Expenses (Note 3):
Advertising and promotion.......................... 1,981,264 1,974,044 7,220
Employee compensation and benefits................. 1,031,054 1,010,213 20,841
Administrative..................................... 749,702 727,196 22,506
Professional fees.................................. 700,451 633,977 66,474
Travel and entertainment........................... 142,708 120,222 22,486
Depreciation....................................... 88,004 88,004 --
Rent............................................... 70,284 70,284 --
Amortization....................................... 21,636 21,636 --
Interest........................................... 19,789 19,789 --
Other.............................................. 19,037 19,037 --
Communication...................................... 19,761 19,761 --
----------- ----------- ---------
4,843,690 4,704,163 139,527
----------- ----------- ---------
Operating (loss)................................... (4,798,105) (4,658,578) (139,527)
----------- ----------- ---------
Nonoperating income (loss):
Realized (loss) on sale of equity securities....... (12,583) (12,583) --
Gain on foreign currency transactions.............. 148,149 148,149 --
Interest income.................................... 4,023 4,023 --
----------- ----------- ---------
(Loss) before income taxes................. (4,658,516) (4,518,989) (139,527)
Income taxes (Note 7)................................ -- -- --
----------- ----------- ---------
Net (loss)................................. $(4,658,516) $(4,518,989) $(139,527)
=========== =========== =========
Average common shares outstanding.................... 3,421,170 5,085,838 500,000
=========== =========== =========
Basic and diluted (loss) per common share............ $ (1.43) $ (0.93) $ (0.28)
=========== =========== =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE> 66
AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
PERIOD FROM FEBRUARY 5, 1997 (INCEPTION) TO AUGUST 31, 1997 AND YEAR ENDED
AUGUST 31, 1998
<TABLE>
<CAPTION>
SERIES A 9%
CONVERTIBLE CUMULATIVE (DEFICIT)
PREFERRED STOCK COMMON STOCK ACCUMULATED ACCUMULATED
----------------------- ------------------------ OTHER DURING THE
NUMBER OF NUMBER OF COMPREHENSIVE DEVELOPMENT UNPAID
SHARES AMOUNT SHARES AMOUNT INCOME STAGE SUBSCRIPTIONS
---------- ---------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance February 5, 1997, date
of incepcion.................. $ -- $ -- $ -- $ -- $ --
Comprehensive income (loss):
Net loss...................... (139,527)
Stock Issued:
Common Stock:
For cash at $.01/share........ 4,750,000 47,795
For legal and other services
at $.01/share............... 5,250,000 48,959
Preferred Stock:
For cash at $1.00 share paid
by December 22, 1997........ 126,287 117,000
Unpaid for at December 22,
1997........................ 36,208 33,545 (33,545)
---------- ---------- ---------- ----------- ----------- ----------- -----------
Balance, August 31, 1997........ 162,495 150,545 10,000,000 96,754 (139,527) (33,545)
Comprehensive income (loss):
Translation (loss)........ (56,445)
Unrealized (loss) on
securities.............. (27,165)
Net (loss)................ (4,518,989)
Common Stock:
1 for 10 reverse stock
split....................... (9,000,000)
1 for 2 reverse stock split... (500,000)
Stock Issued:
For cash at $2.19/share... 7,100 15,550
In exchange for note
receivable from
affiliate at
$2.17/share............. 4,500,000 9,773,260
Interest on note
receivable.............. 165,446
Sale of note
receivable............ 1,517,100
For legal and other
services at
$2.20/share............. 25,500 56,100
In exchange for shares of
JBRI.................... 118,750 237,500
Stock option compensation... 375,000
Preferred stock:
For cash and securities at
$1.00/share, net of offering
cost of $262,284............ 4,837,505 4,575,221 33,545
Dividends paid $.045/share.... (225,000)
---------- ---------- ---------- ----------- ----------- ----------- -----------
Balance, August 31, 1998........ 5,000,000 $4,725,766 5,151,350 $12,236,710 $ (83,610) $(4,883,516) $ --
========== ========== ========== =========== =========== =========== ===========
<CAPTION>
NOTES TOTAL
RECEIVABLE COMPRE-
FROM HENSIVE
STOCKHOLDER INCOME(LOSS) TOTAL
----------- ------------ -----------
<S> <C> <C> <C>
Balance February 5, 1997, date
of incepcion.................. $ -- $ -- $ --
Comprehensive income (loss):
Net loss...................... $ (139,527) (139,527)
===========
Stock Issued:
Common Stock:
For cash at $.01/share........ 47,795
For legal and other services
at $.01/share............... 48,959
Preferred Stock:
For cash at $1.00 share paid
by December 22, 1997........
Unpaid for at December 22,
1997........................ 117,000
----------- -----------
Balance, August 31, 1997........ -- 74,227
Comprehensive income (loss):
Translation (loss)........ $ (56,445) (56,445)
Unrealized (loss) on
securities.............. (27,165) (27,165)
Net (loss)................ (4,518,989) (4,518,989)
-----------
$(4,602,599)
===========
Common Stock:
1 for 10 reverse stock
split.......................
1 for 2 reverse stock split...
Stock Issued:
For cash at $2.19/share... 15,550
In exchange for note
receivable from
affiliate at
$2.17/share............. (9,773,260)
Interest on note
receivable.............. (165,446)
Sale of note
receivable............ 9,938,706 11,455,806
For legal and other
services at
$2.20/share............. 56,100
In exchange for shares of
JBRI.................... 237,500
Stock option compensation... 375,000
Preferred stock:
For cash and securities at
$1.00/share, net of offering
cost of $262,284............ 4,608,766
Dividends paid $.045/share.... (225,000)
----------- -----------
Balance, August 31, 1998........ $ -- $11,995,350
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE> 67
AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
FEBRUARY 5, FEBRUARY 5,
1997 1997
(INCEPTION) TO YEAR ENDED (INCEPTION) TO
AUGUST 31, AUGUST 31, AUGUST 31,
1998 1998 1997
-------------- ----------- --------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net (loss).......................................... $(4,658,516) $(4,518,989) $(139,527)
Adjustments to reconcile net (loss) to net cash
(used in) operating activities:
Noncash expense, professional fees................ 105,059 56,100 48,959
Stock option compensation......................... 375,000 375,000 --
Loss on sale of securities........................ 12,583 12,583 --
(Gain) on foreign currency translation............ (148,149) (148,149) --
Depreciation and amortization..................... 110,528 110,528 --
Effect of changes in foreign currency............. (56,445) (56,445) --
Change in assets and liabilities:
Increase in receivables........................... (377,578) (377,578) --
Increase in prepaid expenses and other............ (267,422) (263,202) (4,220)
Increase in accounts payable, accrued expenses and
other.......................................... 1,038,708 975,131 63,577
----------- ----------- ---------
Net cash (used in) operating activities............. (3,866,232) (3,835,021) (31,211)
----------- ----------- ---------
Cash Flows from Investing Activities
Purchase of equipment............................. (338,184) (323,864) (14,320)
Purchase of J.B. Rea, Inc., net of cash
acquired....................................... (146,973) (146,973) --
Purchase of marketable equity securities.......... (500,865) (500,865) --
Proceeds from sales of marketable equity
securities..................................... 180,000 180,000 --
----------- ----------- ---------
Net cash (used in) investing activities............. (806,022) (791,702) (14,320)
----------- ----------- ---------
Cash Flows from Financing Activities
Proceeds from issuance of preferred stock......... 4,725,766 4,725,766 --
Dividends paid on preferred stock................. (195,401) (195,401) --
Proceeds from issuance of common stock............ 63,345 15,550 47,795
Increase in note payable.......................... 387,597 387,597 --
----------- ----------- ---------
Net cash provided by financing activities........... 4,981,307 4,933,512 47,795
----------- ----------- ---------
Increase in cash and cash equivalents............... 309,053 306,789 2,264
Cash and cash equivalents
Beginning........................................... -- 2,264 --
----------- ----------- ---------
Ending.............................................. $ 309,053 $ 309,053 $ 2,264
=========== =========== =========
Supplemental schedule of noncash financing
activities
Issuance of 288,000, 25,500 and 262,500 common
shares in exchange for services rendered....... $ 105,059 $ 56,100 $ 48,959
=========== =========== =========
Issuance of 4,500,000 common shares in exchange
for notes receivable........................... $ 9,938,706 $ 9,938,706 $ --
=========== =========== =========
Issuance of 118,750 common shares in connection
with the acquisition of JB Rea, Inc............ $ 237,500 $ 237,500 $ --
=========== =========== =========
Capital contribution associated with sale of note
receivable to unrelated investors.............. $ 1,517,100 $ 1,517,000 $ --
=========== =========== =========
</TABLE>
See Notes to Consolidated Financial Statements
F-6
<PAGE> 68
AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF THE BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of business: American Diversified Holdings, Inc. (the "Company") was
organized on February 5, 1997 as a provider of financial services in the United
States and Europe. As a development-stage enterprise, the Company has devoted
most of its resources since inception to raising capital and implementing the
first stages of its business plan. The Company, through its subsidiaries, plans
to provide financial services and distribute financial service products to
individual and institutional investors in the United States, Germany and the
European Union countries. The Company's fiscal year ends on the last day of each
August.
The Company has established four wholly-owned subsidiaries:
<TABLE>
<CAPTION>
PLANNED OPERATION
-----------------
<S> <C>
American Diversified AG ("ADAG") Provider of financial services in Germany
American Diversified Asset Management, Inc. Investment adviser/distributor to planned
("ADAM") mutual funds
American Diversified Publications GmbH Will report on technological and financial
("AMDIV") developments
American Diversified Emissionsberatungs GmbH Will provide consulting support for
("AMEG") enterprises considering a public offering
valued in the U.S. or German marketplace
</TABLE>
Effective March 31, 1998, ADAM merged with James Buchanan Rea Inc.("JBRI"),
the investment advisor and distributor of the Rea-Graham Balanced Fund (the
"Fund"), subsequently renamed American Diversified Global Value Fund. The merger
was recorded as a purchase transaction which resulted in the exchange of 118,750
shares of the Company's common stock valued at $237,500 and cash of $160,875 for
the common stock of JBRI. Goodwill of $372,779 was recorded upon completion of
the acquisition, which represents the excess of the purchase price over the fair
value of the net assets acquired. The pro forma effects on operations as though
the transaction occurred on February 5, 1997 (inception) are not presented
herein as the effects are immaterial.
A summary of the Company's significant accounting policies follows:
Principles of consolidation: The consolidated financial statements include
the accounts of the Company and its subsidiaries. All material intercompany
accounts and transactions are eliminated in consolidation.
Cash and cash equivalents: Cash equivalents include highly liquid debt
instruments which have a maturity of three months or less from the date of
purchase and other highly liquid investments which are readily convertible into
cash. Cash equivalents are stated at cost which approximates market value.
Goodwill: Goodwill is being amortized over seven years. Management
periodically evaluates the recoverability of goodwill, which would be adjusted
for a permanent decline in value, if any, as measured by the recoverability from
projected future cash flows from the acquired business.
Equipment: Equipment is recorded at cost and includes expenditures for
major improvements. Depreciation is determined using accelerated methods based
on five to ten year estimated useful lives. The equipment was placed in service
during fiscal 1998.
Foreign currency transactions: The Company has agreed to fund any cash flow
deficits incurred by ADAG, its European subsidiary until such time that ADAG
generates sales revenue. The Company's functional currency is the U.S. dollar.
ADAG's functional currency is the Deutsche Mark (DM). Assets and liabilities of
the Company's foreign subsidiary are translated at exchange rates in effect at
the balance sheet date and the resulting adjustments are recorded as a
translation adjustment in stockholders' equity. The results
F-7
<PAGE> 69
AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
of operations of the Company's foreign subsidiary are translated using the
average exchange rates during the period.
Income taxes: Deferred taxes are provided on a liability method whereby
deferred tax assets are recognized for deductible temporary differences and
operating loss and tax credit carry forwards and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their tax
bases. Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on the
date of enactment.
Fair value of financial instruments and credit risk: The fair value of cash
and cash equivalents, cash held in escrow and capital stock subscriptions
receivable approximates carrying amounts because of the short term nature of
those instruments. The fair value of marketable equity securities is based on
quoted market prices. The carrying amount of the Company's debt approximates
fair value based on the short-term nature of the debt and rates available for
similar borrowings. A portion of the Company's cash and all of its cash held in
escrow is held in DM in German banks. The Company is exposed to the risk of
foreign exchange rate fluctuations and credit risk. The Company manages its
credit risk by limiting its deposits to banks with the highest credit ratings.
Marketable equity securities: Marketable equity securities consist of an
investment in the Fund, an open-end mutual fund, and is considered
available-for-sale. Such securities are carried at their current net asset value
with any unrealized gains or losses reported as other comprehensive income in
stockholders' equity. Realized gains and losses are recorded on the identified
cost method.
Advertising: The Company expenses the costs of advertising as incurred.
Loss per common share: The basic loss per common share is computed in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 128,
Earning Per Share, and is based on the net loss from operations and the weighted
average number of shares of common stock outstanding during the period. Common
shares issuable upon conversion of preferred stock have not been included in the
computation because their inclusion would have had an antidilutive effect
(reduced the loss per common share).
Information about the computation of the basic loss per share follows:
<TABLE>
<CAPTION>
WEIGHTED
INCOME AVERAGE (LOSS)
(LOSS) SHARES PER SHARE
----------- --------- ---------
<S> <C> <C> <C>
1998
Net (loss)................................... $(4,518,989)
Less: preferred stock dividends.............. (225,000)
----------- --------- ------
$(4,743,989) 5,085,838 $(0.93)
=========== ========= ======
1997
Net (loss)................................... $ (139,527) 500,000 $(0.28)
=========== ========= ======
From inception through 1998
Net (loss)................................... $(4,658,516)
Less: preferred stock dividends.............. (225,000)
----------- --------- ------
$(4,883,516) 3,421,170 $(1.43)
=========== ========= ======
</TABLE>
Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets
F-8
<PAGE> 70
AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
and liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenue and expense
during the reporting period. Actual results could differ from those estimates.
Recent accounting pronouncements: In June 1997, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 130, Reporting Comprehensive Income.
This statement requires companies to classify items of other comprehensive
income, such as unrealized gains and losses on available-for-sale securities, by
their nature in a financial statement and display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial position. The
Company adopted this statement in its fiscal year ended August 31, 1998.
In June 1997, the FASB also issued SFAS No. 131, Disclosures About Segments
of an Enterprise and Related Information. SFAS No. 131 established standards for
reporting information about operating and geographic segments and is effective
for financial statements issued for fiscal years beginning after December 15,
1997. The Company has determined that there will be no significant changes to
the Company's disclosures pursuant to the adoption of SFAS No 131.
NOTE 2. CASH HELD IN ESCROW
In connection with the Company's founding, a group of stockholders
contributed their ownership of a "Bearer Note" secured by a first mortgage on
certain real property in Berlin, Germany. The 4% note, with a face amount 17.5
million Deutsche Marks (DM), was due on December 31, 1999. For U.S. accounting
purposes the capital contribution (valued at $9,773,260) and the accumulated
interest thereon were reported as common stock issued and the note receivable
from stockholders was reflected as a reduction of stockholders' equity until
such time the note and accumulated interest are converted to cash.
On May 29, 1998, the note was sold, on a non-recourse basis, to a group of
unrelated investors for DM 20.2 million resulting in an economic gain of
$1,517,000. For U.S. accounting purposes the gain was reported as an adjustment
to the issuance price of share capital. The transaction was handled through
escrow agents in Berlin. On October 12, 1998 all of the cash held in escrow (DM
20,366,667) was released and transferred to the Company's German bank account.
NOTE 3. LINE OF CREDIT
ADAG has an unsecured line of credit of DM 300,000 which bears interest at
8.75%. During August 1998, ADAG's bank permitted a level of short-term
borrowings of DM 686,000, more than 100% above the contractually established
limit of DM 300,000, with the portion above the limit bearing interest at
12.75%. Subsequent to August 31, 1998, ADAG reduced its outstanding line of
credit within contractual limits. Interest paid on short-term borrowings during
the year ended August 31, 1998 was approximately $20,000.
NOTE 4. RELATED PARTY TRANSACTIONS
Legal and other services provided by the Company's stockholders and
reported as operating expenses in the accompanying financial statements totaled
$56,100 during the year ended August 31, 1998 and $48,959 in the period ended
August 31, 1997.
ADAM is the investment advisor to the Fund. Under the investment advisory
agreement, ADAM receives a monthly fee of 1/12 of 1% of the first $20,000,000 of
the Fund's net assets on the last business day of the month, 1/12 of .75% of the
next $80,000,000, 1/12 of .5% of the next $100,000,000, and 1/12 of .45% of
monthly net assets in excess of $200,000,000. ADAM also receives a distribution
fee charged against the assets of the Fund and equal on an annual basis to .35%
of the Fund's average daily net assets.
F-9
<PAGE> 71
AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ADAM has agreed to reimburse the Fund's expenses, including waiving its
fees to the extent the Fund's expenses exceed, on an annual basis, 1.88% of the
Fund's average daily net assets. In connection with this undertaking the Company
waived fees of $18,608 during the period ended August 31, 1998.
NOTE 5. LEASE COMMITMENT
During fiscal 1998, the Company and its subsidiaries operated in facilities
primarily under short-term lease arrangements. The Company's current long-term
lease requires monthly payments of approximately $3,700, plus utilities and VAT
and expires in 2002. Future minimum lease commitments are as follows:
<TABLE>
<S> <C>
1999...................................................... $ 44,000
2000...................................................... 44,000
2001...................................................... 44,000
2002...................................................... 15,000
--------
$147,000
========
</TABLE>
Subsequent to August 31, 1998, the Company entered into a long-term lease
for additional space in Los Angeles, California. The lease requires annual
minimum payments of approximately $103,000 through December 2001. The Company is
currently in negotiating the terms of a long-term lease for larger office
facilities in Berlin.
NOTE 6. PREFERRED STOCK
The Company's Board of Directors has authorized the issuance of 5,000,000
shares of Series A 9% cumulative convertible redeemable preferred stock. The
cumulative dividends accrue daily and are payable semi-annually, when and as
declared, at an annual rate of $.09 per share commencing January 1, 1998. No
dividends can be paid on the common stock until any accrued, but not yet
declared dividends on the preferred stock have been paid. The Company may at its
option, and subject to certain notification provisions, redeem all or a portion
of the preferred stock at the price of $1.00 per share, plus any accrued and
unpaid dividends. The stockholders do not have the right to demand redemption of
the preferred stock. Each share is convertible at the option of the holder into
common stock at the rate of three preferred shares for one share of common stock
(see Note 10).
In addition, each share of preferred stock shall be automatically converted
into shares of common stock at a conversion price equal to the initial issue
price of the preferred shares, subject to certain adjustments, immediately upon
the closing of a sale of the Company's common stock in a public offering under
the Securities Act of 1933 that results in net proceeds to the Company of at
least $10,000,000.
During 1998, the Company completed its sale of preferred stock in Germany
under Regulation S, guidelines established under the Securities Act of 1933 for
Securities offerings made outside of the United States. The Offering was
registered with the ABundesaufsichtsamt fuer Wertpapier handel, the German
governmental agency which regulates German securities transactions. As of August
31, 1997, the Company received subscriptions for 162,495 preferred shares. As of
July 31, 1998, all preferred stock subscriptions were collected.
NOTE 7. COMMON STOCK
In September 1997, the Company issued 4,500,000 shares (giving effect to
all stock splits and reverse stock splits, see below) of its common stock in
exchange for a note receivable (see Note 2) from an affiliate of one of the
Company's stockholders.
F-10
<PAGE> 72
AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In November 1997, the Company's Board of Directors approved a ten-for-one
stock split which increased the number of authorized voting and non-voting
shares to 110,000,000, and increased issued and outstanding shares to 10 million
at August 31, 1997.
On May 26, 1998, the Board of Directors approved a one-for-ten reverse
stock split which decreased the number of the outstanding shares. On this date
the Company also amended their articles of incorporation to change the number of
authorized common stock to 20,000,000 and preferred shares to 10,000,000. On
August 20, 1998, the Board approved a second reverse stock split of one-for-two.
All fiscal 1998 transactions in the Company's common stock and the loss per
common share for all the periods presented have been adjusted to give effect to
the stock split and reverse stock splits.
The total common stock on the balance sheet as of August 31, 1998 and 1997,
respectively, includes $2,057,546 and $-0- of additional paid-in capital
resulting from transactions not directly related to issuances of common stock.
NOTE 8. STOCK OPTION PLAN
On May 26, 1998 the Board of Directors approved the 1998 Stock Option and
Incentive Plan (the "Plan") which authorizes the granting of options to
employees and directors to purchase an aggregate of up to 1,000,000 shares, but
not more than 5% of the outstanding shares of the Company's common stock. The
Plan authorizes the Board of Directors, or a committee of the Board of
Directors, to grant Incentive Stock Options ("ISOs") as defined under section
422 of the Internal Revenue Code of 1986, as amended, options not so qualified
("NQSOs"), Dividend Equivalent Rights ("DERs"), Stock Appreciation Rights
("SARs"), and Phantom Stock Rights ("PSRs").
Options become exercisable six months after the date granted and expire ten
years after the date granted. During the year ended August 31, 1998, there were
100,000 options granted to buy common shares at an average exercise price of
$3.00. These are the only options outstanding as of August 31, 1998 and none of
the options are exercisable until December 17, 1998.
The Company adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Accordingly, only the intrinsic value of options granted has been
recognized as compensation cost. Had compensation cost for the Company's stock
option plan been determined based on the fair value at the grant date for awards
in 1998 consistent with the provisions of SFAS No. 123, the Company's net loss
and loss per share would have been reduced to the pro forma amounts indicated in
the table below. The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model:
<TABLE>
<CAPTION>
PERIOD
FROM INCEPTION
THROUGH YEAR ENDED
AUGUST 31, 1998 AUGUST 31, 1998
--------------- ---------------
<S> <C> <C>
Net (loss) -- as reported................................... $(4,658,516) $(4,518,989)
Net (loss) -- pro forma..................................... (4,711,016) (4,571,489)
Basic and diluted (loss) per share -- as reported........... (1.29) (0.93)
Basic and diluted (loss) per share -- pro forma............. (1.30) (0.94)
Assumptions:
Dividend yield............................................ --% --%
Expected volatility....................................... --% --%
Risk-free interest rate................................... 5.50% 5.50%
Expected lives............................................ 7 years 7 years
The fair value of options granted during 1998 was $10.26 per
share
</TABLE>
F-11
<PAGE> 73
AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. INCOME AND VALUE ADDED TAXES
The Company has approximately $4,000,000 of federal and state operating
loss carryforwards, which may be utilized to offset future taxable income. The
federal operating loss carryforwards expire in 2018 and the state operating loss
carryforwards expire in 2003. The tax benefit recognized for the net operating
losses have been offset by an equal increase in the valuation allowance for
deferred taxes resulting in no income tax expense or benefit reflected in the
accompanying statement of operations and no income tax expense or benefit has
been allocated to the components of comprehensive income or loss.
The Company's operations in Germany have not yet generated taxable income
and therefore are not yet subject to income taxes. The Company's German
subsidiaries are subject to value added taxes ("VAT")on certain services,
supplies and equipment. The Company also will collect VAT on certain services
that it performs, e.g. consulting services. At August 31,1998 the Company had
refundable VAT of $350,358.
NOTE 10. SUBSEQUENT EVENTS
As of October 30, 1998 substantially all holders of the Company's preferred
stock had elected to convert their shares of preferred stock into common stock
at the stated rate of three preferred shares for one share of common stock. The
conversion had the effect of increasing the Company's outstanding shares of
common stock to approximately 6,818,000 shares.
On November 30, 1998, the Company signed a letter of intent with Nutmeg
Securities, Ltd., (the "Managing Underwriter") which outlines plans for the
Company's Initial Public Offering. Subject to terms and certain conditions set
forth in an underwriting agreement with the Company, the Managing Underwriter
will form a syndicate of underwriters to sell 1,733,334 of the Company's common
shares on a firm commitment basis for resale to the public. In addition to a
selling commission of 8% on the shares sold by the Managing Underwriter and an
expense allowance, the letter of intent provides for the Managing Underwriter to
receive warrants, exercisable for 5 years, to purchase up to 10% of the number
of shares of common stock sold in the Offering at an exercise price of 120% of
the issue price per share.
On December 3, 1998, the Company changed its name to amdiv.com, inc.
F-12
<PAGE> 74
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
James Buchanan Rea, Inc.
Los Angeles, California
We have audited the accompanying balance sheets of James Buchanan Rea, Inc.
as of December 31, 1997 and 1996, and the related statements of operations,
changes in stockholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of James Buchanan Rea, Inc. as
of December 31, 1997 and 1996, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
/s/ MCGLADREY & PULLEN, LLP
--------------------------------------
McGladrey & Pullen, LLP
New York, New York
March 16, 1998, except
for the last paragraph
of Note 9 as to which the
date is March 31, 1998
F-13
<PAGE> 75
JAMES BUCHANAN REA, INC.
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
ASSETS
<TABLE>
<CAPTION>
1997 1996
--------- --------
<S> <C> <C>
Cash and cash equivalents................................... $ 11,336 $ 60,838
Accounts receivable:
Investment advisory fees.................................. 8,462 12,043
Distribution fees......................................... 2,951 3,363
Other..................................................... 2,539
Prepaid expenses............................................ 2,136 2,527
Property and equipment, net (Note 2)........................ 45,344 48,495
Deposits.................................................... 1,687 1,387
--------- --------
$ 74,455 $128,653
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses..................... $ 7,744 $ 5,233
Dealer service fees payable............................... 4,202 5,057
--------- --------
11,946 10,290
--------- --------
Stockholders' Equity (Note 6):
Common stock, no par value; authorized, issued and
outstanding
100,000 shares....................................... 7,500 7,500
Additional paid-in capital............................. 198,735 184,735
Accumulated deficit.................................... (143,726) (73,872)
--------- --------
62,509 118,363
--------- --------
$ 74,455 $128,653
========= ========
</TABLE>
See Notes to Financial Statements.
F-14
<PAGE> 76
JAMES BUCHANAN REA, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Revenue:
Commissions (Note 4)...................................... $ 304 $ 590
Advisory fees (Note 4).................................... 104,109 119,035
Distribution fees (Note 4)................................ 36,647 42,582
Interest.................................................. 1,059 3,852
Other..................................................... 3,000
-------- --------
145,119 166,059
Expenses (Note 4):
Employee compensation and benefits........................ 112,455 114,662
Communications............................................ 2,921 1,613
Occupancy and equipment rental............................ 15,323 16,385
Taxes other than income taxes............................. 800 1,195
Other operating expenses.................................. 83,474 80,531
-------- --------
214,973 214,386
-------- --------
(Loss) before income taxes............................. (69,854) (48,327)
-------- --------
Federal and state income taxes (Note 7)
Net (loss)............................................. $(69,854) $(48,327)
======== ========
Weighted average number of common shares outstanding........ 100,000 100,000
======== ========
Net (loss) per common share................................. $ (0.70) $ (0.48)
======== ========
</TABLE>
See Notes to Financial Statements.
F-15
<PAGE> 77
JAMES BUCHANAN REA, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN ACCUMULATED STOCKHOLDERS
STOCK CAPITAL DEFICIT EQUITY
------ ---------- ----------- ------------
<S> <C> <C> <C> <C>
Balance, December 31, 1995.................... $7,500 $184,735 $ (25,545) $166,690
Net (loss).................................. (48,327) (48,327)
------ -------- --------- --------
Balance, December 31, 1996.................... $7,500 $184,735 $ (73,872) $118,363
Additional contributions.................... 14,000 14,000
Net (loss).................................. (69,854) (69,854)
------ -------- --------- --------
Balance, December 31, 1997.................... $7,500 $198,735 $(143,726) $ 62,509
====== ======== ========= ========
</TABLE>
See Notes to Financial Statements.
F-16
<PAGE> 78
JAMES BUCHANAN REA, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Cash Flows from Operating Activities:
Net (loss)................................................ $(69,854) $(48,327)
Adjustments to reconcile net (loss) to net cash (used in)
operating activities:
Depreciation and amortization.......................... 3,550 3,496
Change in assets and liabilities:
Decrease in receivables................................ 3,993 2,155
Increase in prepaids and other assets.................. (2,448) 1,065
Increase (decrease) in accounts payable and accrued
expenses.............................................. 2,511 610
Decrease in dealer service fees payable................ (855) (1,276)
-------- --------
Net cash (used in) operating activities................... (63,103) (42,277)
-------- --------
Cash Flows from Investing Activities
Purchase of property and equipment........................ (399)
-------- --------
Cash Flows from Financing Activities
Contribution of capital................................... 14,000 --
-------- --------
(Decrease) in cash and cash equivalents................... (49,502) (42,277)
Cash and Cash Equivalents
Beginning................................................. 60,838 103,115
-------- --------
Ending.................................................... $ 11,336 $ 60,838
======== ========
</TABLE>
See Notes to Financial Statements.
F-17
<PAGE> 79
JAMES BUCHANAN REA, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
James Buchanan Rea, Inc. (the "Company") is engaged as the investment
advisor and principal underwriter of the Rea-Graham Funds, Inc. (the "Fund").
The Company also conducts business as an authorized dealer in Fund shares.
The Company operates under the provisions of Paragraph (k)(2)(ii) of Rule
15c3-3 of the Commission and, accordingly, is exempt from the remaining
provisions of that Rule.
SIGNIFICANT ACCOUNTING POLICIES
Securities Transactions: Securities transactions and related commission
income and expense are recorded on a trade date basis.
Revenue Recognition: Advisory fees and distribution fees are recognized as
earned.
Cash Equivalents: Cash equivalents include debt instruments which have a
maturity of three months or less from the date of purchase and other highly
liquid investments which are readily convertible into cash. Cash equivalents are
stated at cost which approximates market value.
Property and Equipment: Property and equipment are stated at cost and
include expenditures for additions and major improvements. Depreciation is
determined principally by the double-declining-balance method and is based on
the following estimated useful lives:
<TABLE>
<CAPTION>
LIFE
IN YEARS
--------
<S> <C>
Automobiles................................................. 5
Capital improvements to executive office.................... 5 - 31
Furniture and equipment..................................... 5 - 7
</TABLE>
Fair Value of Financial Instruments: The fair value of cash and cash
equivalents approximate the carrying amount because of the short maturity of
those instruments.
Net Loss per Common Share: The net loss per common share is based on the
net loss from operations and the weighted average number of shares of common
stock outstanding during each year.
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expense during
the reporting period. Actual results could differ from those estimates.
NOTE 2. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1997 and 1996 is summarized as
follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Automobiles.................................... $ $ 7,525
Capital improvements to executive office....... 66,925 66,925
Furniture and equipment........................ 29,371 28,972
-------- --------
96,296 103,422
Less accumulated depreciation.................. (50,952) (54,927)
-------- --------
$ 45,344 $ 48,495
======== ========
</TABLE>
F-18
<PAGE> 80
JAMES BUCHANAN REA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. PROFIT SHARING PLAN
The Company participates in an employee profit sharing plan which covers
all full-time employees. Annual contributions to the profit sharing plan are
determined by the Board of Directors. No contributions were made to the profit
sharing plan for 1997 and 1996.
NOTE 4. RELATED PARTY TRANSACTIONS
The Company is retained as the investment advisor to the Fund. Under the
terms of the agreement, the Company receives a monthly fee of 1/12 of 1% of the
first $20,000,000 of the Fund's net assets on the last business day of the
month, 1/12 of .75% of the next $80,000,000, 1/12 of .5% of the next
$100,000,000, and 1/12 of .45% of net assets in excess of $200,000,000.
The Company shares office space, personnel and other administrative costs
with the Fund. Total administrative expenses allocated to the Fund for the years
ended December 31, 1997 and 1996 aggregated $31,233 and $30,004, respectively.
On February 28, 1990, the shareholders of the Fund approved a Plan of
Distribution for the Fund (the Plan). The Plan provides that the Fund will pay
monthly to the Company a distribution fee charged against the assets of the Fund
and equal on an annual basis to .35% of the Fund's average daily net assets,
commencing on April 1, 1990. Distribution fees received for the years ended
December 31, 1997 and 1996 were $36,647 and $42,582, respectively. Included in
other operating expenses is $17,309 and $22,269 representing trail commissions
passed on to other dealers in 1997 and 1996, respectively.
As principal underwriter and authorized dealer in Fund shares, the Company
received commissions of $304 and $590, during 1997 and 1996, respectively.
NOTE 5. TOTAL RENTAL EXPENSE
Total rent expense, exclusive of Fund allocated expenses (Note 4) and net
of sublease rental income of $14,119 in 1995, amounted to $9,133 and $9,380 for
the years ended December 31, 1997 and 1996, respectively.
NOTE 6. NET CAPITAL
The Company is subject to the net capital rule of the Commission. This rule
prohibits a broker-dealer from engaging in securities transactions when its
aggregate indebtedness exceeds 15 times its net capital as those terms are
defined in the Rule 15c3-1. Rule 15c3-1 also provides that equity capital may
not be withdrawn or cash dividends paid if the resulting net capital ratio would
exceed ten to one.
The Company's net capital, required net capital, and net capital ratio as
of December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
---------- -------
<S> <C> <C>
Net Capital.................................... $ 10,199 $58,920
---------- -------
Required net capital........................... $ 5,000 $ 5,000
---------- -------
Net capital ratio.............................. 1.17 to 1 17 to 1
========== =======
</TABLE>
NOTE 7. INCOME TAXES
The Company has approximately $195,000 and $181,000 of federal and state
operating loss carryforwards, respectively, which may be utilized to offset
future taxable income as of December 31, 1997. The federal operating loss
carryforwards expire from years 2009 to 2012 and the state operating loss
carryforwards
F-19
<PAGE> 81
JAMES BUCHANAN REA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
from years 1999 to 2002. For the years ended December 31, 1997 and 1996, tax
benefits recognized for net operating losses were offset by equal increase in
the valuation allowance for deferred taxes resulting in no income tax expense or
benefit reflected on the Statements of Operations.
NOTE 8. OFF-BALANCE-SHEET RISK
As discussed in Note 1, the Company's customers' securities transactions
are introduced on a fully disclosed basis with its clearing broker-dealer. The
clearing broker-dealer carries all accounts of the Company's customers and is
responsible for execution, collection and payment of funds, and receipt and
delivery of securities, relative to customer transactions. Off-balance-sheet
risk exists due to the possibility that customers may be unable to fulfill their
contractual commitments, in which case the clearing broker-dealer may charge to
the Company any losses it incurs. The Company seeks to minimize this risk
through procedures designed to monitor the creditworthiness of its customers and
to ensure that customer transactions are executed properly by the clearing
broker-dealer.
NOTE 9. PENDING MERGER
On November 24, 1997, the Company entered into an agreement to merge with
American Diversified Asset Management, Inc. (American Diversified) with American
Diversified to be the survivor of the merger. The merger will be affected by an
exchange of 2,375,000 shares of common stock of American Diversified and cash of
$160,875 for the common stock of the Company. The cash proceeds will be utilized
to retire the stock of the minority shareholders of the Company. The merger was
approved by the shareholders of the Fund on January 12, 1998.
On March 31, 1998, the Company's merger into American Diversified Holdings,
Inc. became effective.
F-20
<PAGE> 82
- ------------------------------------------------------
- ------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 1
Risk Factors.......................... 6
The Company........................... 15
Use of Proceeds....................... 17
Dilution.............................. 19
Dividend Policy....................... 20
Capitalization........................ 21
Description of Business............... 22
Unaudited Pro Form Consolidated
Financial Statements................ 37
Management's Discussion and Analysis
of Financial Condition and Results
of Operation........................ 39
Description of Property............... 42
Directors, Executive Officers and
Significant Employees............... 42
Remuneration of Directors and
Officers............................ 46
Security Ownership of Management and
Certain Securityholders............. 49
Interest of Management and Others in
Certain Transactions................ 50
Description of Securities............. 50
Shares Eligible for Future Sale....... 52
Underwriting.......................... 53
Legal Matters......................... 55
Experts............................... 55
Additional Information................ 55
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
------------------------
NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION AND REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO ITS DATE. THIS PROSPECTUS DOSE NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE
REGISTERED SECURITIES TO WHICH IT RELATES. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY
CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
1,733,334 SHARES
COMMON STOCK (NO PAR VALUE)
LOGO
------------
PROSPECTUS
------------
Nutmeg Securities, Ltd.
December , 1998
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 83
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Articles of Incorporation limit the liability of directors and officers
to the fullest extent permitted under Nevada General Corporation Law. As allowed
by Nevada Revised Statutes, the Articles of Incorporation and Bylaws of the
Company provide that the liability of the directors of the Company for monetary
damages shall be eliminated to the fullest extent permissible under Nevada law.
This is intended to eliminate the personal liability of a director for monetary
damages in an action brought by or in the right of the Company for breach of a
director's duties to the Company or its shareholders except for liability for
acts or omissions that involve intentional misconduct or knowing and culpable
violation of law, for acts or omissions that a director believes to be contrary
the best interests of the Company or its shareholders or that involve the
absence of good faith on the part of the director, for any transaction from
which a director derived an improper personal benefit, for acts or omissions
that show a reckless disregard for the director's duty to the Company or its
shareholders in circumstances in which the director was aware, or should have
been aware, in the ordinary course of performing a director's duties, of a risk
of serious injury to the Company or its shareholders, for acts or omissions that
constitute an unexcused pattern of inattention that amounts to an abdication of
the director's duty to the Company or its shareholders, with respect to certain
contracts in which a director has a material financial interest and for approval
of certain improper distributions to shareholders or certain loans or
guarantees. This provision does not limit or eliminate the rights of the Company
or any shareholder to seek non-monetary relief such as an injunction or
rescission in the event of a breach of a director's duty of care.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses in connection with this
Registration Statement. All of such expenses are estimates, other than the
filing fees payable to the Commission.
<TABLE>
<S> <C>
Filing Fee -- Securities and Exchange Commission............ $ 15,061.00
Exchange Listing Fee........................................ 70,000.00
Fees and Expenses of Accountants............................ 75,000.00
Fees and Expenses of Counsel................................ 200,000.00
Printing and Engraving Expenses............................. 100,000.00
Blue Sky Fees and Expenses.................................. 10,000.00
Transfer Agent Fees......................................... 4,000.00
Miscellaneous Expenses...................................... 20,000.00
-----------
Total............................................. $494,061.00
===========
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
See "Interest of Management and Others in Certain Transactions" above, for
a description of the Company's common stock issued in the JBRI-ADAM merger.
See "Description of Security -- Preferred Stock," for a discussion of the
5,000,000 private placement of Series A Preferred Stock to approximately 384
shareholders, which was completed on March 31, 1998.
Mr. Peter Hartmann contributed $22,979 in cash and the remainder in
services for the 2,375,000 shares of Common Stock issued to him as of March
1997. The 2,375,000 shares issued to Mr. Hartmann have been converted into
118,750 shares of Common Stock following a 1:10 reverse stock split of the
Common Stock, effective May 26, 1998, and a 1:2 reverse stock split of the
Common Stock, effective August 20, 1998. See "Description of
Securities -- Common Stock" and "Security Ownership of Management and Certain
Securityholders."
II-1
<PAGE> 84
ITEM 27. EXHIBITS
(a) The following exhibits to this Registration Statement are filed
herewith:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C> <C>
1.1 -- Form of Underwriting Agreement*
1.2 -- Form of Warrant Agreement (filed as part of Exhibit 1.1)*
2.1 -- Plan and Agreement of Merger and Reorganization among JBRI,
ADAM, the Company and certain shareholders of JBRI**
3.1 -- Articles of Incorporation**
3.1.1 -- Amendment to Articles of Incorporation dated April 1, 1997**
3.1.2 -- Amendment to Articles of Incorporation dated November 20,
1997**
3.1.3 -- Amendment to Articles of Incorporation dated January 12,
1998**
3.1.4 -- Certificate of Designation re: Series A Preferred Stock,
dated February 5, 1998**
3.1.5 -- Amendment to Articles of Incorporation dated May 29, 1998.**
3.1.6 -- Amendment to Articles of Incorporation dated October 5,
1998.**
3.1.7 -- Amendment to Articles of Incorporation dated December 3,
1998**
3.2 -- Bylaws of the registrant**
4.1 -- Specimen of Common Stock of Registrant**
4.2 -- Specimen of Series A Preferred Stock of Registrant**
5.1 -- Opinion of Jeffers, Wilson, Shaff & Falk, LLP**
10.1 -- Form of Investment Advisory Agreement of ADAM with
Rea-Graham Balanced Fund, Inc.**
10.2 -- Form of Investment Sub-Advisory Agreement of ADAM with Ladas
& Hulings, Inc.**
10.3 -- Employment Agreement among Registrant, ADAM and James B.
Rea, Jr.**
10.5 -- Employment Agreement between Registrant and Peter Hartmann**
10.6 -- 1998 Stock Option and Incentive Plan adopted as of May 26,
1998**
10.7 -- Escrow Agreement among Registrant, Nutmeg Securities, Ltd.,
and City National Bank*
21.1 -- Subsidiaries**
23.1 -- Consent of McGladrey & Pullen, LLP*
23.2 -- Consent of Jeffers, Wilson, Shaff & Falk, LLP (filed as part
of Exhibit 5)**
24.1 -- Power of Attorney (included in the signature page)**
27.1 -- Financial Data Schedules**
</TABLE>
- ---------------
* Being filed herewith
** Previously Filed
(b) All financial statement schedules that might otherwise be required to
be filed as a party of this Registration Statement have been omitted because the
required information is shown in the financial statements or notes thereto, the
amounts involved are not significant, or the schedules are not applicable.
ITEM 28. UNDERTAKINGS
The undersigned small business issues hereby undertakes:
(1) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed in
the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the
II-2
<PAGE> 85
securities being registered, the Company will, unless in the opinion of the
Company's counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(2) The undersigned registrant hereby undertakes that:
(i) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430(A) and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of
this registration statement as of the time it was declared effective.
(ii) For the purpose of determining any liability under the Act,
treat each post-effective amendment that contains a form of prospectus
as a new registration statement for the securities offered in
registration statement and that the Offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 86
SIGNATURES
In accordance with the requirements of the Securities Act, the registrant
certifies that is has reasonable grounds to believe that it meets all of the
requirements of filing on Form SB-2 and authorized this Registration Statement
to be signed on its behalf by the undersigned, in the City of Los Angeles, State
of California, on December 9, 1998.
amdiv.com, inc.
By: /s/ JAMES BUCHANAN REA, JR.
------------------------------------
James Buchanan Rea, Jr.,
President and Chief Executive
Officer
In accordance with the requirements of the Securities Act of 1933, this
Amendment to the Registration Statement has been signed below by the following
persons in the capacities and on the dates stated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <C> <S>
/s/ PETER HARTMANN Chairman of the Board and Vice December 9, 1998
- --------------------------------------------------- President of International
Peter Hartmann Development
/s/ JAMES BUCHANAN REA, JR. Director, President and Chief December 9, 1998
- --------------------------------------------------- Executive Officer
James Buchanan Rea, Jr.
* Chief Financial Officer and December 9, 1998
- --------------------------------------------------- Treasurer
Roland Kuettner
* Director December 9, 1998
- ---------------------------------------------------
Thomas Corcovelos
* Director December 9, 1998
- ---------------------------------------------------
Thomas H. Fitzgerald, Jr.
*By /s/ JAMES BUCHANAN REA, JR.
-----------------------------------------------
James Buchanan Rea, Jr.
As Attorney-in-fact
</TABLE>
II-4
<PAGE> 87
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C> <C>
1.1 -- Form of Underwriting Agreement*
1.2 -- Form of Warrant Agreement (filed as part of Exhibit 1.1)*
2.1 -- Plan and Agreement of Merger and Reorganization among JBRI,
ADAM, the Company and certain shareholders of JBRI**
3.1 -- Articles of Incorporation**
3.1.1 -- Amendment to Articles of Incorporation dated April 1, 1997**
3.1.2 -- Amendment to Articles of Incorporation dated November 20,
1997**
3.1.3 -- Amendment to Articles of Incorporation dated January 12,
1998**
3.1.4 -- Certificate of Designation re: Series A Preferred Stock,
dated February 5, 1998**
3.1.5 -- Amendment to Articles of Incorporation dated May 29, 1998.**
3.1.6 -- Amendment to Articles of Incorporation dated October 5,
1998.**
3.1.7 -- Amendment to Articles of Incorporation dated December 3,
1998**
3.2 -- Bylaws of the registrant**
4.1 -- Specimen of Common Stock of Registrant**
4.2 -- Specimen of Series A Preferred Stock of Registrant**
5.1 -- Opinion of Jeffers, Wilson, Shaff & Falk, LLP**
10.1 -- Form of Investment Advisory Agreement of ADAM with
Rea-Graham Balanced Fund, Inc.**
10.2 -- Form of Investment Sub-Advisory Agreement of ADAM with Ladas
& Hulings, Inc.**
10.3 -- Employment Agreement among Registrant, ADAM and James B.
Rea, Jr.**
10.5 -- Employment Agreement between Registrant and Peter Hartmann**
10.6 -- 1998 Stock Option and Incentive Plan adopted as of May 26,
1998**
10.7 -- Escrow Agreement among Registrant, Nutmeg Securities, Ltd.,
and City National Bank*
21.1 -- Subsidiaries**
23.1 -- Consent of McGladrey & Pullen, LLP*
23.2 -- Consent of Jeffers, Wilson, Shaff & Falk, LLP (filed as part
of Exhibit 5)**
24.1 -- Power of Attorney (included in the signature page)**
27.1 -- Financial Data Schedules**
</TABLE>
- ---------------
* Being filed herewith
** Previously Filed
<PAGE> 1
EXHIBIT 1.1
[Form of Underwriting Agreement - Subject to Additional Review]
1,733,334 SHARES OF COMMON STOCK
amdiv.com, inc.
UNDERWRITING AGREEMENT
New York, New York
, 1998
Nutmeg Securities, Ltd.
495 Post Road East
Westpost, CT 06880
Ladies and Gentlemen:
amdiv.com, inc., a Nevada corporation (the "Company"), confirms its
agreement with Nutmeg Securities, Ltd. ("Nutmeg"), and each of the underwriters
named in Schedule A hereto (collectively, the "Underwriters," which term shall
also include any underwriter substituted as hereinafter provided in Section 11),
for whom Nutmeg is acting as representative (in such capacity, Nutmeg shall
hereinafter sometimes be referred to as "you" or the "Representative"), with
respect to the sale by the Company and the purchase by the Underwriters, acting
severally and not jointly, of the respective numbers of shares of the Company's
common stock, no par value ("Common Stock") set forth in Schedule A hereto. The
aggregate [1,733,334] shares of Common Stock set forth on Schedule A are
hereinafter referred to as the "Offered Securities."
Upon your request, as provided in Section 2(b) of this Agreement, the
Company shall also issue and sell to the Underwriters, acting severally and not
jointly, their proportionate share of an additional [260,000] shares of Common
Stock for the purpose of covering over-allotments, if any. The [260,000] shares
of Common Stock available for over-allotments are hereinafter referred to as the
"Option Securities." The Company also proposes to issue and sell to the
Representative warrants (the "Representative's Warrants") pursuant to the
Representative's Warrant Agreement (the "Representative's Warrant Agreement")
for the purchase of a number of shares of Common Stock equal to ten percent
(10%) of Offered Securities. The Shares of Common Stock issuable upon exercise
of the Representative's Warrants are hereinafter referred to as the
"Representative's Securities." The Offered Securities, the Option Securities,
the Representative's Warrants and the Representative's Securities (collectively,
hereinafter referred to as the "Securities") are more fully described in the
Registration Statement and the Prospectus referred to below.
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents
and warrants to, and agrees with, each of the Underwriters as of the date
hereof, and as of the Closing Date (as hereinafter defined) and each Option
Closing Date (as hereinafter defined), if any, as follows:
1
<PAGE> 2
(a) The Company has prepared and filed with the Securities and
Exchange Commission (the "Commission") a registration statement, and an
amendment or amendments thereto, on Form SB-2 (No. 333-62489), including any
related preliminary prospectus ("Preliminary Prospectus"), for the registration
of the Offered Securities and the Option Securities under the Securities Act of
1933, as amended (the "Act"), which registration statement and amendment or
amendments have been prepared by the Company in conformity with the requirements
of the Act, and the rules and regulations (the "Regulations") of the Commission
under the Act. The Company will promptly file a further amendment to said
registration statement in the form heretofore delivered to the Underwriters and
will not file any other amendment thereto to which the Underwriters shall have
objected in writing after having been furnished with a copy thereof. Except as
the context may otherwise require, such registration statement, as amended, on
file with the Commission at the time the registration statement becomes
effective (including the prospectus, financial statements, schedules, exhibits
and all other documents filed as a part thereof or incorporated therein
(including, but not limited to those documents or information incorporated by
reference therein) and all information deemed to be a part thereof as of such
time pursuant to paragraph (b) of Rule 430(A) of the Regulations)), is
hereinafter called the "Registration Statement", and the form of prospectus in
the form first filed with the Commission pursuant to Rule 424(b) of the
Regulations, is hereinafter called the "Prospectus." For purposes hereof, "Rules
and Regulations" mean the rules and regulations adopted by the Commission under
either the Act or the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), as applicable.
(b) Neither the Commission nor any state regulatory authority has
issued any order preventing or suspending the use of any Preliminary Prospectus,
the Registration Statement or Prospectus or any part thereof and no proceedings
for a stop order suspending the effectiveness of the Registration Statement or
any of the Company's securities have been instituted or are pending or
threatened. Each of the Preliminary Prospectus, the Registration Statement and
Prospectus at the time of filing thereof conformed with the requirements of the
Act and the Rules and Regulations, and none of the Preliminary Prospectus, the
Registration Statement or Prospectus at the time of filing thereof contained an
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading, except that this
representation and warranty does not apply to statements made in reliance upon
and in conformity with written information furnished to the Company with respect
to the Underwriters by or on behalf of the Underwriters expressly for use in
such Preliminary Prospectus, Registration Statement or Prospectus or any
amendment thereof or supplement thereto.
(c) When the Registration Statement becomes effective and at all
times subsequent thereto up to the Closing Date (as defined herein) and each
Option Closing Date (as defined herein), if any, and during such longer period
as the Prospectus may be required to be delivered in connection with sales by
the Underwriters or a dealer, the Registration Statement and the Prospectus will
contain all statements which are required to be stated therein in accordance
with the Act and the Rules and Regulations, and will conform to the requirements
of the Act and the Rules and Regulations; neither the Registration Statement nor
the Prospectus, nor any amendment or supplement thereto, will contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, provided, however,
that this representation and warranty does not apply to statements made or
statements omitted in reliance upon and in conformity with information furnished
to the Company in writing by or on behalf of any Underwriter expressly for use
in the Preliminary Prospectus, Registration Statement or Prospectus or any
amendment thereof or supplement thereto.
(d) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the state of its incorporation.
Except as set forth in the Prospectus, the Company does not own an interest in
any corporation, partnership, trust, joint venture or other business entity. The
Company is duly qualified and licensed and in good standing as a foreign
corporation in each jurisdiction in which its ownership or leasing of any
properties or the character of its operations requires such qualification or
licensing. The Company has all requisite power, and has obtained any and all
necessary authorizations, approvals, orders, licenses, certificates, franchises
and permits of and from all governmental or regulatory officials and bodies
(including, without limitation, those having jurisdiction over environmental or
similar matters), to own or lease its properties and conduct its business
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<PAGE> 3
income and other taxes in such financial statements are sufficient for the
payment of all accrued and unpaid federal, state, local and foreign income
taxes, interest, penalties, assessments or deficiencies applicable to the
Company, whether disputed or not, for the applicable period then ended and
periods prior thereto; adequate allowance for doubtful accounts has been
provided for unindemnified losses due to the operations of the Company; and the
statements of income do not contain any items of special or nonrecurring income
not earned in the ordinary course of business, except as specified in the notes
thereto.
(g) The Company (i) has paid all federal, state, local, and foreign
taxes for which it is liable, or has established adequate reserves for such
taxes, (ii) has furnished all information returns it is required to furnish
pursuant to the Internal Revenue Code of 1986, as amended (the "Code"), (iii)
has established adequate reserves for such taxes which are not due and payable,
and (iv) does not have any tax deficiency or claims outstanding, proposed or
assessed against it, other than as described in the Registration Statement.
(h) No transfer tax, stamp duty or other similar tax is payable by or
on behalf of the Underwriters in connection with (i) the issuance by the Company
of the Securities, (ii) the purchase by the Underwriters of the Offered
Securities and the Option Securities from the Company and the purchase by the
Representative of the Representative's Warrants from the Company, (iii) the
consummation by the Company of any of its obligations under this Agreement, or
(iv) resales of the Offered Securities and the Option Securities in connection
with the distribution contemplated hereby.
(i) The Company maintains insurance policies, including, but not
limited to, general liability, malpractice and property insurance, which insures
the Company, and its employees, against such losses and risks generally insured
against by comparable businesses. The Company (A) has not failed to give notice
or present any insurance claim with respect to any matter, including but not
limited to the Company 's business, property or employees, under any insurance
policy or surety bond in a due and timely manner, (B) does not have any disputes
or claims against any underwriter of such insurance policies or surety bonds or
has failed to pay any premiums due and payable thereunder, or (C) has failed to
comply with all conditions contained in such insurance policies and surety
bonds. There are no facts or circumstances under any such insurance policy or
surety bond which would relieve any insurer of its obligation to satisfy in full
any valid claim of the Company.
(j) There is no action, suit, proceeding, inquiry, arbitration,
investigation, litigation or governmental proceeding (including, without
limitation, those having jurisdiction over environmental or similar matters),
domestic or foreign, pending or, to the best of the Company's knowledge,
threatened against (or circumstances that may give rise to the same), or
involving the properties or business of, the Company which (i) questions the
validity of the capital stock of the Company, this Agreement, or the
Representative's Warrant Agreement, or of any action taken or to be taken by the
Company pursuant to or in connection with this Agreement or the Representative's
Warrant Agreement, (ii) is required to be disclosed in the Registration
Statement which is not so disclosed (and such proceedings as are summarized in
the Registration Statement are accurately summarized in all material respects),
or (iii) might materially and adversely affect the condition, financial or
otherwise, or the earnings, position, prospects, stockholders' equity, value,
operation, properties, business or results of operations of the Company.
(k) The Company has full legal right, power and authority to
authorize, issue, deliver and sell the Securities, enter into this Agreement and
the Representative's Warrant Agreement and to consummate the transactions
provided for in this Agreement and the Representative's Warrant Agreement; and
this Agreement and the Representative's Warrant Agreement have each been duly
and properly authorized, executed and delivered by the Company. Each of this
Agreement and the Representative's Warrant Agreement constitutes a legal, valid
and binding agreement of the Company enforceable against the Company in
accordance with its terms, and none of the Company's issue and sale of the
Securities, execution or delivery of this Agreement or the Representative's
Warrant Agreement, its performance hereunder and thereunder, its consummation of
the transactions contemplated herein and therein, or the conduct of its business
as described in the Registration Statement, the Prospectus, and any amendments
or supplements thereto, conflicts with or will conflict with or results or will
result in any breach or violation of any of the terms or provisions of, or
constitutes or will constitute a default under, or result in the creation or
imposition of any lien, charge, claim, encumbrance, pledge, security interest,
defect or other restriction or equity of any kind whatsoever upon, any
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<PAGE> 4
property or assets (tangible or intangible) of the Company pursuant to the terms
of (i) the articles of incorporation or by-laws of the Company, (ii) any
license, contract, collective bargaining agreement, indenture, mortgage, deed of
trust, lease, voting trust agreement, stockholders agreement, note, loan or
credit agreement or any other agreement or instrument to which the Company is a
party or by which the Company is or may be bound or to which its or assets
(tangible or intangible) is or may be subject, or any indebtedness, or (iii) any
statute, judgment, decree, order, rule or regulation applicable to the Company
of any arbitrator, court, regulatory body or administrative agency or other
governmental agency or body (including, without limitation, those having
jurisdiction over environmental or similar matters), domestic or foreign, having
jurisdiction over the Company or any of its activities or properties.
(l) No consent, approval, authorization or order of, and no filing
with, any court, regulatory body, government agency or other body, domestic or
foreign, is required for the issuance of the Securities pursuant to the
Prospectus and the Registration Statement, the performance of this Agreement and
the Representative's Warrant Agreement and the transactions contemplated hereby
and thereby, including without limitation, any waiver of any preemptive, first
refusal or other rights that any entity or person may have for the issue and/or
sale of any of the Securities, except such as have been or may be obtained under
the Act or may be required under state securities or Blue Sky laws in connection
with the Underwriters' purchase and distribution of the Offered Securities and
the Option Securities, and the Representative's Warrants to be sold by the
Company hereunder.
(m) All executed agreements, contracts or other documents or copies
of executed agreements, contracts or other documents filed as exhibits to the
Registration Statement to which the Company is a party or by which it or they
may be bound or to which its assets, properties or business may be subject have
been duly and validly authorized, executed and delivered by the Company and
constitute the legal, valid and binding agreements of the Company, as the case
may be, enforceable against it in accordance with its terms. The descriptions in
the Registration Statement of agreements, contracts and other documents are
accurate and fairly present the information required to be shown with respect
thereto by Form SB-2, and there are no contracts or other documents which are
required by the Act to be described in the Registration Statement or filed as
exhibits to the Registration Statement which are not described or filed as
required, and the exhibits which have been filed are complete and correct copies
of the documents of which they purport to be copies.
(n) Subsequent to the respective dates as of which information is set
forth in the Registration Statement and Prospectus, and except as may otherwise
be indicated or contemplated herein or therein, the Company has not (i) issued
any securities or incurred any liability or obligation, direct or contingent,
for borrowed money, (ii) entered into any transaction other than in the ordinary
course of business, or (iii) declared or paid any dividend or made any other
distribution on or in respect of its capital stock of any class, and there has
not been any change in the capital stock, or any change in the debt (long or
short term) or liabilities or material adverse change in or affecting the
general affairs, management, financial operations, stockholders' equity or
results of operations of the Company.
(o) Except as may be set forth in the Registration Statement, no
default exists in the due performance and observance of any term, covenant or
condition of any license, contract, collective bargaining agreement, indenture,
mortgage, installment sale agreement, lease, deed of trust, voting trust
agreement, stockholders agreement, partnership agreement, note, loan or credit
agreement, purchase order, or any other agreement or instrument evidencing an
obligation for borrowed money, or any other material agreement or instrument to
which the Company is a party or by which the Company may be bound or to which
the property or assets (tangible or intangible) of the Company is subject or
affected.
(p) To the best of the Company's knowledge it has generally enjoyed a
satisfactory employer-employee relationship with its employees and is in
compliance with all federal, state, local, and foreign laws and regulations
respecting employment and employment practices, terms and conditions of
employment and wages and hours. There are no pending investigations involving
the Company by the U.S. Department of Labor, or any other governmental agency
responsible for the enforcement of such federal, state, local, or foreign laws
and regulations. There is no unfair labor practice charge or complaint against
the Company pending before the National Labor Relations Board or any lockout,
strike, picketing, boycott, dispute, slowdown or stoppage pending or threatened
against or
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<PAGE> 5
involving the Company, or any predecessor entity, and none has ever occurred. No
representation question exists respecting the employees of the Company, and no
collective bargaining agreement or modification thereof is currently being
negotiated by the Company. No grievance or arbitration proceeding is pending
under any expired or existing collective bargaining agreements of the Company.
No labor dispute with the employees of the Company exists, or, is imminent.
(q) Except as may be set forth in the Registration Statement, the
Company does not maintain, sponsor or contribute to any program or arrangement
that is an "employee pension benefit plan," an "employee welfare benefit plan,"
or a "multi-employer plan" as such terms are defined in Sections 3(2), 3(1) and
3(37), respectively, of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA") ("ERISA Plans"). Except as may be set forth in the
Registration Statement, the Company does not maintain or contribute, now or at
any time previously, to a defined benefit plan, as defined in Section 3(35) of
ERISA. No ERISA Plan (or any trust created thereunder) has engaged in a
"prohibited transaction" within the meaning of Section 406 of ERISA or Section
4975 of the Code, which could subject the Company to any tax penalty on
prohibited transactions and which has not adequately been corrected. Each ERISA
Plan is in compliance with all reporting, disclosure and other requirements of
the Code and ERISA as they relate to any such ERISA Plan. Determination letters
have been received from the Internal Revenue Service with respect to each ERISA
Plan which is intended to comply with Code Section 401(a), stating that such
ERISA Plan and the attendant trust are qualified thereunder. The Company has
never completely or partially withdrawn from a "multi-employer plan."
(r) Neither the Company, nor any of its employees, directors,
stockholders, partners, or affiliates (within the meaning of the Rules and
Regulations) has taken or will take, directly or indirectly, any action designed
to or which has constituted or which might be expected to cause or result in,
under the Exchange Act, or otherwise, stabilization or manipulation of the price
of any security of the Company to facilitate the sale or resale of the
Securities or otherwise.
(s) Except as otherwise disclosed in the Prospectus, none of the
patents, patent applications, trademarks, service marks, trade names and
copyrights, and licenses and rights to the foregoing presently owned or held by
the Company, are in dispute so far as known by the Company or are in any
conflict with the right of any other person or entity. Except as otherwise
disclosed in the Prospectus, the Company (i) owns or has the right to use, free
and clear of all liens, charges, claims, encumbrances, pledges, security
interests, defects or other restrictions or equities of any kind whatsoever, all
patents, trademarks, service marks, trade names and copyrights, technology and
licenses and rights with respect to the foregoing, used in the conduct of its
business as now conducted or proposed to be conducted without infringing upon or
otherwise acting adversely to the right or claimed right of any person,
corporation or other entity under or with respect to any of the foregoing and
(ii) is not obligated or under any liability whatsoever to make any payment by
way of royalties, fees or otherwise to any owner or licensee of, or other
claimant to, any patent, trademark, service mark, trade name, copyright,
know-how, technology or other intangible asset, with respect to the use thereof
or in connection with the conduct of its business or otherwise.
(t) The Company has good and marketable title to, or valid and
enforceable leasehold estates in, all items of real and personal property stated
in the Prospectus to be owned or leased by it, free and clear of all liens,
charges, claims, encumbrances, pledges, security interests, defects, or other
restrictions or equities of any kind whatsoever, other than those referred to in
the Prospectus and liens for taxes not yet due and payable.
(u) McGladrey & Pullen, LLP, whose report is filed with the
Commission as a part of the Registration Statement, are independent certified
public accountants as required by the Act and the Rules and Regulations.
(v) The Company has agreed to cause to be duly executed agreements
pursuant to which each of the Company's executive officers, directors, and
certain shareholders have agreed not to, directly or indirectly, sell, assign,
transfer, or otherwise dispose of any shares of Common Stock or securities
convertible into, exercisable or exchangeable for or evidencing any right to
purchase or subscribe for any shares of Common Stock for a period of
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<PAGE> 6
twenty-four (24) months following the effective date of the Registration
Statement. The Company will cause the Transfer Agent (as hereinafter defined) to
mark an appropriate legend on the face of stock certificates representing all of
such securities and to place "stop transfer" orders on the Company's stock
ledgers.
(w) There are no claims, payments, issuances, arrangements or
understandings, whether oral or written, for services in the nature of a
finder's or origination fee with respect to the sale of the Securities hereunder
or any other arrangements, agreements, understandings, payments or issuance with
respect to the Company, or any of its officers, directors, stockholders,
partners, employees or affiliates, that may affect the Underwriters'
compensation, as determined by the National Association of Securities Dealers,
Inc. ("NASD").
(x) The Offered Securities and Option Securities have been approved
for quotation on [the National Association of Securities Dealers Automated
Quotation System].
(y) Neither the Company, nor any of its officers, employees, agents
or any other person acting on behalf of the Company has, directly or indirectly,
given or agreed to give any money, gift or similar benefit (other than legal
price concessions to customers in the ordinary course of business) to any
customer, supplier, employee or agent of a customer or supplier, or official or
employee of any governmental agency (domestic or foreign) or instrumentality of
any government (domestic or foreign) or any political party or candidate for
office (domestic or foreign) or other person who was, is, or may be in a
position to help or hinder the business of the Company (or assist the Company in
connection with any actual or proposed transaction) which (a) might subject the
Company, or any other such person to any damage or penalty in any civil,
criminal or governmental litigation or proceeding (domestic or foreign), (b) if
not given in the past, might have had a material adverse effect on the assets,
business or operations of the Company, or (c) if not continued in the future,
might adversely affect the assets, business, condition, financial or otherwise,
earnings, position, properties, value, operations or prospects of the Company.
The Company's internal accounting controls are sufficient to cause the Company
to comply with the Foreign Corrupt Practices Act of 1977, as amended.
(z) Except as set forth in the Prospectus, no officer, director,
stockholder or partner of the Company, or any "affiliate" or "associate" (as
these terms are defined in Rule 405 promulgated under the Rules and Regulations)
of any of the foregoing persons or entities has or has had, either directly or
indirectly, (i) an interest in any person or entity which (A) furnishes or sells
services or products which are furnished or sold or are proposed to be furnished
or sold by the Company, or (B) purchases from or sells or furnishes to the
Company any goods or services, or (ii) a beneficiary interest in any contract or
agreement to which the Company is a party or by which it may be bound or
affected. Except as set forth in the Prospectus under "Certain Transactions,"
there are no existing agreements, arrangements, understandings or transactions,
or proposed agreements, arrangements, understandings or transactions, between or
among the Company, and any officer, director, or 5% or greater security holder
of the Company, or any partner, affiliate or associate of any of the foregoing
persons or entities.
(aa) Any certificate signed by any officer of the Company, and
delivered to the Underwriters or to Underwriters' Counsel (as defined herein)
shall be deemed a representation and warranty by the Company to the Underwriters
as to the matters covered thereby.
(bb) The minute books of the Company have been made available to the
Underwriters and contain a complete summary of all meetings and actions of the
directors (including committees thereof) and stockholders of each of the
Company, since the time of its incorporation, and reflect all transactions
referred to in such minutes accurately in all material respects.
(cc) Except and to the extent described in the Prospectus, no holders
of any securities of the Company or of any options, warrants or other
convertible or exchangeable securities of the Company have the right to include
any securities issued by the Company in the Registration Statement or any
registration statement to be filed by the Company or to require the Company to
file a registration statement under the Act and no person or entity holds any
anti-dilution rights with respect to any securities of the Company.
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<PAGE> 7
(dd) The Company has as of the effective date of the Registration
Statement entered into employment agreements with James Buchanan Rea, Jr., and
Peter Hartmann in the forms filed as Exhibits 10.3 and 10.5, respectively, to
the Registration Statement.
(ee) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurance that (i) transactions are executed in
accordance with management's general or specific authorizations; (ii)
transactions are recorded as necessary to permit preparations of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorizations; and (iv) the
recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
2. PURCHASE, SALE AND DELIVERY OF THE SECURITIES
(a) On the basis of the representations, warranties, covenants and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company agrees to sell to each Underwriter, and each Underwriter,
severally and not jointly, agrees to purchase from the Company at a price of
$___ [92% of the public offering price] per share of Common Stock, that number
of Offered Securities set forth in Schedule A opposite the name of such
Underwriter, subject to such adjustment as the Representative in its discretion
shall make to eliminate any sales or purchases of fractional shares, plus any
additional number of Offered Securities which such Underwriter may become
obligated to purchase pursuant to the provisions of Section 11 hereof.
(b) In addition, on the basis of the representations, warranties,
covenants and agreements herein contained, but subject to the terms and
conditions herein set forth, the Company hereby grants an option to the
Underwriters, severally and not jointly, to purchase all or any part of their
proportionate share of the Option Securities, at a price of $___ [92% of the
public offering price] per share of Common Stock. The option granted hereby will
expire forty-five (45) days after (i) the date the Registration Statement
becomes effective, if the Company has elected not to rely on Rule 430A under the
Rules and Regulations, or (ii) the date of this Agreement if the Company has
elected to rely upon Rule 430A under the Rules and Regulations, and may be
exercised in whole or in part from time to time only for the purpose of covering
over-allotments which may be made in connection with the offering and
distribution of the Offered Securities upon notice by the Representative to the
Company setting forth the number of Option Securities as to which the several
Underwriters are then exercising the option and the time and date of payment and
delivery for any such Option Securities. Any such time and date of delivery (an
"Option Closing Date") shall be determined by the Representative, but shall not
be later than three (3) full business days after the exercise of said option,
nor in any event prior to the Closing Date, as hereinafter defined, unless
otherwise agreed upon by the Representative and the Company. Nothing herein
contained shall obligate the Underwriters to make any over-allotments. No Option
Securities shall be delivered unless the Offered Securities shall be
simultaneously delivered or shall theretofore have been delivered as herein
provided.
(c) Payment of the purchase price for, and delivery of certificates
for, the Offered Securities shall be made at the offices of the Representative
at 495 Post Road East, Westport, Connecticut 06880, or at such other place as
shall be agreed upon by the Representative and the Company. Such delivery and
payment shall be made at 10:00 a.m. (New York City time) on , 1998 or at such
other time and date as shall be agreed upon by the Representative and the
Company, but not less than three (3) nor more than five (5) full business days
after the effective date of the Registration Statement (such time and date of
payment and delivery being herein called the "Closing Date"). In addition, in
the event that any or all of the Option Securities are purchased by the
Underwriters, payment of the purchase price for, and delivery of certificates
for, such Option Securities shall be made at the above-mentioned office of the
Representative or at such other place as shall be agreed upon by the
Representative and the Company on each
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<PAGE> 8
Option Closing Date as specified in the notice from the Representative to the
Company. Delivery of the certificates for the Offered Securities and the Option
Securities, if any, shall be made to the Underwriters against payment by the
Underwriters, severally and not jointly, of the purchase price for the Offered
Securities and the Option Securities, if any, to the order of the Company for
the Offered Securities and the Option Securities, if any, by New York Clearing
House funds. In the event such option is exercised, the Underwriters, acting
severally and not jointly, shall purchase that proportion of the total number of
Option Securities then being purchased which the number of Offered Securities
set forth in Schedule A hereto opposite the name of such Underwriter bears to
the total number of Offered Securities, subject in each case to such adjustments
as the Representative in its discretion shall make to eliminate any sales or
purchases of fractional shares. Certificates for the Offered Securities and the
Option Securities, if any, shall be in definitive, fully registered form, shall
bear no restrictive legends and shall be in such denominations and registered in
such names as the Underwriters may request in writing at least two (2) business
days prior to the Closing Date or the relevant Option Closing Date, as the case
may be. The certificates for the Offered Securities and the Option Securities,
if any, shall be made available to the Representative at such office or such
other place as the Representative may designate for inspection, checking and
packaging no later than 9:30 a.m. on the last business day prior to the Closing
Date or the relevant Option Closing Date, as the case may be.
(d) On the Closing Date, the Company shall issue and sell to the
Representative the Representative's Warrants at a purchase price of $.001 per
warrant, which Representative's Warrants shall entitle the Representative to
purchase an aggregate number of shares of Common Stock equal to ten percent
(10%) of the Offered Securities. The Representative's Warrants shall be
exercisable for a period of five (5) years commencing one year after the
effective date of the Registration Statement at a price equaling one hundred
twenty percent (120%) of the initial public offering price of the shares of
Common Stock. The Representative's Warrant Agreement and form of Warrant
Certificate shall be substantially in the form attached hereto as Exhibit A.
Payment for the Representative's Warrants shall be made on the Closing Date.
3. PUBLIC OFFERING OF THE SHARES OF COMMON STOCK. As soon after the
Registration Statement becomes effective as the Representative deems advisable,
the Underwriters shall make a public offering of the shares of Common Stock
(other than to residents of or in any jurisdiction in which qualification of the
shares of Common Stock is required and has not become effective) at the price
and upon the other terms set forth in the Prospectus. The Representative may
from time to time increase or decrease the public offering price after
distribution of the shares of Common Stock has been completed to such extent as
the Representative, in its discretion deems advisable. The Underwriters may
enter into one or more agreements as the Underwriters, in their sole discretion,
deem advisable with one or more broker-dealers who shall act as dealers in
connection with such public offering.
4. COVENANTS AND AGREEMENTS OF THE COMPANY. The Company covenants and
agrees with the Underwriters as follows:
(a) The Company shall use its best efforts to cause the Registration
Statement and any amendments thereto to become effective as promptly as
practicable and will not at any time, whether before or after the effective date
of the Registration Statement, file any amendment to the Registration Statement
or supplement to the Prospectus or file any document under the Act or Exchange
Act before termination of the offering of the shares of Common Stock by the
Underwriters of which the Representative shall not previously have been advised
and furnished with a copy, or to which the Representative shall have objected or
which is not in compliance with the Act, the Exchange Act or the Rules and
Regulations.
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<PAGE> 9
(b) As soon as the Company is advised or obtains knowledge thereof,
the Company will advise the Representative and confirm the notice in writing (i)
when the Registration Statement, as amended, becomes effective, if the
provisions of Rule 430A promulgated under the Act will be relied upon, when the
Prospectus has been filed in accordance with said Rule 430A and when any
post-effective amendment to the Registration Statement becomes effective; (ii)
of the issuance by the Commission of any stop order or of the initiation, or the
threatening, of any proceeding suspending the effectiveness of the Registration
Statement or any order preventing or suspending the use of the Preliminary
Prospectus or the Prospectus, or any amendment or supplement thereto, or the
institution of proceedings for that purpose; (iii) of the issuance by the
Commission or by any state securities commission of any proceedings for the
suspension of the qualification of any of the Securities for offering or sale in
any jurisdiction or of the initiation, or the threatening, of any proceeding for
that purpose; (iv) of the receipt of any comments from the Commission; and (v)
of any request by the Commission for any amendment to the Registration Statement
or any amendment or supplement to the Prospectus or for additional information.
If the Commission or any state securities commission shall enter a stop order or
suspend such qualification at any time, the Company will make every effort to
obtain promptly the lifting of such order.
(c) The Company shall file the Prospectus (in form and substance
satisfactory to the Representative) or transmit the Prospectus by a means
reasonably calculated to result in filing with the Commission pursuant to Rule
424(b)(1) (or, if applicable and if consented to by the Representative, pursuant
to Rule 424(b)(4)) not later than the Commission's close of business on the
earlier of (i) the second business day following the execution and delivery of
this Agreement and (ii) the fifth business day after the effective date of the
Registration Statement.
(d) The Company will give the Representative notice of its intention
to file or prepare any amendment to the Registration Statement (including any
post-effective amendment) or any amendment or supplement to the Prospectus
(including any revised prospectus which the Company proposes for use by the
Underwriters in connection with the offering of the Securities which differs
from the corresponding prospectus on file at the Commission at the time the
Registration Statement becomes effective, whether or not such revised prospectus
is required to be filed pursuant to Rule 424(b) of the Rules and Regulations),
and will furnish the Representative with copies of any such amendment or
supplement a reasonable amount of time prior to such proposed filing or use, as
the case may be, and will not file any such prospectus to which the
Representative or Arter & Hadden LLP ("Underwriters' Counsel") shall object.
(e) The Company shall endeavor in good faith, in cooperation with the
Representative, at or prior to the time the Registration Statement becomes
effective, to qualify the Securities for offering and sale under the securities
laws of such jurisdictions as the Representative may designate to permit the
continuance of sales and dealings therein for as long as may be necessary to
complete the distribution, and shall make such applications, file such documents
and furnish such information as may be required for such purpose; provided,
however, the Company shall not be required to qualify as a foreign corporation
or file a general or limited consent to service of process in any such
jurisdiction. In each jurisdiction where such qualification shall be effected,
the Company will, unless the Representative agrees that such action is not at
the time necessary or advisable, use all reasonable efforts to file and make
such statements or reports at such times as are or may reasonably be required by
the laws of such jurisdiction to continue such qualification.
(f) During the time when a prospectus is required to be delivered
under the Act, the Company shall use all reasonable efforts to comply with all
requirements imposed upon it by the Act and the Exchange Act, as now and
hereafter amended and by the Rules and Regulations, as from time to time in
force, so far as necessary to permit the continuance of sales of or dealings in
the Securities in accordance with the provisions hereof and the Prospectus, or
any amendments or supplements thereto. If at any time when a prospectus relating
to the Securities is required to be delivered under the Act, any event shall
have occurred as a result of which, in the opinion of counsel for the Company or
Underwriters' Counsel, the Prospectus, as then amended or supplemented, includes
an untrue statement of a material fact or omits to state any material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading, or if
it is necessary at any time to amend the Prospectus to comply with the Act, the
Company will notify the Representative promptly and prepare and file with the
Commission an appropriate amendment or supplement in accordance with Section 10
of the Act, each such amendment or supplement to be satisfactory to
Underwriters' Counsel, and the Company will furnish to the Underwriters copies
of such amendment or supplement as soon as available and in such quantities as
the Underwriters may request.
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<PAGE> 10
(g) As soon as practicable, but in any event not later than
forty-five (45) days after the end of the 12-month period beginning on the day
after the end of the fiscal quarter of the Company during which the effective
date of the Registration Statement occurs (ninety (90) days in the event that
the end of such fiscal quarter is the end of the Company 's fiscal year), the
Company shall make generally available to its security holders, in the manner
specified in Rule 158(b) of the Rules and Regulations, and to the
Representative, an earnings statement which will be in the detail required by,
and will otherwise comply with, the provisions of Section 11(a) of the Act and
Rule 158(a) of the Rules and Regulations, which statement need not be audited
unless required by the Act, covering a period of at least twelve (12)
consecutive months after the effective date of the Registration Statement.
(h) During a period of five (5) years after the date hereof, the
Company will furnish to its stockholders, as soon as practicable, annual reports
(including financial statements audited by independent public accountants) and
unaudited quarterly reports of earnings, and will deliver to the Representative:
(i) concurrently with furnishing such quarterly reports to its
stockholders, statements of income of the Company for each quarter in the form
furnished to the Company's stockholders and certified by the Company's principal
financial or accounting officer;
(ii) concurrently with furnishing such annual reports to its
stockholders, a balance sheet of the Company as at the end of the preceding
fiscal year, together with statements of operations, stockholders' equity, and
cash flows of the Company for such fiscal year, accompanied by a copy of the
certificate thereon of independent certified public accountants;
(iii) as soon as they are available, copies of all reports
(financial or other) mailed to stockholders;
(iv) as soon as they are available, copies of all reports and
financial statements furnished to or filed with the Commission, the NASD or any
securities exchange;
(v) very press release and every material news item or article of
interest to the financial community in respect of the Company, or its affairs,
which was released or prepared by or on behalf of the Company; and
(vi) any additional information of a public nature concerning the
Company (and any future subsidiary) or its businesses which the Representative
may reasonably request.
During such five-year period, if the Company has an active subsidiary,
the foregoing financial statements will be on a consolidated basis to the extent
that the accounts of the Company and its subsidiary(ies) are consolidated, and
will be accompanied by similar financial statements for any significant
subsidiary which is not so consolidated.
(i) The Company will maintain a transfer agent ("Transfer Agent")
and, if necessary under the jurisdiction of incorporation of the Company, a
Registrar (which may be the same entity as the Transfer Agent) for its Common
Stock.
(j) The Company will furnish to the Representative or on the
Representative's order, without charge, at such place as the Representative may
designate, copies of each Preliminary Prospectus, the Registration Statement and
any pre-effective or post-effective amendments thereto (two of which copies will
be signed and will include all financial statements and exhibits), the
Prospectus, and all amendments and supplements thereto, including any prospectus
prepared after the effective date of the Registration Statement, in each case as
soon as available and in such quantities as the Representative may request.
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(k) On or before the effective date of the Registration Statement,
the Company shall provide the Representative with true original copies of duly
executed, legally binding and enforceable agreements pursuant to which, for a
period of twenty-four (24) months from the effective date of the Registration
Statement, the Company's executive officers, directors and 5% shareholders agree
that it or he or she will not, directly or indirectly, issue, offer to sell,
sell, grant an option for the sale or purchase of, assign, transfer, pledge,
hypothecate or otherwise encumber or dispose of any shares of Common Stock or
securities convertible into, exercisable or exchangeable for or evidencing any
right to purchase or subscribe for any shares of Common Stock (either pursuant
to Rule 144 of the Rules and Regulations or otherwise) or dispose of any
beneficial interest therein without the prior consent of the Representative
(collectively, the "Lock-up Agreements"). During the twenty-four (24) month
period commencing on the effective date of the Registration Statement, the
Company shall not, without the prior written consent of the Representative,
sell, contract or offer to sell, issue, transfer, assign, pledge, distribute, or
otherwise dispose of, directly or indirectly, any shares of Common Stock or any
options, rights or warrants with respect to any shares of Common Stock. On or
before the Closing Date, the Company shall deliver instructions to the Transfer
Agent authorizing it to place appropriate legends on the certificates
representing the securities subject to the Lock-up Agreements and to place
appropriate stop transfer orders on the Company's ledgers. The Company further
covenants that it will not file a registration statement with the Commission
during the twenty-four (24) month period commencing on the effective date of the
Registration Statement without the prior written consent of the Representative.
(l) Neither the Company, nor any of its officers, directors,
stockholders, nor any of their affiliates (within the meaning of the Rules and
Regulations) will take, directly or indirectly, any action designed to, or which
might in the future reasonably be expected to cause or result in, stabilization
or manipulation of the price of any securities of the Company.
(m) Except for cumulative changes of less than $500,000 in each
specific item set forth in the "Use of Proceeds" section in the Prospectus,
which will be mutually acceptable for the Company and the Representative, the
Company will not change the manner in which it uses the proceeds from the sale
of the Securities from that which is set forth in the "Use of Proceeds" without
giving written notice of such change to the Representative at least ten (10)
business days prior to any such use.
(n) The Company shall timely file all such reports, forms or other
documents as may be required (including, but not limited to, a Form SR as may be
required pursuant to Rule 463 under the Act) from time to time, under the Act,
the Exchange Act, and the Rules and Regulations, and all such reports, forms and
documents filed will comply as to form and substance with the applicable
requirements under the Act, the Exchange Act, and the Rules and Regulations.
(o) The Company shall furnish to the Representative as early as
practicable prior to the date hereof, the Closing Date and each Option Closing
Date, if any, but no later than two (2) full business days prior thereto, a copy
of the latest available unaudited interim financial statements of the Company
(which in no event shall be as of a date more than thirty (30) days prior to the
date of the Registration Statement) which has been read by the Company's
independent public accountants, as stated in their letters to be furnished
pursuant to Sections 6(l) and 6(m) hereof.
(p) The Company shall cause the Common Stock to be listed on NASDAQ
and, for a period of five (5) years from the date hereof, use its best efforts
to maintain the NASDAQ listing of the Common Stock to the extent outstanding.
(q) For a period of five (5) years from the Closing Date, the Company
shall furnish to the Representative at reasonable request and the Company's sole
expense, (i) daily consolidated transfer sheets relating to the Common Stock
(ii) the list of holders of all of the Company's securities and (iii) a Blue Sky
"Trading Survey" for secondary sales of the Company's securities prepared by
counsel to the Company.
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(r) As soon as practicable, (i) but in no event more than five (5)
business days before the effective date of the Registration Statement, file a
Form 8-A with the Commission providing for the registration under the Exchange
Act of the Securities and (ii) but in no event more than thirty (30) days after
the effective date of the Registration Statement, take all necessary and
appropriate actions to be included in Standard and Poor's Corporation
Descriptions and Moody's OTC Manual and to continue such inclusion for a period
of not less than five (5) years.
(s) The Company hereby agrees that, except as set forth above in
Section 4(k) and the 1,000,000 shares issued or reserved for future issuance
under the Company's 1998 Stock Option and Incentive Plan ("Stock Option Plan"),
it will not, for a period of twelve (12) months from the effective date of the
Registration Statement, adopt, propose to adopt or otherwise permit to exist any
employee, officer, director, consultant or compensation plan or similar
arrangement, permitting (i) the grant, issue, sale or entry into any agreement
to grant, issue or sell any option, warrant or other contract right (x) at an
exercise price that is less than the greater of the public offering prices of
the Common Stock set forth herein and the fair market value on the date of grant
or sale or (y) to any of its executive officers or directors or to any holder of
5% or more of the Common Stock; (ii) the maximum number of shares of Common
Stock or other securities of the Company purchasable at any time pursuant to
options or warrants issued by the Company to exceed such 1,000,000 shares
reserved for future issuance under the Company's Stock Option Plan; (iii) the
payment for such securities with any form of consideration other than cash; or
(iv) the existence of stock appreciation rights, phantom options or similar
arrangements. Furthermore, the Company agrees that for a period of twelve (12)
months from the effective date of the Registration Statement, the Company will
not amend any material employment agreement or option agreement or other
agreement providing compensation to any executive officer, director or other
principal stockholder, without the prior written consent of the Representative.
(t) Until the completion of the distribution of the Securities, the
Company shall not, without the prior written consent of the Representative and
Underwriters' Counsel, issue, directly or indirectly, any press release or other
communication or hold any press conference with respect to the Company or its
activities or the offering contemplated hereby, other than trade releases issued
in the ordinary course of the Company's business consistent with past practices
with respect to the Company's operations.
(u) For a period equal to the lesser of (i) five (5) years from the
date hereof, or (ii) the sale to the public of the Representative's Securities,
the Company will not take any action or actions which may prevent or disqualify
the Company's use of Form SB-2 (or other appropriate form) for the registration
under the Act of the Representative's Securities.
(v) The Company shall maintain an active Board of Directors following
the completion of the offering which will consist of a minimum of two (2)
outside and independent directors. The Board of Directors shall also have both
an audit and compensation committees each consisting of no more than three (3)
members, at least one of which shall be an independent director.
(w) The Company agrees to offer the Representative a right of first
refusal to act as the managing underwriter in connection with any future public
offerings and private placements, or a merger or other corporate transaction
involving the Company, occurring within two (2) years following the effective
date of the Offering.
(x) The Company agrees that the Company shall direct all inquires
regarding the offering to the Representative.
5. PAYMENT OF EXPENSES.
(a) The Company hereby agrees to pay on the Closing Date, and each
Option Closing Date, if any, all expenses and fees (other than fees of
Underwriters' Counsel, except as provided in (iv) below) incident to the
performance of the obligations of the Company under this Agreement and the
Representative's Warrant Agreement, including, without limitation, (i) the fees
and expenses of accountants and counsel for the Company, (ii) all costs and
expenses incurred in connection with the preparation, duplication, printing
(including mailing and handling charges), filing, delivery and mailing
(including the payment of postage with respect thereto) of the Registration
Statement and the Prospectus and any amendments and supplements thereto and the
printing, mailing (including the payment of
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<PAGE> 13
postage with respect thereto) and delivery of this Agreement, the
Representative's Warrant Agreement, [the Agreement Among Underwriters], the
Selected Dealer Agreements, and related documents, including the cost of all
copies thereof and of the Preliminary Prospectuses and of the Prospectus and any
amendments thereof or supplements thereto supplied to the Underwriters and such
dealers as the Underwriters may request, in quantities as hereinabove stated,
(iii) the printing, engraving, issuance and delivery of the Securities
including, but not limited to, (x) the purchase by the Underwriters of the
Offered Securities and the Option Securities and the purchase by the
Representative of the Representative's Warrants from the Company, (y) the
consummation by the Company of any of its obligations under this Agreement and
the Representative's Warrant Agreement, and (z) resale of the Offered Securities
and the Option Securities by the Underwriters in connection with the
distribution contemplated hereby, (iv) the qualification of the Securities under
state or foreign securities or "Blue Sky" laws and determination of the status
of such securities under legal investment laws, including the costs of printing
and mailing the "Preliminary Blue Sky Memorandum", the "Supplemental Blue Sky
Memorandum" and "Legal Investments Survey," if any, and disbursements and fees
of counsel in connection therewith, (v) advertising costs and expenses,
including but not limited to costs and expenses in connection with the "road
show", information meetings and presentations, bound volumes and prospectus
memorabilia and "tombstone" advertisement expenses, (vi) costs and expenses in
connection with due diligence investigations, including but not limited to the
fees of any independent counsel, expert or consultant retained, (vii) fees and
expenses of the Transfer Agent and registrar and all issue and transfer taxes,
if any, (viii) applications for assignment of a rating of the Securities by
qualified rating agencies, (ix) the fees payable to the Commission and the NASD,
and (x) the fees and expenses incurred in connection with the quotation of the
Offered Securities and the Option Securities on the NASDAQ and any other
exchange.
(b) If this Agreement is terminated by the Underwriters in accordance
with the provisions of Section 6 (except Sections 6(c), 6(j) and 6(n)) or
Section 12, the Company shall indemnify the Underwriters for all of their actual
accountable out-of-pocket expenses, including the Representative's staff time at
agreed rates and the reasonable fees and disbursements of counsel for the
Underwriters and all Blue Sky counsel fees (excluding filing fees) and
disbursements (less amounts previously paid pursuant to Section 5(c) hereof).
(c) The Company further agrees that, in addition to the expenses
payable pursuant to subsection (a) of this Section 5, it will pay to the
Representative on the Closing Date by certified or bank cashier's check or, at
the election of the Representative, by deduction from the applicable proceeds, a
non-accountable expense allowance equal to three percent (3.0%) of the gross
proceeds received by the Company from the sale of the Offered Securities,
$65,000 of which has been paid to date. In the event the Representative elects
to exercise the overallotment option described in Section 2(b) hereof, the
Company further agrees to pay to the Representative on each Option Closing Date,
by certified or bank cashier's check, or at the Representative's election, by
deduction from the proceeds of the Option Securities purchased on such Option
Closing Date, a non-accountable expense allowance equal to 3% of the gross
proceeds received by the Company from the Underwriters' sale of their
proportionate share of the Option Securities.
6. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS. The obligations of the
Underwriters hereunder shall be subject to the continuing accuracy of the
representations and warranties of the Company herein as of the date hereof and
as of the Closing Date and each Option Closing Date, if any, as if they had been
made on and as of the Closing Date or each Option Closing Date, as the case may
be; the accuracy on and as of the Closing Date or Option Closing Date, if any,
of the statements of the officers of the Company made pursuant to the provisions
hereof; and the performance by the Company on and as of the Closing Date and
each Option Closing Date, if any, of its covenants and obligations hereunder and
to the following further conditions:
(a) The Registration Statement shall have become effective not later
than 9:30 a.m., New York time, on or such later date and time as shall be
consented to in writing by the Representative, and, at the Closing Date and each
Option Closing Date, if any, no stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for that
purpose shall have been instituted or shall be pending or contemplated by the
Commission and any request on the part of the Commission for additional
information shall have been complied
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<PAGE> 14
with to the reasonable satisfaction of Underwriters' Counsel. If the Company has
elected to rely upon Rule 430A of the Rules and Regulations, the price of the
Common Stock and any price-related information previously omitted from the
effective Registration Statement pursuant to such Rule 430A shall have been
transmitted to the Commission for filing pursuant to Rule 424(b) of the Rules
and Regulations within the prescribed time period and, prior to the Closing
Date, the Company shall have provided evidence satisfactory to the
Representative of such timely filing, or a post-effective amendment providing
such information shall have been promptly filed and declared effective in
accordance with the requirements of Rule 430A of the Rules and Regulations.
(b) The Representative shall not have advised the Company that the
Registration Statement, or any amendment thereto, contains an untrue statement
of fact which, in the Representative's opinion, is material, or omits to state a
fact which, in the Representative's opinion, is material and is required to be
stated therein or is necessary to make the statements therein not misleading, or
that the Prospectus, or any supplement thereto, contains an untrue statement of
fact which, in the Representative's opinion, is material, or omits to state a
fact which, in the Representative's opinion, is material and is required to be
stated therein or is necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(c) On or prior to the Closing Date and each Option Closing Date, if
any, the Representative shall have received from Underwriters' Counsel, such
opinion or opinions with respect to the organization of the Company, the
validity of the Securities, the Registration Statement, the Prospectus and other
related matters as the Representative may reasonably request and Underwriters'
Counsel shall have received such papers and information as they reasonably
request to enable them to pass upon such matters.
(d) At the Closing Date, the Underwriters shall have received the
favorable opinion of Jeffers, Wilson, Shaff & Falk, LLP, counsel to the Company,
dated the Closing Date, addressed to the Underwriters and in form and substance
satisfactory to Underwriters' Counsel, to the effect that:
(i) the Company (A) has been duly organized and is validly
existing as a corporation in good standing under the laws of its jurisdiction,
(B) is duly qualified and licensed and in good standing as a foreign corporation
in each jurisdiction in which its ownership or leasing of any properties or the
character of its operations requires such qualification or licensing, and (C)
has all requisite corporate power and authority, and has obtained any and all
necessary authorizations, approvals, orders, licenses, certificates, franchises
and permits of and from all governmental or regulatory officials and bodies
(including, without limitation, those having jurisdiction over environmental or
similar matters), to own or lease its properties and conduct its business as
described in the Prospectus; the Company is and has been doing business in
compliance with all such authorizations, approvals, orders, licenses,
certificates, franchises and permits and all federal, state and local laws,
rules and regulations; and, the Company has not received any notice of
proceedings relating to the revocation or modification of any such
authorization, approval, order, license, certificate, franchise, or permit
which, singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, would materially adversely affect the business, operations,
condition, financial or otherwise, or the earnings, business affairs, position,
prospects, value, operation, properties, business or results of operations of
the Company. The disclosures in the Registration Statement concerning the
effects of federal, state and local laws, rules and regulations on the Company's
business as currently conducted and as contemplated are correct in all material
respects and do not omit to state a fact required to be stated therein or
necessary to make the statements contained therein not misleading in light of
the circumstances in which they were made;
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<PAGE> 15
(ii) except as described in the Prospectus, the Company does not
own an interest in any other corporation, partnership, joint venture, trust or
other business entity;
(iii) the Company has a duly authorized, issued and outstanding
capitalization as set forth in the Prospectus, and any amendment or supplement
thereto, under "CAPITALIZATION", and the Company is not a party to or bound by
any instrument, agreement or other arrangement providing for it to issue, sell,
transfer, purchase or redeem any capital stock, rights, warrants, options or
other securities, except for this Agreement and the Representative's Warrant
Agreement and as described in the Prospectus. The Securities and all other
securities issued or issuable by the Company conform in all material respects to
all statements with respect thereto contained in the Registration Statement and
the Prospectus. All issued and outstanding securities of the Company have been
duly authorized and validly issued and are fully paid and non-assessable; the
holders thereof have no rights of rescission with respect thereto, and are not
subject to personal liability by reason of being such holders; and none of such
securities were issued in violation of the preemptive rights of any holders of
any security of the Company or any similar rights granted by the Company. The
Securities to be sold by the Company hereunder and under the Representative's
Warrant Agreement are not and will not be subject to any preemptive or other
similar rights of any stockholder, have been duly authorized and, when issued,
paid for and delivered in accordance with the terms hereof, will be validly
issued, fully paid and non-assessable and conform to the description thereof
contained in the Prospectus; the holders thereof will not be subject to any
liability solely as such holders; all corporate action required to be taken for
the authorization, issue and sale of the Securities has been duly and validly
taken; and the certificates representing the Securities are in due and proper
form. The Representative's Warrants constitute valid and binding obligations of
the Company to issue and sell, upon exercise thereof and payment therefor, the
number and type of securities of the Company called for thereby. Upon the
issuance and delivery pursuant to this Agreement of the Offered Securities and
the Option Securities and the Representative's Warrants to be sold by the
Company, the Underwriters and the Representative, will acquire good and
marketable title to the Offered Securities and the Option Securities and the
Representative's Warrants free and clear of any pledge, lien, charge, claim,
encumbrance, pledge, security interest, or other restriction or equity of any
kind whatsoever. No transfer tax is payable by or on behalf of the Underwriters
in connection with (A) the issuance by the Company of the Securities, (B) the
purchase by the Underwriters of the Offered Securities and the Option Securities
from the Company, and the purchase by the Representative of the Representative's
Warrants from the Company (C) the consummation by the Company of any of its
obligations under this Agreement or the Representative's Warrant Agreement, or
(D) resales of the Offered Securities and the Option Securities in connection
with the distribution contemplated hereby.
(iv) based on oral and/or written advice from the staff of the
Commission, the Registration Statement has become effective under the Act, and,
if applicable, filing of all pricing information has been timely made in the
appropriate form under Rule 430A, and to the knowledge of such counsel, no stop
order suspending the use of the Preliminary Prospectus, the Registration
Statement or Prospectus or any part of any thereof or suspending the
effectiveness of the Registration Statement has been issued and no proceedings
for that purpose have been instituted or are pending or threatened or
contemplated under the Act;
(v) the Preliminary Prospectus, the Registration Statement, and
the Prospectus and any amendments or supplements thereto (other than the
financial statements and other financial and statistical data included therein,
as to which no opinion need be rendered) comply as to form in all material
respects with the requirements of the Act and the Rules and Regulations.
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<PAGE> 16
(vi) to the best of such counsel's knowledge, (A) there are no
agreements, contracts or other documents required by the Act to be described in
the Registration Statement and the Prospectus and filed as exhibits to the
Registration Statement other than those described in the Registration Statement
(or required to be filed under the Exchange Act if upon such filing they would
be incorporated, in whole or in part, by reference therein) and the Prospectus
and filed as exhibits thereto, and the exhibits which have been filed are
correct copies of the documents of which they purport to be copies; (B) the
descriptions in the Registration Statement and the Prospectus and any supplement
or amendment thereto of contracts and other documents to which the Company is a
party or by which it is bound, including any document to which the Company is a
party or by which it is bound, incorporated by reference into the Prospectus and
any supplement or amendment thereto, are accurate and fairly represent the
information required to be shown by Form SB-2; (C) there is not pending or
threatened against the Company any action, arbitration, suit, proceeding,
inquiry, investigation, litigation, governmental or other proceeding (including,
without limitation, those having jurisdiction over environmental or similar
matters), domestic or foreign, pending or threatened against (or circumstances
that may give rise to the same), or involving the properties or business of the
Company which (x) is required to be disclosed in the Registration Statement
which is not so disclosed (and such proceedings as are summarized in the
Registration Statement are accurately summarized in all respects), (y) questions
the validity of the capital stock of the Company or this Agreement or the
Representative's Warrant Agreement, or of any action taken or to be taken by the
Company pursuant to or in connection with any of the foregoing; (D) no statute
or regulation or legal or governmental proceeding required to be described in
the Prospectus is not described as required; and (E) there is no action, suit or
proceeding pending, or threatened, against or affecting the Company before any
court or arbitrator or governmental body, agency or official (or any basis
thereof known to such counsel) in which there is a reasonable possibility of a
decision which may result in a material adverse change in the condition,
financial or otherwise, or the earnings, position, prospects, stockholders'
equity, value, operation, properties, business or results of operations of the
Company, which could adversely affect the present or prospective ability of the
Company to perform its obligations under this Agreement or the Representative's
Warrant Agreement or which in any manner draws into question the validity or
enforceability of this Agreement or the Representative's Warrant Agreement;
(vii) the Company has full legal right, power and authority to
enter into this Agreement and the Representative's Warrant Agreement, and to
consummate the transactions provided for therein; and this Agreement and the
Representative's Warrant Agreement has been duly authorized, executed and
delivered by the Company. Each of this Agreement and the Representative's
Warrant Agreement, assuming due authorization, execution and delivery by each
other party thereto, constitutes a legal, valid and binding agreement of the
Company enforceable against the Company in accordance with its terms (except as
such enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application relating to or
affecting enforcement of creditors' rights and the application of equitable
principles in any action, legal or equitable, and except as rights to indemnity
or contribution may be limited by applicable law), and none of the Company's
execution or delivery of this Agreement and the Representative's Warrant
Agreement, its performance hereunder or thereunder, its consummation of the
transactions contemplated herein or therein, or the conduct of its business as
described in the Registration Statement, the Prospectus, and any amendments or
supplements thereto, conflicts with or will conflict with or results or will
result in any breach or violation of any of the terms or provisions of, or
constitutes or will constitute a default under, or result in the creation or
imposition of any lien, charge, claim, encumbrance, pledge, security interest,
defect or other restriction or equity of any kind whatsoever upon, any property
or assets (tangible or intangible) of the Company pursuant to the terms of, (A)
the articles of incorporation or by-laws of the Company, (B) any license,
contract, collective bargaining agreement, indenture, mortgage, deed of trust,
lease, voting trust agreement, stockholders agreement, note, loan or credit
agreement or any other agreement or instrument to which the Company is a party
or by which it is or may be bound or to which any of its properties or assets
(tangible or intangible) is or may be subject, or any indebtedness, or (C) any
statute, judgment, decree, order, rule or regulation applicable to the Company
of any arbitrator, court, regulatory body or administrative agency or other
governmental agency or body (including, without limitation, those having
jurisdiction over environmental or similar matters), domestic or foreign, having
jurisdiction over the Company or any of its respective activities or properties.
(viii) no consent, approval, authorization or order, and no
filing with, any court, regulatory body, government agency or other body (other
than registration under the Act or qualification under state or foreign
securities law or approval by the NASD) is required in connection with the
issuance of the Offered Securities and the Option Securities pursuant to the
Prospectus and the Registration Statement, the issuance of the Representative's
Warrants, the performance of this Agreement and the Representative's Warrant
Agreement, and the transactions contemplated hereby and thereby;
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<PAGE> 17
(ix) the properties and business of the Company conform in all
material respects to the description thereof contained in the Registration
Statement and the Prospectus; and the Company has good and marketable title to,
or valid and enforceable leasehold estates in, all items of real and personal
property stated in the Prospectus to be owned or leased by it, in each case free
and clear of all liens, charges, claims, encumbrances, pledges, security
interests, defects or other restrictions or equities of any kind whatsoever,
other than those referred to in the Prospectus and liens for taxes not yet due
and payable;
(x) to such counsel's knowledge, the Company is not in breach of,
or in default under, any term or provision of any license, contract, collective
bargaining agreement, indenture, mortgage, installment sale agreement, deed of
trust, lease, voting trust agreement, stockholders' agreement, partnership
agreement, note, loan or credit agreement or any other agreement or instrument
evidencing an obligation for borrowed money, or any other agreement or
instrument to which the Company is a party or by which the Company may be bound
or to which the properties or assets (tangible or intangible) of the Company is
subject or affected; and the Company is not in violation of any term or
provision of its articles of incorporation or by-laws or in violation of any
franchise, license, permit, judgment, decree, order, statute, rule or
regulation;
(xi) the statements in the Prospectus under "RISK FACTORS," "THE
COMPANY," "BUSINESS," "MANAGEMENT," "SECURITY OWNERSHIP OF MANAGEMENT AND
CERTAIN SECURITY HOLDERS," "CERTAIN TRANSACTIONS," "DESCRIPTION OF SECURITIES,"
and "SHARES ELIGIBLE FOR FUTURE SALE" have been reviewed by such counsel, and
insofar as they refer to statements of law, descriptions of statutes, licenses,
rules or regulations or legal conclusions, are correct in all material respects;
(xii) the Offered Securities and Option Securities have been
accepted for quotation on the NASDAQ;
(xiii) the persons listed under the caption "SECURITY OWNERSHIP
OF MANAGEMENT AND CERTAIN SECURITY HOLDERS" in the Prospectus are the respective
"beneficial owners" (as such phrase is defined in regulation 13d-3 under the
Exchange Act) of the securities set forth opposite their respective names
thereunder as and to the extent set forth therein;
(xiv) to such counsel's knowledge, neither the Company nor any of
its officers, stockholders, employees or agents, nor any other person acting on
behalf of the Company has, directly or indirectly, given or agreed to give any
money, gift or similar benefit (other than legal price concessions to customers
in the ordinary course of business) to any customer, supplier, employee or agent
of a customer or supplier, or official or employee of any governmental agency or
instrumentality of any government (domestic or foreign) or any political party
or candidate for office (domestic or foreign) or other person who is or may be
in a position to help or hinder the business of the Company (or assist it in
connection with any actual or proposed transaction) which (A) might subject the
Company to any damage or penalty in any civil, criminal or governmental
litigation proceeding, (B) if not given in the past, might have had an adverse
effect on the assets, business or operations of the Company, as reflected in any
of the financial statements contained in the Registration Statement, or (C) if
not continued in the future, might adversely affect the assets, business,
operations or prospects of the Company;
(xv) except as may be disclosed therein, no person, corporation,
trust, partnership, association or other entity has the right to include and/or
register any securities of the Company in the Registration Statement, require
the Company to file any registration statement or, if filed, to include any
security in such registration statement;
(xvi) except as described in the Prospectus, there are no claims,
payments, issuances, arrangements or understandings for services in the nature
of a finder's or origination fee with respect to the sale of the Securities
hereunder or financial consulting arrangements or any other arrangements,
agreements, understandings, payments or issuances that may affect the
Underwriters' compensation, as determined by the NASD;
(xvii) assuming due execution by the parties thereto other than
the Company, the Lock-up Agreements are legal, valid and binding obligations of
the parties thereto, enforceable against the party and any subsequent holder of
the securities subject thereto in accordance with its terms (except as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application relating to or
affecting enforcement of creditors' rights and the application of equitable
principles in any action, legal or equitable, and except as rights to indemnity
or contribution may be limited by applicable law);
(xviii) except as described in the Prospectus, the Company does
not (A) maintain, sponsor or contribute to any ERISA Plans, (B) maintain or
contribute, now or at any time previously, to a defined benefit plan, as defined
in Section 3(35) of ERISA, and (C) has never completely or partially withdrawn
from a "multi-employer plan";
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(xix) the minute books of the Company have been made available to
the Underwriters and to such counsel's knowledge contain a complete summary of
all meetings and actions of the directors and stockholders of the Company since
the time of its incorporation and reflect all transactions referred to in such
minutes accurately in all material respects;
(xx) except as set forth in the Prospectus and to the best
knowledge of such counsel, no officer, director or stockholder of the Company,
or any "affiliate" or "associate" (as these terms are defined in Rule 405
promulgated under the Rules and Regulations) of any of the foregoing persons or
entities has or has had, either directly or indirectly, (A) an interest in any
person or entity which (x) furnishes or sells services or products which are
furnished or sold or are proposed to be furnished or sold by the Company, or (y)
purchases from or sells or furnishes to the Company any goods or services, or
(B) a beneficial interest in any contract or agreement to which the Company is a
party or by which it may be bound or affected. Except as set forth in the
Prospectus under "CERTAIN TRANSACTIONS," there are no existing agreements,
arrangements, understandings or transactions, or proposed agreements,
arrangements, understandings or transactions, between or among the Company, and
any officer, director, or 5% or greater securityholder of the Company, or any
affiliate or associate of any such person or entity;
(xxi) to the best of such counsel's knowledge, after due inquiry,
there is no action, suit, proceeding, inquiry, investigation, litigation or
governmental proceeding, domestic or foreign, pending or threatened (or
circumstances that may give rise to the same) involving the Company's
production, use, testing, manufacturing or marketing of any products or
services, which (i) questions the authority of the Company to produce, use,
test, manufacture or market any products or services as described in the
Prospectus, (ii) questions the completeness or accuracy of data generated by any
trials, tests or studies being conducted by or on behalf of the Company, (iii)
is required to be disclosed in the Prospectus which is not so disclosed, or (iv)
might materially and adversely affect the condition, financial or otherwise, or
the earnings, prospects, value, operations or business of the Company.
Such counsel shall state that such counsel has participated in
conferences with officers and other representatives of the Company, and
representatives of the independent public accountants for the Company, at which
conferences such counsel made inquiries of such officers, representatives and
accountants and discussed the contents of the Preliminary Prospectus, the
Registration Statement, the Prospectus, and related matters and, although such
counsel is not passing upon and does not assume any responsibility for the
accuracy, completeness or fairness of the statements contained in the
Preliminary Prospectus, the Registration Statement and Prospectus, on the basis
of the foregoing, no facts have come to the attention of such counsel which lead
them to believe that either the Registration Statement or any amendment thereto,
at the time such Registration Statement or amendment became effective or the
Preliminary Prospectus or Prospectus or amendment or supplement thereto as of
the date of such opinion contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein not misleading (it being understood that such
counsel need express no opinion with respect to the financial statements and
schedules and other financial and statistical data included in the Preliminary
Prospectus, the Registration Statement or the Prospectus). Such counsel shall
further state that its opinions may be relied upon by Underwriters' Counsel in
rendering its opinion to the Underwriters.
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws other than the laws of the United States and
jurisdictions in which they are admitted, to the extent such counsel deems
proper and to the extent specified in such opinion, if at all, upon an opinion
or opinions (in form and substance satisfactory to Underwriters' Counsel) of
other counsel acceptable to Underwriters' Counsel, familiar with the applicable
laws; (B) as to matters of fact, to the extent they deem proper, on certificates
and written statements of responsible officers of the Company and certificates
or other written statements of officers of departments of various jurisdictions
having custody of documents respecting the corporate existence or good standing
of the Company, provided that copies of any such statements or certificates
shall be delivered to Underwriters' Counsel if requested. The opinion of such
counsel for the Company shall state that the opinion of any such other counsel
is in form satisfactory to such counsel and that the Representative,
Underwriters' Counsel and they are each justified in relying thereon.
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(e) At each Option Closing Date, if any, the Underwriters shall have
received the favorable opinion of Jeffers, Wilson, Shaff & Falk LLP, counsel to
the Company, dated on such Option Closing Date, addressed to the Underwriters
and in form and substance satisfactory to Underwriters' Counsel confirming as of
such Option Closing Date the statements made by Jeffers, Wilson, Shaff & Falk
LLP in its opinions delivered on the Closing Date.
(f) On or prior to the Closing Date and each Option Closing Date, if
any, Underwriters' Counsel shall have been furnished such documents,
certificates and opinions as they may reasonably require for the purpose of
enabling them to review or pass upon the matters referred to in subsection (c)
of this Section 6, or in order to evidence the accuracy, completeness or
satisfaction of any of the representations, warranties or conditions of the
Company, or herein contained.
(g) Prior to the Closing Date and each Option Closing Date, if any,
(i) there shall have been no material adverse change nor development involving a
prospective change in the condition, financial or otherwise, earnings, position,
value, properties, results of operations, prospects, stockholders' equity or the
business activities of the Company, whether or not in the ordinary course of
business, from the latest dates as of which such condition is set forth in the
Registration Statement and Prospectus; (ii) there shall have been no
transaction, not in the ordinary course of business, entered into by the
Company, from the latest date as of which the financial condition of the Company
is set forth in the Registration Statement and Prospectus which is materially
adverse to the Company or; (iii) the Company nor shall not be in material
default under any provision of any instrument relating to any outstanding
indebtedness; (iv) the Company shall not have issued any securities (other than
the Securities) or declared or paid any dividend or made any distribution in
respect of its capital stock of any class and there has not been any change in
the capital stock or any material change in the debt (long or short term) or
liabilities or obligations of the Company (contingent or otherwise); (v) no
material amount of the assets of the Company shall have been pledged or
mortgaged, except as set forth in the Registration Statement and Prospectus;
(vi) no action, suit or proceeding, at law or in equity, shall have been pending
or threatened (or circumstances giving rise to same) against the Company, or
affecting any of its properties or businesses before or by any court or federal,
state or foreign commission, board or other administrative agency wherein an
unfavorable decision, ruling or finding may materially adversely affect the
business, operations, earnings, position, value, properties, results of
operations, prospects or financial condition or income of the Company; and (vii)
no stop order shall have been issued under the Act nd no proceedings therefor
shall have been initiated, threatened or contemplated by the Commission.
(h) At the Closing Date and each Option Closing Date, if any, the
Underwriters shall have received a certificate of the Company signed by the
principal executive officer and by the chief financial or chief accounting
officer of the Company, dated the Closing Date or Option Closing Date, as the
case may be, to the effect that such persons has carefully examined the
Registration Statement, the Prospectus, and this Agreement, and that:
(i) The representations and warranties of the Company in this
Agreement are true and correct, as if made on and as of the Closing Date or the
Option Closing Date, as the case may be, and the Company has complied with all
agreements and covenants and satisfied all conditions contained in this
Agreement on its part to be performed or satisfied at or prior to such Closing
Date or Option Closing Date, as the case may be;
(ii) No stop order suspending the effectiveness of the
Registration Statement or any part thereof has been issued, and no proceedings
for that purpose have been instituted or are pending or, to the best of each of
such person's knowledge, are contemplated or threatened under the Act;
(iii) The Registration Statement and the Prospectus and, if any,
each amendment and each supplement thereto, contain all statements and
information required to be included therein, and none of the Registration
Statement, the Prospectus nor any amendment or supplement thereto includes any
untrue statement of a material fact or omits to state any material fact required
to be stated therein or necessary to make the statements therein not misleading
and neither the Preliminary Prospectus or any supplement thereto included any
untrue statement of a material fact or omitted to state any material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading; and
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<PAGE> 20
(iv) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus, (a) the Company has
not incurred up to and including the Closing Date or the Option Closing Date, as
the case may be, other than in the ordinary course of its business, any material
liabilities or obligations, direct or contingent; (b) the Company has not paid
or declared any dividends or other distributions on its capital stock; (c) the
Company has not entered into any material transactions not in the ordinary
course of business; (d) there has not been any change in the capital stock or
long-term debt or any increase in the short-term borrowings (other than any
increase in the short-term borrowings in the ordinary course of business) of the
Company; (e) the Company has not sustained any material loss or damage to its
properties or assets, whether or not insured; (f) there is no litigation which
is pending or threatened (or circumstances giving rise to same) against the
Company or any affiliated party which is required to be set forth in an amended
or supplemented Prospectus which has not been set forth; and (g) there has
occurred no event required to be set forth in an amended or supplemented
Prospectus which has not been set forth.
References to the Registration Statement and the Prospectus in this
subsection (h) are to such documents as amended and supplemented at the date of
such certificate.
(i) By the Closing Date, the Underwriters will have received
clearance from the NASD as to the amount of compensation allowable or payable to
the Underwriters, as described in the Registration Statement.
(j) At the time this Agreement is executed, the Underwriters shall
have received a letter, dated such date, addressed to the Underwriters in form
and substance satisfactory (including the non-material nature of the changes or
decreases, if any, referred to in clause (iii) below) in all respects to the
Underwriters and Underwriters' Counsel, from McGladrey & Pullen, LLP:
(i) confirming that they are independent certified public
accountants with respect to the Company within the meaning of the Act and the
applicable Rules and Regulations;
(ii) stating that it is their opinion that the financial
statements and supporting schedules of the Company included in the Registration
Statement comply as to form in all material respects with the applicable
accounting requirements of the Act and the Rules and Regulations thereunder and
that the Representative may rely upon the opinion of McGladrey & Pullen, LLP
with respect to the financial statements and supporting schedules included in
the Registration Statement;
(iii) stating that, on the basis of a limited review which
included a reading of the latest available unaudited interim financial
statements of the Company, a reading of the latest available minutes of the
stockholders and board of directors and the various committees of the board of
directors of the Company, consultations with officers and other employees of the
Company responsible for financial and accounting matters and other specified
procedures and inquiries, nothing has come to their attention which would lead
them to believe that (A) the unaudited financial statements and supporting
schedules of the Company included in the Registration Statement do not comply as
to form in all material respects with the applicable accounting requirements of
the Act and the Rules and Regulations or are not fairly presented in conformity
with generally accepted accounting principles applied on a basis substantially
consistent with that of the audited financial statements of the Company included
in the Registration Statement, or (B) at a specified date not more than five (5)
days prior to the effective date of the Registration Statement, there has been
any change in the capital stock or long-term debt of the Company, or any
decrease in the stockholders' equity or net current assets or net assets of the
Company as compared with amounts shown in the ________ balance sheet included in
the Registration Statement, other than as set forth in or contemplated by the
Registration Statement, or, if there was any change or decrease, setting forth
the amount of such change or decrease, and (C) during the period from _________
to a specified date not more than five (5) days prior to the effective date of
the Registration Statement, there was any decrease in net revenues, net earnings
or increase in net earnings per common share of the Company or the Subsidiaries,
in each case as compared with the corresponding period beginning _________,
other than as set forth in or contemplated by the Registration Statement, or, if
there was any such decrease, setting forth the amount of such decrease;
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<PAGE> 21
(iv) setting forth, at a date not later than five (5) days prior
to the date of the Registration Statement, the amount of liabilities of the
Company taken as a whole (including a break-down of commercial paper and notes
payable to banks);
(v) stating that they have compared specific dollar amounts,
numbers of shares, percentages of revenues and earnings, statements and other
financial information pertaining to the Company set forth in the Prospectus in
each case to the extent that such amounts, numbers, percentages, statements and
information may be derived from the general accounting records, including work
sheets, of the Company and excluding any questions requiring an interpretation
by legal counsel, with the results obtained from the application of specified
readings, inquiries and other appropriate procedures (which procedures do not
constitute an examination in accordance with generally accepted auditing
standards) set forth in the letter and found them to be in agreement;
(vi) statements as to such other matters incident to the
transaction contemplated hereby as the Representative may reasonably request.
(k) At the Closing Date and each Option Closing Date, if any, the
Underwriters shall have received from McGladrey & Pullen, LLP a letter, dated as
of the Closing Date or the Option Closing Date, as the case may be, to the
effect that they reaffirm that statements made in the letter furnished pursuant
to subsection (j) of this Section, except that the specified date referred to
shall be a date not more than five (5) days prior to the Closing Date or the
Option Closing Date, as the case may be, and, if the Company has elected to rely
on Rule 430A of the Rules and Regulations, to the further effect that they have
carried out procedures as specified in clause (v) of subsection (j) of this
Section with respect to certain amounts, percentages and financial information
as specified by the Representative and deemed to be a part of the Registration
Statement pursuant to Rule 430A(b) and have found such amounts, percentages and
financial information to be in agreement with the records specified in such
clause (v).
(l) On the Closing Date and each Option Closing Date, if any, there
shall have been duly tendered to the Representative for the several
Underwriters' accounts the appropriate number of Offered Securities or Option
Securities, as the case may be.
(m) No order suspending the sale of the Securities in any
jurisdiction designated by the Representative pursuant to subsection (e) of
Section 4 hereof shall have been issued on either the Closing Date or the Option
Closing Date, if any, and no proceedings for that purpose shall have been
instituted or shall be contemplated.
(n) On or before the Closing Date, the Company shall have executed
and delivered to the Representative (i) the Representative's Warrant Agreement
substantially in the form filed as Exhibit 4.2 to the Registration Statement, in
final form and substance satisfactory to the Representative, and (ii) the
Representative's Warrants in such denominations and to such designees as shall
have been provided to the Company by the Representative.
(o) On or before the Closing Date, the Offered Securities and Option
Securities shall have been duly approved for listing on NASDAQ, subject to
official notice of issuance.
(p) On or before the Closing Date, there shall have been delivered to
the Representative all of the Lock-up Agreements, in form and substance
satisfactory to Underwriters' Counsel.
If any condition to the Underwriters' obligations hereunder to be
fulfilled prior to or at the Closing Date or the relevant Option Closing Date,
as the case may be, is not so fulfilled, the Representative may terminate this
Agreement or, if the Representative so elects, it may waive any such conditions
which have not been fulfilled or extend the time for their fulfillment.
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7. INDEMNIFICATION.
(a) The Company agrees to indemnify and hold harmless the
Underwriters (for purposes of this Section 7 "Underwriter" shall include the
officers, directors, partners, employees, agents and counsel of the Underwriter,
including specifically each person who may be substituted for an Underwriter as
provided in Section 11 hereof), and each person, if any, who controls the
Underwriter ("controlling person") within the meaning of Section 15 of the Act
or Section 20(a) of the Exchange Act, from and against any and all losses,
claims, damages, expenses or liabilities, joint or several (and actions,
proceedings, investigations, inquiries, suits and litigation in respect
thereof), whatsoever (including but not limited to any and all expenses
whatsoever reasonably incurred in investigating, preparing or defending against
any such claim, action, proceeding, investigation, inquiry, suit or litigation,
commenced or threatened, or any claim whatsoever), as such are incurred, to
which the Underwriter or such controlling person may become subject under the
Act, the Exchange Act or any other statute or at common law or otherwise or
under the laws of foreign countries, arising out of or based upon (A) any untrue
statement or alleged untrue statement of a material fact contained (i) in any
Preliminary Prospectus, the Registration Statement or the Prospectus (as from
time to time amended and supplemented); (ii) in any post-effective amendment or
amendments or any new registration statement and prospectus in which is included
securities of the Company issued or issuable upon exercise of the Securities; or
(iii) in any application or other document or written communication (in this
Section 7 collectively called "application") executed by the Company or based
upon written information furnished by the Company in any jurisdiction in order
to qualify the Securities under the securities laws thereof or filed with the
Commission, any state securities commission or agency, NASDAQ or any other
securities exchange; (B) the omission or alleged omission therefrom of a
material fact required to be stated therein or necessary to make the statements
therein not misleading (in the case of the Prospectus, in the light of the
circumstances under which they were made), or (C) any breach of any
representation, warranty, covenant or agreement of the Company contained herein
or in any certificate by or on behalf of the Company or any of its officers
delivered pursuant hereto, unless, in the case of clause (A) or (B) above, such
statement or omission was made in reliance upon and in conformity with written
information furnished to the Company with respect to any Underwriter by or on
behalf of such Underwriter expressly for use in any Preliminary Prospectus, the
Registration Statement or Prospectus, or any amendment thereof or supplement
thereto, or in any application, as the case may be. The indemnity agreement in
this subsection (a) shall be in addition to any liability which the Company may
have at common law or otherwise.
The foregoing indemnity with respect to any untrue statement
contained in or omission from a Preliminary Prospectus shall not inure to the
benefit of any Underwriter (or any person controlling such Underwriter) from
whom the person asserting any such loss, liability, claim, damage or expense
purchased any of the Securities which are the subject thereof if (1) the Company
or shall sustain the burden of proving that such asserting person did not
receive a copy of the Prospectus (or the Prospectus as amended or supplemented)
at or prior to the written confirmation of the sale of such Securities to such
person and the untrue statement contained in or omitted from such Preliminary
Prospectus was corrected in the Prospectus (or the Prospectus as amended or
supplemented); and (2) the Company shall have complied with its covenant
pursuant to Section 4(f) of this Agreement.
(b) the Underwriters agree severally, but not jointly, to indemnify
and hold harmless the Company, its directors and officers who have signed the
Registration Statement, and each other person, if any, who controls the Company
within the meaning of the Act, to the same extent as the foregoing indemnity
from the Company to the Underwriters but only with respect to statements or
omissions, if any, made in any Preliminary Prospectus, the Registration
Statement or Prospectus or any amendment thereof or supplement thereto or in any
application made in reliance upon, and in strict conformity with, written
information furnished to the Company with respect to any Underwriter by such
Underwriter expressly for use in such Preliminary Prospectus, the Registration
Statement or Prospectus or any amendment thereof or supplement thereto or in any
such application, provided that such written information or omissions only
pertain to disclosures in the Preliminary Prospectus, the Registration Statement
or Prospectus directly relating to the transactions effected by the Underwriters
in connection with this Offering. The Company acknowledges that the statements
with respect to the public offering of the Offered Securities and the Option
Securities set forth under the heading "Underwriting" and the stabilization
legend in the Prospectus have been furnished by the Underwriters expressly for
use therein and constitute the only information furnished in writing by or on
behalf of the Underwriters for inclusion in the Prospectus.
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(c) Promptly after receipt by an indemnified party under this Section
7 of notice of the commencement of any claim, action, suit, investigation,
inquiry, proceeding or litigation, such indemnified party shall, if a claim in
respect thereof is to be made against one or more indemnifying parties under
this Section 7, notify each party against whom indemnification is to be sought
in writing of the commencement thereof (but the failure so to notify an
indemnifying party shall not relieve it from any liability which it may have
under this Section 7 except to the extent that it has been prejudiced in any
material respect by such failure or from any liability which it may have
otherwise). In case any such claim, action, suit, investigation, inquiry,
proceeding or litigation is brought against any indemnified party, and it
notifies an indemnifying party or parties of the commencement thereof, the
indemnifying party or parties will be entitled to participate therein, and to
the extent it may elect by written notice delivered to the indemnified party
promptly after receiving the aforesaid notice from such indemnified party, to
assume the defense thereof with counsel reasonably satisfactory to such
indemnified party. Notwithstanding the foregoing, the indemnified party or
parties shall have the right to employ its or their own counsel in any such case
but the fees and expenses of such counsel shall be at the expense of such
indemnified party or parties unless (i) the employment of such counsel shall
have been authorized in writing by the indemnifying parties in connection with
the defense of thereof at the expense of the indemnifying party, (ii) the
indemnifying parties shall not have employed counsel reasonably satisfactory to
such indemnified party to have charge of the defense thereof within a reasonable
time after notice of commencement thereof, or (iii) such indemnified party or
parties shall have reasonably concluded that there may be defenses available to
it or them which are different from or additional to those available to one or
all of the indemnifying parties (in which case the indemnifying parties shall
not have the right to direct the defense thereof on behalf of the indemnified
party or parties), in any of which events such fees and expenses of one
additional counsel shall be borne by the indemnifying parties. In no event shall
the indemnifying parties be liable for fees and expenses of more than one
counsel (in addition to any local counsel) separate from their own counsel for
all indemnified parties in connection with any one claim, action, suit,
investigation, inquiry, proceeding or litigation or separate but similar or
related claims, actions, suits, investigations, inquiries, proceedings or
litigation in the same jurisdiction arising out of the same general allegations
or circumstances. Anything in this Section 7 to the contrary notwithstanding, an
indemnifying party shall not be liable for any settlement of any claim, action,
suit, investigation, inquiry, proceeding or litigation effected without its
written consent; provided, however, that such consent was not unreasonably
withheld. An indemnifying party will not, without the prior written consent of
the indemnified parties, settle, compromise or consent to the entry of any
judgment with respect to any pending or threatened claim, action, suit,
investigation, inquiry, proceeding or litigation in respect of which
indemnification or contribution may be sought hereunder (whether or not the
indemnified parties are actual or potential parties to such claim, action, suit,
investigation, inquiry, proceeding or litigation), unless such settlement,
compromise or consent (i) includes an unconditional release of each indemnified
party from all liability arising out of such claim, action, suit, investigation,
inquiry, proceeding or litigation and (ii) does not include a statement as to or
an admission of fault, culpability or a failure to act by or on behalf of any
indemnified party.
(d) In order to provide for just and equitable contribution in any
case in which (i) an indemnified party makes claim for indemnification pursuant
to this Section 7, but it is judicially determined (by the entry of a final
judgment or decree by a court of competent jurisdiction and the expiration of
time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case notwithstanding the fact that
the express provisions of this Section 7 provide for indemnification in such
case, or (ii) contribution under the Act may be required on the part of any
indemnified party, then each indemnifying party shall contribute to the amount
paid as a result of such losses, claims, damages, expenses or liabilities (or
actions in respect thereof) (A) in such proportion as is appropriate to reflect
the relative benefits received by the contributing parties, on the one hand, and
the party to be indemnified on the other hand, from the offering of the Offered
Securities and the Option Securities or (B) if the allocation provided by clause
(A) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the contributing parties, on the one hand,
and the party to be indemnified on the other hand in connection with the
statements or omissions that resulted in such losses, claims, damages, expenses
or liabilities, as well as any other relevant equitable considerations. In any
case where the Company is the contributing party and the Underwriters are the
indemnified party, the relative benefits received by the Company on the one
hand, and the Underwriters, on the other, shall be deemed to be in the same
proportion as the total net proceeds from the offering of the Offered Securities
and the Option Securities (before deducting expenses) bear to the total
underwriting discounts received by the Underwriters hereunder, in each case as
set forth in the table on the Cover
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Page of the Prospectus. Relative fault shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact relates to
information supplied by the Company, or by the Underwriters, and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such untrue statement or omission. The amount paid or payable by an
indemnified party as a result of the losses, claims, damages, expenses or
liabilities (or actions in respect thereof) referred to above in this subsection
(d) shall be deemed to include any legal or other expenses reasonably incurred
by such indemnified party in connection with investigating or defending any such
action or claim. Notwithstanding the provisions of this subsection (d), the
Underwriters shall not be required to contribute any amount in excess of the
underwriting discount applicable to the Offered Securities and the Option
Securities purchased by the Underwriters hereunder. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. For purposes of this Section 7, each person, if
any, who controls the Company or the Underwriter within the meaning of the Act,
each officer of the Company who has signed the Registration Statement, and each
director of the Company shall have the same rights to contribution as the
Company or the Underwriter, as the case may be, subject in each case to this
subsection (d). Any party entitled to contribution will, promptly after receipt
of notice of commencement of any action, suit or proceeding against such party
in respect to which a claim for contribution may be made against another party
or parties under this subsection (d), notify such party or parties from whom
contribution may be sought, but the omission so to notify such party or parties
shall not relieve the party or parties from whom contribution may be sought from
any obligation it or they may have hereunder or otherwise than under this
subsection (d), or to the extent that such party or parties were not adversely
affected by such omission. The contribution agreement set forth above shall be
in addition to any liabilities which any indemnifying party may have at common
law or otherwise.
8. REPRESENTATIONS AND AGREEMENTS TO SURVIVE DELIVERY. All
representations, warranties and agreements contained in this Agreement or
contained in certificates of officers of the Company submitted pursuant hereto,
shall be deemed to be representations, warranties and agreements at the Closing
Date and the Option Closing Date, as the case may be, and such representations,
warranties and agreements of the Company and the indemnity agreements contained
in Section 7 hereof, shall remain operative and in full force and effect
regardless of any investigation made by or on behalf of any Underwriter, the
Company, any controlling person of any Underwriter or the Company, and shall
survive termination of this Agreement or the issuance and delivery of the
Securities to the Underwriters and the Representative, as the case may be.
9. EFFECTIVE DATE. This Agreement shall become effective at 10:00 a.m.,
New York City time, on the next full business day following the date hereof, or
at such earlier time after the Registration Statement becomes effective as the
Representative, in its discretion, shall release the Securities for sale to the
public; provided, however, that the provisions of Sections 5, 7 and 10 of this
Agreement shall at all times be effective. For purposes of this Section 9, the
Securities to be purchased hereunder shall be deemed to have been so released
upon the earlier of dispatch by the Representative of telegrams to securities
dealers releasing such securities for offering or the release by the
Representative for publication of the first newspaper advertisement which is
subsequently published relating to the Securities.
10. TERMINATION.
(a) Subject to subsection (b) of this Section 10, the Representative
shall have the right to terminate this Agreement, (i) if any domestic or
international event or act or occurrence has materially adversely disrupted, or
in the Representative's opinion will in the immediate future materially
adversely disrupt, the financial markets; (ii) if any material adverse change in
the financial markets shall have occurred; (iii) if trading generally shall have
been suspended or materially limited on or by, as the case may be, any of the
New York Stock Exchange, the American Stock Exchange, the NASD, the Commission
or any governmental authority having jurisdiction over such matters; (iv) if
trading of any of the securities of the Company shall have been suspended by a
state securities administrator or the Commission; (v) if the United States shall
have become involved in a war or major hostilities, or if there shall have been
an escalation in an existing war or major hostilities or a national emergency
shall have been declared in the United States; or (vi) if a banking moratorium
has been declared by a state or federal authority; (vii) if
25
<PAGE> 25
a moratorium in foreign exchange trading has been declared; (viii) if the
Company shall have sustained a loss material or substantial to the Company or by
fire, flood, accident, hurricane, earthquake, theft, sabotage or other calamity
or malicious act which, whether or not such loss shall have been insured, will,
in the Representative's opinion, make it inadvisable to proceed with the
offering, sale and/or delivery of the Securities; (ix) if there shall have been
such a material adverse change in the conditions or prospects of the Company or
such material adverse change in the general market, political or economic
conditions, in the United States or elsewhere, that, in each case, in the
Representative's judgment, would make it inadvisable to proceed with the
offering, sale and/or delivery of the Offered Securities, or (x) if James
Buchanan Rea, Jr. shall no longer serve the Company in his present capacity.
(b) If this Agreement is terminated by the Representative in
accordance with the provisions of Section 10(a) the Company shall promptly
reimburse and indemnify the Representative for all of its actual out-of-pocket
expenses, including the fees and disbursements of counsel for the Underwriters
and all Blue Sky counsel fees (excluding filing fees) and disbursements (less
amounts previously paid pursuant to Section 5(c) above). In addition, the
Company shall remain liable for all Blue Sky counsel fees and disbursements,
expenses and filing fees. Notwithstanding any contrary provision contained in
this Agreement, if this Agreement shall not be carried out within the time
specified herein, or any extension thereof granted to the Representative, by
reason of any failure on the part of the Company to perform any undertaking or
satisfy any condition of this Agreement by it to be performed or satisfied
(including, without limitation, pursuant to Section 6 (except if this Agreement
is terminated pursuant to Sections 6(c), 6(j) or 6(o)) or Section 12) then, the
Company shall promptly reimburse and indemnify the Representative for all of
their actual accountable out-of-pocket expenses, including the reasonable fees
and disbursements of counsel for the Underwriters (less amounts previously paid
pursuant to Section 5(c) above). In addition, the Company shall remain liable
for all Blue Sky counsel fees and disbursements, expenses and filing fees.
Notwithstanding any contrary provision contained in this Agreement, any election
hereunder or any termination of this Agreement (including, without limitation,
pursuant to Sections 6, 10, 11 and 12 hereof), and whether or not this Agreement
is otherwise carried out, the provisions of Section 5 and Section 7 shall not be
in any way affected by such election or termination or failure to carry out the
terms of this Agreement or any part hereof.
11. SUBSTITUTION OF THE UNDERWRITERS. If one or more of the Underwriters
shall fail (otherwise than for a reason sufficient to justify the termination of
this Agreement under the provisions of Section 6, Section 10 or Section 12
hereof) to purchase Offered Securities which it or they are obligated to
purchase on such date under this Agreement (the "Defaulted Securities"), the
Representative shall have the right, within 24 hours thereafter, to make
arrangement for one or more of the non-defaulting Underwriters, or any other
underwriters, to purchase all, but not less than all, of the Defaulted
Securities in such amounts as may be agreed upon and upon the terms herein set
forth; if, however, the Representative shall not have completed such
arrangements within such 24-hour period, then:
(a) if the number of Defaulted Securities does not exceed 10% of the
total number of Offered Securities to be purchased on such date, the
non-defaulting Underwriters shall be obligated to purchase the full amount
thereof in the proportions that underwriting obligations hereunder bear to the
underwriting obligations of all non-defaulting Underwriters, or
(b) if the number of Defaulted Securities exceeds 10% of the total
number of Offered Securities, this Agreement shall terminate without liability
on the part of any non-defaulting Underwriters (or, if such default shall occur
with respect to any Option Securities to be purchased on an Option Closing Date,
the Underwriters may at the Representatives' option, by notice from the
Representative to the Company, terminate the Underwriters' obligation to
purchase Option Securities from the Company on such date).
No action taken pursuant to this Section 11 shall relieve any
defaulting Underwriter from liability in respect of any default by such
Underwriter under this Agreement.
In the event of any such default which does not result in a
termination of this Agreement, the Representative shall have the right to
postpone the Closing Date for a period not exceeding seven (7) days in order to
effect any required changes in the Registration Statement or Prospectus or in
any other documents or arrangements.
26
<PAGE> 26
12. DEFAULT BY THE COMPANY. If the Company shall fail at the Closing
Date or at any Option Closing Date, as applicable, to sell and deliver the
number of Firm Securities which it is obligated to sell hereunder on such date,
then this Agreement shall terminate (or, if such default shall occur with
respect to any Option Securities to be purchased on an Option Closing Date, the
Underwriters may at the Representatives' option, by notice from the
Representative to the Company, terminate the Underwriters' obligation to
purchase Option Securities from the Company on such date) without any liability
on the part of any non-defaulting party other than pursuant to Section 5,
Section 7 and Section 10 hereof. No action taken pursuant to this Section 12
shall relieve the Company from liability, if any, in respect of such default;
provided, however, that the Company's liability shall be limited to the
reimbursement of these items specified in the first sentence of Section 10(b)
plus an amount equal to the unused portion, if any, of the $25,000 retainer and
pursuant to Section 5(c).
13. NOTICES. All notices and communications hereunder, except as herein
otherwise specifically provided, shall be in writing and shall be deemed to have
been duly given if mailed or transmitted by any standard form of
telecommunication. Notices to the Underwriters shall be directed to the
Representative, Nutmeg Securities, Ltd., 495 Post Road East, Westport, CT 06880,
Attention: Christopher Daniels, with a copy to Cadwalader, Wickersham & Taft,
100 Maiden Lane, New York, NY 10038, Attention: Gerald A. Eppner, Esq. Notices
to the Company shall be directed to the Company at 10900 Wilshire Boulevard, 9th
Floor, Los Angeles, California 90024, Attention: Peter Hartmann, Chairman, with
a copy to: Jeffers, Wilson, Shaff & Falk LLP, 18881 Von Karman Avenue, Suite
1400 Irvine, California 92612, Attention: Michael B. Jeffers, Esq.
14. PARTIES. This Agreement shall inure solely to the benefit of and
shall be binding upon, the Underwriters, the Company and the controlling
persons, directors and officers referred to in Section 7 hereof, and successors,
legal representatives and assigns, and no other person shall have or be
construed to have any legal or equitable right, remedy or claim under or in
respect of or by virtue of this Agreement or any provisions herein contained. No
purchaser of Firm Securities or Option Securities from any Underwriter shall be
deemed to be a successor by reason merely of such purchase.
15. CONSTRUCTION. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of New York without giving
effect to the choice of law or conflict of laws principles. The prevailing party
in any dispute hereunder shall be entitled to an award of its reasonable legal
fees for resolving such dispute.
16. ARBITRATION. The parties agree that in the event of any dispute with
respect to this Agreement or their respective obligations hereunder, such
dispute shall be settled by arbitration in Los Angeles, California, or such
other jurisdiction as the parties may agree, in accordance with the rules of the
National Association of Securities Dealers, Inc. Any award rendered by the
arbitrators shall be final and judgment may be entered upon him or it by any
court of competent jurisdiction.
17. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, and all of which
taken together shall be deemed to be one and the same instrument.
18. ENTIRE AGREEMENT; AMENDMENTS. This Agreement and the
Representative's Warrant Agreement constitute the entire agreement of the
parties hereto and supersede all prior written or oral agreements,
understandings and negotiations with respect to the subject matter hereof. This
Agreement may not be amended except in a writing, signed by the Representative
and the Company.
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<PAGE> 27
If the foregoing correctly sets forth the understanding between the
Underwriters and the Company, please so indicate in the space provided below for
that purpose, whereupon this letter shall constitute a binding agreement among
us.
Very truly yours,
amdiv.com, inc.
By:
----------------------------------
James Buchanan Rea, Jr., President
and Chief Executive Officer
Confirmed and accepted as of
the date first above written.
NUTMEG SECURITIES, LTD.
For itself and as Representative
of the several Underwriters named in
Schedule A hereto.
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
28
<PAGE> 28
SCHEDULE A
FIRM SECURITIES
<TABLE>
<CAPTION>
Number of Shares
of Common Stock
Underwriters to be Purchased
- ------------ ------------------
<S> <C>
Nutmeg Securities, Ltd............................
Total............................................. [_________]
</TABLE>
30
<PAGE> 29
EXHIBIT A
FORM OF REPRESENTATIVE'S WARRANT AGREEMENT
- --------------------------------------------------------------------------------
amdiv.com, inc.
AND
NUTMEG SECURITIES, LTD.
---------------------
REPRESENTATIVE'S WARRANT AGREEMENT
DATED AS OF ________, 1998
- --------------------------------------------------------------------------------
<PAGE> 30
THIS REPRESENTATIVE'S WARRANT AGREEMENT dated as of _______, 1998
between amdiv.com, inc., a Nevada corporation (the "Company"), and NUTMEG
SECURITIES, LTD. (hereinafter referred to variously as the "Holder", "Nutmeg",
or "Representative").
W I T N E S S E T H:
WHEREAS, the Company has prepared and filed with the Securities and
Exchange Commission a registration statement on Form SB-2 (No. 333-62489) for
the registration of 1,733,334 shares of the common stock, no par value, of the
Company (the "Common Stock");
WHEREAS, Nutmeg has agreed pursuant to an underwriting agreement (the
"Underwriting Agreement") dated as of the date hereof among Nutmeg Securities,
Ltd., as the Representative of the several Underwriters listed therein, and the
Company to act as a Representative in connection with the Company's proposed
public offering of such 1,733,334 shares of Common Stock (the "Offered Shares")
at a public offering price of $14.00 per share; and
WHEREAS, the Company proposes to issue to Nutmeg warrants ("Warrants")
to purchase a number of shares of Common Stock of the Company equal to ten
percent (10%) of the Offered Shares placed by the Underwriters (up to a maximum
of ____________ shares), in connection with the Company's proposed public
offering; and
WHEREAS, the Warrants to be issued pursuant to this Agreement will be
issued on the Closing Date (as such term is defined in the Underwriting
Agreement) by the Company to Nutmeg or its designees in consideration for,
and as part of Nutmeg's compensation in connection with, its acting as the
Representative pursuant to the Underwriting Agreement.
NOW, THEREFORE, in consideration of the premises, the payment by Nutmeg
to the Company of an aggregate _________ dollars ($_________), the agreements
herein set forth and other good and valuable consideration, hereby acknowledged,
the parties hereto agree as follows:
1. GRANT. Nutmeg (or its designees) is hereby granted the right to
purchase, at any time from the effective date of the Registration Statement,
until 5:30 P.M., New York time, on __________, 2003, up to an aggregate number
of shares of Common Stock equal to ten percent (10%) of the Offered Shares
placed by the Underwriters, (up to a maximum of ____________ shares) in
connection with the Company's public offering, subject to the terms and
conditions of this Agreement. Except as set forth herein, the shares of Common
Stock are in all respects identical to the shares of Common Stock being
purchased by the Underwriters for resale to the public pursuant to the terms and
provisions of the Underwriting Agreement. The shares of Common Stock are
sometimes hereinafter referred to as the "Securities."
2. WARRANT CERTIFICATE. The warrant certificate (the "Warrant
Certificate") delivered and to be delivered pursuant to this Agreement shall be
in the form set forth in Exhibit 1, attached hereto and made a part hereof, with
such appropriate insertions, omissions, substitutions, and other variations as
required or permitted by this Agreement.
3. EXERCISE OF WARRANT.
3.1. METHOD OF EXERCISE. The Warrants initially are exercisable at an
aggregate initial exercise price (subject to adjustment as provided in Section 8
hereof) per share of Common Stock set forth in Section 6 hereof payable by
certified or official bank check in New York Clearing House funds, subject to
adjustment as provided in Section 8 hereof. Upon surrender of a Warrant
Certificate with the annexed Form of Election to Purchase duly executed,
together with payment of the Exercise Price (as hereinafter defined) for the
shares of Common Stock purchased at the Company's principal executive offices in
California (presently located at 10900 Wilshire Boulevard, 9th Floor, Los
Angeles, California 90024) the registered holder of a Warrant Certificate
("Holder" or "Holders") shall be entitled to receive a certificate or
certificates for the shares of Common Stock so purchased. The purchase rights
represented by
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<PAGE> 31
the Warrant Certificate are exercisable at the option of the Holder thereof, in
whole or in part (but not as to fractional shares of the Common Stock underlying
the Warrant). The Warrant may be exercised to purchase all or part of the shares
of Common Stock. In the case of the purchase of less than all the shares of
Common Stock purchasable under the Warrant Certificate, the Company shall cancel
said Warrant Certificate upon the surrender thereof and shall execute and
deliver a new Warrant Certificate of like tenor for the balance of the shares of
Common Stock purchasable thereunder.
3.2. EXERCISE BY SURRENDER OF WARRANT. In addition to the method of
payment set forth in Section 3.1 and in lieu of any cash payment required
thereunder, the Holder(s) of the Warrant shall have the right at any time and
from time to time to exercise the Warrant in full or in part by surrendering the
Warrant Certificate in the manner specified in Section 3.1 hereof. The number of
shares of Common Stock to be issued pursuant to this Section 3.2 shall be equal
to the difference between (a) the number of shares of Common Stock in respect of
which the Warrant is exercised and (b) a fraction, the numerator of which shall
be the number of shares of Common Stock in respect of which the Warrant is
exercised multiplied by the Exercise Price and the denominator of which shall be
the Market Price (as defined in Section 3.3 hereof) of the Common Stock. Solely
for the purposes of this paragraph, Market Price shall be calculated either (i)
on the date on which the form of election attached hereto is deemed to have been
sent to the Company pursuant to Section 13 hereof ("Notice Date") or (ii) as the
average of the Market Prices for each of the five trading days preceding the
Notice Date, whichever of (i) or (ii) is greater.
3.3 DEFINITION OF MARKET PRICE. As used herein, the phrase "Market Price"
at any date shall be deemed to be the last reported sale price of the Common
Stock, or, in the case no such reported sale takes place on such day, the
average of the last reported sale prices for the last three (3) trading days, in
either case as officially reported by the principal securities exchange on which
the Common Stock is listed or admitted for trading or by the National
Association of Securities Dealers Automated Quotation System ("Nasdaq") National
Market, or, if the Common Stock is not listed or admitted for trading on any
national securities exchange or quoted by Nasdaq, the average closing bid price
as furnished by the National Association of Securities Dealers, Inc. ("NASD")
through Nasdaq or a similar organization if Nasdaq is no longer reporting such
information, or if the Common Stock is not quoted on Nasdaq, as determined in
good faith (using customary valuation methods) by resolution of the members of
the Board of Directors of the Company, based on the best information available
to it.
4. ISSUANCE OF CERTIFICATES. Upon the exercise of the Warrant, the issuance
of certificates for shares of Common Stock and/or other securities, properties
or rights underlying such Warrant shall be made forthwith (and in any event
within five (5) business days thereafter) without charge to the Holder thereof
including, without limitation, any tax which may be payable in respect of the
issuance thereof, and such certificates shall (subject to the provisions of
Sections 5 and 7 hereof) be issued in the name of, or in such names as may be
directed by, the Holder thereof; provided, however, that the Company shall not
be required to pay any tax which may be payable in respect of any transfer
involved in the issuance and delivery of any such certificates in a name other
than that of the Holder, and the Company shall not be required to issue or
deliver such certificates unless or until the person or persons requesting the
issuance thereof shall have paid to the Company the amount of such tax or shall
have established to the satisfaction of the Company that such tax has been paid.
The Warrant Certificates and the certificates representing the shares of
Common Stock underlying the Warrant (and/or other securities, property or rights
issuable upon the exercise of the Warrant) shall be executed on behalf of the
Company by the manual or facsimile signature of the then Chairman or Vice
Chairman of the Board of Directors or President or Vice President of the
Company. The Warrant Certificate shall be dated the date of execution by the
Company upon initial issuance, division, exchange, substitution or transfer.
Certificates representing the shares of Common Stock (and/or other securities,
property or rights issuable upon exercise of the Warrant) shall be dated as of
the Notice Date (regardless of when executed or delivered) and dividend bearing
securities so issued shall accrue dividends from the Notice Date.
5. RESTRICTION ON TRANSFER OF WARRANT. The Holder of a Warrant
Certificate, by its acceptance thereof, covenants and agrees that the Warrant is
being acquired as an investment and not with a view to the distribution thereof;
that the Warrant may not be sold, transferred, assigned, hypothecated or
otherwise disposed of, in whole or in part, for a period of one (1) year from
the date hereof, except to officers of the Representative.
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<PAGE> 32
6. EXERCISE PRICE.
6.1 INITIAL AND ADJUSTED EXERCISE PRICE. Except as otherwise provided
in Section 8 hereof, the initial exercise price of the Warrant shall be $____
[120% of the initial public offering price] per share of Common Stock. The
adjusted exercise price shall be the price which shall result from time to time
from any and all adjustments of the initial exercise price in accordance with
the provisions of Section 8 hereof. Any transfer of the Warrant shall constitute
an automatic transfer and assignment of the registration rights set forth in
Section 7 hereof with respect to the Securities or other securities, properties
or rights underlying the Warrant.
6.2 EXERCISE PRICE. The term "Exercise Price" herein shall mean the
initial exercise price or the adjusted exercise price, depending upon the
context or unless otherwise specified.
7. REGISTRATION RIGHTS.
7.1 REGISTRATION UNDER THE SECURITIES ACT OF 1933. The Warrant, the
shares of Common Stock or other securities issuable upon exercise of the
Warrant, (collectively, the "Warrant Securities") have not been registered under
the Securities Act of 1933, as amended (the "Act") pursuant to the Company's
Registration Statement on Form SB- 2 (Registration No. 333-62489) (the
"Registration Statement"). The certificates representing the Warrant Securities
shall bear the following legend:
The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended ("Act"),
and may not be offered or sold except pursuant to (i) an
effective registration statement under the Act, (ii) to the
extent applicable, Rule 144 under the Act (or any similar rule
under such Act relating to the disposition of securities), or
(iii) an opinion of counsel, if such opinion shall be reasonably
satisfactory to counsel to the issuer, that an exemption from
registration under such Act is available.
7.2 PIGGYBACK REGISTRATION. If, at any time commencing one year after
the date hereof and expiring five (5) years thereafter, the Company proposes to
register any of its securities under the Act (other than pursuant to Form S-4,
Form S-8 or a comparable registration statement) it will give written notice by
registered mail, at least thirty (30) days prior to the filing of each such
registration statement, to Nutmeg and to all other Holders of the Warrant and/or
the Warrant Securities of its intention to do so. If Nutmeg or other Holders of
the Warrant and/or Warrant Securities notify the Company within twenty (20)
business days after receipt of any such notice of its or their desire to include
any such securities in such proposed registration statement, the Company shall
afford Nutmeg and such Holders of the Warrant and/or Warrant Securities the
opportunity to have any such Warrant Securities registered under such
registration statement.
Notwithstanding the provisions of this Section 7.2, the Company shall
have the right at any time after it shall have given written notice pursuant to
this Section 7.2 (irrespective of whether a written request for inclusion of any
such securities shall have been made) to elect not to file any such proposed
registration statement, or to withdraw the same after the filing but prior to
the effective date thereof.
7.3 DEMAND REGISTRATION.
(a) At any time commencing one year after the date hereof and
expiring five (5) years thereafter, the Holder of the Warrant and/or
Warrant Securities representing a "Majority" (as hereinafter defined)
of such securities (assuming the exercise of all of the Warrant)
shall have the one-time right (which right is in addition to the
registration rights under Section 7.2 hereof), exercisable by written
notice to the Company, to have the Company prepare and file with the
Securities and Exchange Commission (the "Commission") a registration
statement and such other documents, including a prospectus, as may
A-3
<PAGE> 33
be necessary in the opinion of both counsel for the Company and
counsel for Nutmeg and Holders, in order to comply with the
provisions of the Act, so as to permit a public offering and sale
of their respective Warrant Securities for six (6) consecutive
months by such Holders and any other Holder of the Warrant and/or
Warrant Securities who notify the Company within ten (10) days
after receiving notice from the Company of such request.
(b) The Company covenants and agrees to give written notice of
any registration request under this Section 7.3 by any Holder or
Holders to all other registered Holders of the Warrant and the
Warrant Securities within ten (10) days from the date of the receipt
of any such registration request.
(c) Notwithstanding anything to the contrary contained herein, if
the Company shall not have filed a registration statement for the
Warrant Securities within the time period specified in Section 7.4(a)
hereof pursuant to the written notice specified in Section 7.3(a) of
a Majority of the Holders of the Warrant and/or Warrant Securities,
the Company may, at its option, upon the written notice of election
of a Majority of the Holders of the Warrant and/or Warrant Securities
requesting such registration, repurchase (i) any and all Warrant
Securities of such Holders at the higher of the Market Price per
share of Common Stock on (x) the date of the notice sent pursuant to
Section 7.3(a) or (y) the expiration of the period specified in
Section 7.4(a) and (ii) any and all Warrant of such Holders at such
Market Price less the Exercise Price of such Warrant. Such repurchase
shall be in immediately available funds and shall close within two
(2) days after the later of (i) the expiration of the period
specified in Section 7.4(a) or (ii) the delivery of the written
notice of election specified in this Section 7.3(c).
(d) If all of the Holders are able to sell the Warrant Securities
pursuant to Rule 144 under the Securities Act of 1933, as amended,
and without regard to the volume limitations thereunder, the Holders'
rights under Section 7.2 and 7.3(a) shall terminate.
7.4 COVENANTS OF THE COMPANY WITH RESPECT TO REGISTRATION. In
connection with any registration under Section 7.2 or 7.3 hereof, the Company
covenants and agrees as follows:
(a) The Company shall use its best efforts to file a registration
statement within thirty (30) days of receipt of any demand therefor,
shall use its best efforts to have any registration statements
declared effective at the earliest possible time, and shall furnish
each Holder desiring to sell Warrant Securities such number of
prospectuses as shall reasonably be requested.
(b) The Company shall pay all costs (excluding fees and expenses
of Holder(s)' counsel and any underwriting or selling commissions),
fees and expenses in connection with all registration statements
filed pursuant to Sections 7.2 and 7.3(a) hereof including, without
limitation, the Company's legal and accounting fees, printing
expenses, blue sky fees and expenses.
(c) The Company will take all necessary action which may be
required in qualifying or registering the Warrant Securities included
in a registration statement for offering and sale under the
securities or blue sky laws of such states as reasonably are
requested by the Holder(s), provided that the Company shall not be
obligated to execute or file any general consent to service of
process or to qualify as a foreign corporation to do business under
the laws of any such jurisdiction.
(d) The Company shall indemnify the Holder(s) of the Warrant
Securities to be sold pursuant to any registration statement and each
person, if any, who controls such Holders within the meaning of
Section 15 of the Act or Section 20(a) of the Securities Exchange Act
of 1934, as amended ("Exchange Act"), against all loss, claim,
damage, expense or liability (including all expenses reasonably
incurred in investigating, preparing or defending against any claim
whatsoever) to which any of them may become subject under the Act,
the Exchange Act or otherwise, arising from such registration
statement but only to the same extent and with the same effect as the
provisions pursuant to which the Company has agreed to indemnify each
of the Underwriters contained in Section 7 of the Underwriting
Agreement.
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<PAGE> 34
(e) The Holder(s) of the Warrant Securities to be sold pursuant
to a registration statement, and their successors and assigns, shall
severally, and not jointly, indemnify the Company, its officers and
directors and each person, if any, who controls the Company within
the meaning of Section 15 of the Act or Section 20(a) of the Exchange
Act, against all loss, claim, damage, expense or liability (including
all expenses reasonably incurred in investigating, preparing or
defending against any claim whatsoever) to which they may become
subject under the Act, the Exchange Act or otherwise, arising from
information furnished by or on behalf of such Holders, or their
successors or assigns, for specific inclusion in such registration
statement to the same extent and with the same effect as the
provisions contained in Section 7 of the Underwriting Agreement
pursuant to which the Underwriters have agreed to indemnify the
Company.
(f) Nothing contained in this Agreement shall be construed as
requiring the Holder(s) to exercise their Warrant prior to the
initial filing of any registration statement or the effectiveness
thereof.
(g) The Company shall not permit the inclusion of any securities
other than the Warrant Securities to be included in any registration
statement filed pursuant to Section 7.3 hereof, or permit any other
registration statement to be or remain effective during the
effectiveness of a registration statement filed pursuant to Section
7.3 hereof (other than (i) shelf registrations effective prior
thereto and (ii) registrations on Form S-4 or S-8), without the prior
written consent of the Holders of the Warrant and Warrant Securities
representing a Majority of such securities.
(h) The Company shall furnish to each Holder participating in the
offering and to each underwriter, if any, a signed counterpart,
addressed to such Holder or underwriter, of (i) an opinion of counsel
to the Company, dated the effective date of such registration
statement (and, if such registration includes an underwritten public
offering, an opinion dated the date of the closing under the
underwriting agreement), and (ii) a "cold comfort" letter dated the
effective date of such registration statement (and, if such
registration includes an underwritten public offering, a letter dated
the date of the closing under the underwriting agreement) signed by
the independent public accountants who have issued a report on the
Company's financial statements included in such registration
statement, in each case covering substantially the same matters with
respect to such registration statement (and the prospectus included
therein) and, in the case of such accountants' letter, with respect
to events subsequent to the date of such financial statements, as are
customarily covered in opinions of issuer's counsel and in
accountants' letters delivered to underwriters in underwritten public
offerings of securities.
(i) The Company shall as soon as practicable after the effective
date of the registration statement, and in any event within 15 months
thereafter, make "generally available to its security holders"
(within the meaning of Rule 158 under the Act) an earnings statement
(which need not be audited) complying with Section 11(a) of the Act
and covering a period of at least 12 consecutive months beginning
after the effective date of the registration statement.
(j) The Company shall deliver promptly to each Holder
participating in the offering requesting the correspondence and
memoranda described below and to the managing underwriters, copies of
all correspondence between the Commission and the Company, its
counsel or auditors and all memoranda relating to discussions with
the Commission or its staff with respect to the registration
statement and permit each Holder and underwriter to do such
investigation, upon reasonable advance notice, with respect to
information contained in or omitted from the registration statement
as it deems reasonably necessary to comply with applicable securities
laws or rules of the NASD. Such investigation shall include access to
books, records and properties and opportunities to discuss the
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<PAGE> 35
business of the Company with its officers and independent auditors,
all to such reasonable extent and at such reasonable times and as
often as any such Holder or underwriter shall reasonably request.
(k) The Company shall enter into an underwriting agreement with
the managing underwriters selected for such underwriting by Holders
holding a Majority of the Warrant Securities requested pursuant to
Section 7.3(a) to be included in such underwriting, which may be
Nutmeg. Such agreement shall be satisfactory in form and substance to
the Company, each Holder and such managing underwriter(s), and shall
contain such representations, warranties and covenants by the Company
and such other terms as are customarily contained in agreements of
that type used by the managing underwriter(s). The Holders shall be
parties to any underwriting agreement relating to an underwritten
sale of their Warrant Securities whether pursuant to Section 7.2 or
Section 7.3(a) and may, at their option, require that any or all of
the representations, warranties and covenants of each of the Company
and the Subsidiary to or for the benefit of such underwriter(s) shall
also be made to and for the benefit of such Holders. Such Holders
shall not be required to make any representations or warranties to or
agreements with the Company or the underwriter(s) except as they may
relate to such Holders and their intended methods of distribution.
(l) For purposes of this Agreement, the term "Majority" in
reference to the Holders of Warrant or Warrant Securities, shall mean
in excess of fifty percent (50%) of the then outstanding Warrant or
Warrant Securities that (i) are not held by the Company, an
affiliate, officer, creditor, employee or agent thereof or any of
their respective affiliates, members of their family, persons acting
as nominees or in conjunction therewith and (ii) have not been resold
to the public pursuant to a registration statement filed with the
Commission under the Act.
8. ADJUSTMENTS TO EXERCISE PRICE AND NUMBER OF SECURITIES.
8.1. SUBDIVISION AND COMBINATION. In case the Company shall at any
time subdivide or combine the outstanding shares of Common Stock, the Exercise
Price shall forthwith be proportionately decreased in the case of subdivision or
increased in the case of combination.
8.2. STOCK DIVIDENDS AND DISTRIBUTIONS. In case the Company shall pay
a dividend in, or make a distribution of, shares of Common Stock, the Exercise
Price shall forthwith be proportionately decreased. An adjustment made pursuant
to this Section 8.2 shall be made as of the record date for the subject stock
dividend or distribution.
8.3. ADJUSTMENT IN NUMBER OF SECURITIES. Upon each adjustment of the
Exercise Price pursuant to the provisions of this Section 8, the number of
Warrant Securities issuable upon the exercise at the adjusted exercise price of
each Warrant shall be adjusted to the nearest full amount by multiplying a
number equal to the Exercise Price in effect immediately prior to such
adjustment by the number of Warrant Securities issuable upon exercise of the
Warrant immediately prior to such adjustment and dividing the product so
obtained by the adjusted Exercise Price.
8.4. DEFINITION OF COMMON STOCK. For the purpose of this Agreement,
the term "Common Stock" shall mean (i) the class of stock designated as Common
Stock in the Certificate of Incorporation of the Company as may be amended as of
the date hereof, or (ii) any other class of stock resulting from successive
changes or reclassifications of such Common Stock consisting solely of changes
in par value, or from par value to no par value, or from no par value to par
value.
8.5. MERGER OR CONSOLIDATION. In case of any consolidation of the
Company with, or merger of the Company with, or merger of the Company into,
another corporation (other than a consolidation or merger which does not result
in any reclassification or change of the outstanding Common Stock), the
corporation formed by such consolidation or merger shall execute and deliver to
the Holder a supplemental warrant agreement providing that the holder of each
Warrant then outstanding or to be outstanding shall have the right thereafter
(until the expiration of such Warrant) to receive, upon exercise of such
Warrant, the kind and amount of shares of stock and other securities and
A-6
<PAGE> 36
property receivable upon such consolidation or merger, by a holder of the number
of securities of the Company for which such Warrant might have been exercised
immediately prior to such consolidation, merger, sale or transfer. Such
supplemental warrant agreement shall provide for adjustments which shall be
identical to the adjustments provided in Section 8. The above provision of this
subsection shall similarly apply to successive consolidations or mergers.
8.6. NO ADJUSTMENT OF EXERCISE PRICE IN CERTAIN CASES. No adjustment
of the Exercise Price shall be made if the amount of said adjustment shall be
less than two cents ($0.02) per Warrant Security, provided, however, that in
such case any adjustment that would otherwise be required then to be made shall
be carried forward and shall be made at the time of and together with the next
subsequent adjustment which, together with any adjustment so carried forward,
shall amount to at least two cents ($0.02) per Warrant Security.
9. EXCHANGE AND REPLACEMENT OF WARRANT CERTIFICATES. Each Warrant
Certificate is exchangeable without expense, upon the surrender thereof by the
registered Holder at the principal executive office of the Company, for a new
Warrant Certificate of like tenor and date representing in the aggregate the
right to purchase the same number of Warrant Securities in such denominations as
shall be designated by the Holder thereof at the time of such surrender.
Upon receipt by the Company of evidence reasonably satisfactory to it of
the loss, theft, destruction or mutilation of any Warrant Certificate, and, in
case of loss, theft or destruction, of indemnity or security reasonably
satisfactory to it, and reimbursement to the Company of all reasonable expenses
incidental thereto, and upon surrender and cancellation of the Warrant, if
mutilated, the Company will make and deliver a new Warrant Certificate of like
tenor, in lieu thereof.
10. ELIMINATION OF FRACTIONAL INTERESTS. The Company shall not be
required to issue certificates representing fractions of shares of Common Stock
upon the exercise of the Warrant, nor shall it be required to issue scrip or pay
cash in lieu of fractional interests, it being the intent of the parties that
all fractional interests shall be eliminated by rounding any fraction up to the
nearest whole number of shares of Common Stock or other securities, properties
or rights.
11. RESERVATION AND LISTING OF SECURITIES. The Company shall at all
times reserve and keep available out of its authorized shares of Common Stock,
solely for the purpose of issuance upon the exercise of the Warrant, such number
of shares of Common Stock or other securities, properties or rights as shall be
issuable upon the exercise thereof. The Company covenants and agrees that, upon
exercise of the Warrant and payment of the Exercise Price therefor, all shares
of Common Stock, and other securities issuable upon such exercise shall be duly
and validly issued, fully paid, non-assessable and not subject to the preemptive
rights of any stockholder. As long as the Warrant shall be outstanding, the
Company shall use its best efforts to cause all shares of Common Stock issuable
upon the exercise of the Warrant to be listed (subject to official notice of
issuance) on all securities exchanges on which the Common Stock may then be
listed and/or quoted on the Nasdaq National Market.
12. NOTICES TO WARRANT HOLDERS. Nothing contained in this Agreement
shall be construed as conferring upon the Holders the right to vote or to
consent or to receive notice as a stockholder in respect of any meetings of
stockholders for the election of directors or any other matter, or as having any
rights whatsoever as a stockholder of the Company. If, however, at any time
prior to the expiration of the Warrant and their exercise, any of the following
events shall occur:
(a) the Company shall take a record of the holders of its shares of
Common Stock for the purpose of entitling them to receive a dividend or
distribution payable otherwise than in cash, or a cash dividend or
distribution payable otherwise than out of current or retained earnings
or capital surplus (in accordance with applicable law), as indicated by
the accounting treatment of such dividend or distribution on the books
of the Company; or
(b) the Company shall offer to all the holders of its Common Stock
any additional shares of capital stock of the Company or securities
convertible into or exchangeable for shares of capital stock of the
Company, or any option, right or warrant to subscribe therefor; or
A-7
<PAGE> 37
(c) a dissolution, liquidation or winding up of the Company (other
than in connection with a consolidation or merger) or a sale of all or
substantially all of its property, assets and business as an entirety
shall be proposed;
then, in any one or more of said events, the Company shall give written notice
of such event at least thirty (30) days prior to the date fixed as a record date
or the date of closing the transfer books for the determination of the
stockholders entitled to such dividend, distribution, convertible or
exchangeable securities or subscription rights, or entitled to vote on such
proposed dissolution, liquidation, winding up or sale. Such notice shall specify
such record date or the date of closing the transfer books, as the case may be.
Failure to give such notice or any defect therein shall not affect the validity
of any action taken in connection with the declaration or payment of any such
dividend, or the issuance of any convertible or exchangeable securities, or
subscription rights, options or Warrant, or any proposed dissolution,
liquidation, winding up or sale.
13. NOTICES.
All notices, requests, consents and other communications hereunder shall
be in writing and shall be deemed to have been duly made and sent when
delivered, or mailed by registered or certified mail, return receipt requested:
(a) If to the registered Holder of the Warrant, to the address of
such Holder as shown on the books of the Company; or
(b) If to the Company, to the address set forth in Section 3 hereof
or to such other address as the Company may designate by notice to the
Holders.
14. SUPPLEMENTS AND AMENDMENTS. The Company and Nutmeg may from time to
time supplement or amend this Agreement without the approval of any Holders of
Warrant Certificates (other than Nutmeg) in order to cure any ambiguity, to
correct or supplement any provision contained herein which may be defective or
inconsistent with any provisions herein, or to make any other provisions in
regard to matters or questions arising hereunder which the Company and Nutmeg
may deem necessary or desirable and which the Company and Nutmeg deem shall not
adversely affect the interests of the Holders of Warrant Certificates.
15. SUCCESSORS. All the covenants and provisions of this Agreement shall
be binding upon and inure to the benefit of the Company, the Holders and their
respective successors and assigns hereunder.
16. TERMINATION. This Agreement shall terminate at the close of business
on _______, [2005]. Notwithstanding the foregoing, the indemnification
provisions of Section 7 shall survive such termination until the close of
business on _______, [2010].
17. GOVERNING LAW; LEGAL COSTS AND EXPENSES. This Agreement and each
Warrant Certificate issued hereunder shall be deemed to be a contract made under
the laws of the State of New York and for all purposes shall be construed in
accordance with the laws of said State without giving effect to the rules of
said State governing the conflicts of laws.
The Company, Nutmeg and the Holders agree that the prevailing party(ies)
in any action, proceeding or claim arising out of, or relating in any way to
this Agreement shall be entitled to recover from the other party(ies) all of
its/their reasonable legal costs and expenses relating to such action or
proceeding and/or incurred in connection with the preparation therefor.
18. ENTIRE AGREEMENT; MODIFICATION. This Agreement (including the
Underwriting Agreement) contains the entire understanding between the parties
hereto with respect to the subject matter hereof and may not be modified or
amended except by a writing duly signed by the party against whom enforcement of
the modification or amendment is sought.
A-8
<PAGE> 38
19. SEVERABILITY. If any provision of this Agreement shall be held to be
invalid or unenforceable, such invalidity or unenforceability shall not affect
any other provision of this Agreement.
20. CAPTIONS. The caption headings of the Sections of this Agreement are
for convenience of reference only and are not intended, nor should they be
construed as, a part of this Agreement and shall be given no substantive effect.
21. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement shall be
construed to give to any person or corporation other than the Company and
Nutmeg and any other registered Holder(s) of the Warrant Certificates or
Warrant Securities any legal or equitable right, remedy or claim under this
Agreement; and this Agreement shall be for the sole benefit of the Company and
Nutmeg and any other registered Holders of Warrant Certificates or Warrant
Securities.
22. COUNTERPARTS. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and such counterparts shall together constitute but one and the
same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, as of the day and year first above written.
amdiv.com, inc.
By: _______________________________
Name:
Title:
Attest:
___________________________________
Secretary
NUTMEG SECURITIES, LTD.
By: _______________________________
Name:
Title:
A-9
<PAGE> 39
EXHIBIT 1
[FORM OF WARRANT CERTIFICATE]
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, (ii) TO THE
EXTENT APPLICABLE, RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT
RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) AN OPINION OF COUNSEL, IF
SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL FOR THE ISSUER, THAT AN
EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANT REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN.
EXERCISABLE ON OR BEFORE 5:30 P.M., NEW YORK TIME, __________, 2003.
No. W- Warrant to Purchase
____ Shares of Common Stock and/or
WARRANT CERTIFICATE
This Warrant Certificate certifies that __________, or registered
assigns, is the registered holder of Warrant to purchase initially, at any time
from the effective date of the Registration Statement until 5:30 p.m. New York
time on ___________, 2003 [five years from the effective date of the
Registration Statement] ("Expiration Date"), up to __________ fully-paid and
non-assessable shares of common stock, no par value ("Common Stock"), of
amdiv.com, inc., a Nevada corporation (the "Company"), at the initial exercise
price, subject to adjustment in certain events (the "Exercise Price"), of
$______ [120% of the initial public offering price] per share of Common Stock
upon surrender of this Warrant Certificate and payment of the Exercise Price at
an office or agency of the Company, but subject to the conditions set forth
herein and in the warrant agreement dated as of _______, 1998 between the
Company and Nutmeg Securities, Ltd. (the "Warrant Agreement"). Payment of the
Exercise Price shall be made by certified or official bank check in New York
Clearing House funds payable to the order of the Company or by surrender of this
Warrant Certificate.
No Warrant may be exercised after 5:30 p.m., New York time, on the
Expiration Date, at which time all Warrant evidenced hereby, unless exercised
prior thereto, hereby shall thereafter be void.
The Warrant evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrant issued pursuant to the Warrant Agreement, which
Warrant Agreement is hereby incorporated by reference in and made a part of this
instrument and is hereby referred to for a description of the rights, limitation
of rights, obligations, duties and immunities thereunder of the Company and the
holders (the words "holders" or "holder" meaning the registered holders or
registered holder) of the Warrant.
The Warrant Agreement provides that upon the occurrence of certain
events the Exercise Price and the type and/or number of the Company's securities
issuable thereupon may, subject to certain conditions, be adjusted. In such
event, the Company will, at the request of the holder, issue a new Warrant
Certificate evidencing the adjustment in the Exercise Price and the number
and/or type of securities issuable upon the exercise of the Warrant; provided,
however, that the failure of the Company to issue such new Warrant Certificates
shall not in any way change, alter, or otherwise impair, the rights of the
holder as set forth in the Warrant Agreement.
Upon due presentment for registration of transfer of this Warrant
Certificate at an office or agency of the Company, a new Warrant Certificate or
Warrant Certificates of like tenor and evidencing in the aggregate a like number
of Warrant shall be issued to the transferee(s) in exchange for this Warrant
Certificate, subject to the limitations provided
Ex-1
<PAGE> 40
herein and in the Warrant Agreement, without any charge except for any tax or
other governmental charge imposed in connection with such transfer.
Upon the exercise of less than all of the Warrant evidenced by this
Certificate, the Company shall forthwith issue to the holder hereof a new
Warrant Certificate representing such number of unexercised Warrant.
The Company may deem and treat the registered holder(s) hereof as the
absolute owner(s) of this Warrant Certificate (notwithstanding any notation of
ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, and of any distribution to the holder(s) hereof, and for all
other purposes, and the Company shall not be affected by any notice to the
contrary.
All terms used in this Warrant Certificate which are defined in the
Warrant Agreement shall have the meanings assigned to them in the Warrant
Agreement.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed under its corporate seal.
Dated as of ___________, 1998
amdiv.com, inc.
By: _______________________________
Name:
Title:
Ex-2
<PAGE> 41
[FORM OF ELECTION TO PURCHASE PURSUANT TO SECTION 3.1]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase:
[ ] _________________ shares of Common Stock;
and herewith tenders in payment for such securities a certified or official bank
check payable in New York Clearing House Funds to the order of amdiv.com, inc.,
in the amount of $_______________________, all in accordance with the terms of
Section 3.1 of the Representative's Warrant Agreement dated as of
______________________, 1998 between amdiv.com, inc. and Nutmeg Securities,
Ltd. The undersigned requests that a certificate for such securities be
registered in the name of whose address is and that such Certificate be
delivered to ____________________ whose address is ________________________.
Dated: _____________________
Signature__________________________
(Signature must conform in all
respects to name of holder as
specified on the face of the
Warrant Certificate)
___________________________________
(Insert Social Security or Other
Identifying Number of Holder)
<PAGE> 42
[FORM OF ELECTION TO PURCHASE PURSUANT TO SECTION 3.2]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase:
[ ] _________________ shares of Common Stock;
and herewith tenders in payment for such securities ________ Warrant all in
accordance with the terms of Section 3.2 of the Representative's Warrant
Agreement dated as of __________________, 1998 between amdiv.com,inc., and
Nutmeg Securities, Ltd. The undersigned requests that a certificate for
such securities be registered in the name of whose address is _____________ and
that such Certificate be delivered to ____________________ whose address is
______________________________.
Dated: ___________________
Signature ________________________
(Signature must conform in all
respects to name of holder as
specified on the face of the
Warrant Certificate.)
__________________________________
(Insert Social Security or Other
Identifying Number of Holder)
<PAGE> 43
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED _________________________ hereby sells, assigns and
transfers unto _________________________________________________________________
(Please print name and address of transferee)
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint Attorney, to transfer the
within Warrant Certificate on the books of the within-named Company, with full
power of substitution.
Dated:______________________
Signature __________________________
(Signature must conform in all
respects to name of holder as
specified on the face of the Warrant
Certificate.)
____________________________________
(Insert Social Security or Other
identifying Number of Holder)
<PAGE> 1
EXHIBIT 10.7
ESCROW AGREEMENT
This Escrow Agreement (this "Agreement") is entered into on December
__, 1998 by and among City National Bank, national association (the "Escrow
Agent"), amdiv.com, inc., a Nevada corporation ("amdiv") and Nutmeg Securities,
Ltd. ("Nutmeg").
ARTICLE I
ESCROW FUND
1.1 Establishment of and Distribution from Escrow.
1.1.1 On the date of the closing of amdiv's Pubic Offering of
Common Stock (the "Closing Date"), Nutmeg, on behalf of
amdiv, shall deposit into escrow (the "Escrow") with the
Escrow Agent an amount of $15,000,000.
1.1.2 amdiv shall also deposit into Escrow from time to time
the amount of all fees and costs of Escrow Agent
permitted under this Agreement to the extent such
amounts are deducted or offset from the Escrow funds.
1.1.3 The Escrow Agent shall pay and disburse to amdiv from
the Escrow the following amounts at the times set forth
below:
(i) Up to $6,000,000 upon written certification by an
authorized officer of amdiv that such amount shall
be deposited directly into a separate lock-up
account, to be established in a financial
institution in the Federal Republic of Germany,
solely for the purpose of fulfilling the net
capital requirements of broker/dealers under
German law.
(ii) Subject to Section 1.1.4, all amounts in the
Escrow upon the earliest to occur of the
following:
(A) The date that is ninety (90) days after the
Closing Date, provided that the Escrow Agent
has received the "Commencement of Business
Notice" substantially in the form attached as
Exhibit A, which indicates that amdiv has
commenced its European Union brokerage
business as evidenced by the consummation of
one transaction in one account;
(B) The date on which the Escrow Agent receives
the "Revenue Notice", substantially in the
form attached hereto as Exhibit B, which
indicates that amdiv has obtained gross
revenue (as determined in accordance with
Generally Accepted Accounting Standards, as
applied in the United States) of at least
$5,000,000 from the European Union brokerage
business; or
(C) The Commencement of Business Notice and the
Revenue Notice shall be completed by McGladrey
& Pullen, independent auditors to amdiv, and
delivered to the Escrow Agent.
1.1.4 Notwithstanding anything to the contrary herein, the
Escrow shall be terminated and all funds therein shall
be paid and disbursed to amdiv not later than the date
one year from the Closing Date or such earlier time as
may be designated by Nutmeg in a written notice of
termination to the Escrow Agent. The Company shall use
its best efforts to obtain the regulatory approvals
necessary to implement its business plan as contemplated
in the Company's Registration Statement on Form SB-2
(File No. 333-62489), as amended, and to satisfy the
conditions specified in subparagraphs (A) and (B) of
Section 1.1.3(i)
1.1.5 All funds deposited into Escrow, and all interest
thereon, shall remain the property of amdiv. Without the
prior written consent of amdiv, no person or entity
shall be permitted to withdraw, use or otherwise direct
the Escrow Agent to use the Escrow funds for any purpose
other than to pay amdiv.
<PAGE> 2
1.2 Separate Funds of the Escrow Fund. amdiv may direct the Escrow Agent
to establish one or more Funds to hold such portions of the assets
of the Escrow Fund as amdiv shall direct, along with the earnings
and profits thereon.
ARTICLE II
THE ESCROW AGENT
2.1 Scope of Powers, Duties and Obligations of the Escrow Agent. Subject
to Nutmeg's and amdiv's directions in accordance with the provisions
of this Agreement, the Escrow Agent has whatever powers are
conferred by law and which are required to discharge its obligations
and exercise its rights under this Escrow Agreement, including but
not limited to the powers specified in the following Paragraphs of
this Article, and the powers and authority granted to the Escrow
Agent shall have no duties or obligations except those specifically
set forth in this Agreement.
2.2 Powers Exercisable by the Escrow Agent, Subject to this Agreement.
The Escrow Agent is authorized and empowered to exercise the
following powers, subject to the limitations contained in this
Agreement.
2.2.1 To register any investment held in the Escrow Fund in
its own name or in the name of a nominee and to hold any
investment in bearer form. The books and records of the
Escrow Agent shall show that all such investments are
part of the Escrow Fund. The Escrow Agent shall be
liable for all acts of its nominee;
2.2.2 To utilize registered securities depositories to hold
assets of the Escrow Fund, provided however that the
Escrow Agent shall not be relieved of any fiduciary
responsibility with with respect to the assets so held;
2.2.3 To employ agents, including public accountants and legal
counsel (which may be counsel for amdiv or Nutmeg), as
it shall determine appropriate, and to pay their
reasonable expenses and compensation from Escrow Funds;
2.2.4 To rely on amdiv to defend and litigate, or settle, at
their expense, any suit brought against the Escrow Funds
or any order sought to be satisfied out of the Escrow
Funds, without duty on the Escrow Agent beyond
forwarding related papers to amdiv and complying with
any final order to the extent of the Escrow Fund;
2.2.5 To withhold from taking any action until it receives
proper written notice of an occurrence of any event
affecting this Escrow.
2.2.6 To treat as genuine, sufficient and correct, in form,
execution and validity, and as the document it purports
to be, and from the party it purports to be from, any
notice, instruction, letter, paper, telex or other
document purported to be furnished to Escrow Agent by
amdiv or Nutmeg and believed by Escrow Agent to be both
genuine and to have been transmitted by the proper party
or parties, and Escrow Agent shall have no liability
with respect to any action taken or foregone by Escrow
Agent in good faith in reliance on such document;
2.2.7 To deposit the Escrow Funds, after reduction for Escrow
Agent's accrued fees and expenses, in an interest
bearing passbook savings account with Escrow Agent's
commercial department requiring the signatures of amdiv,
should amdiv not appoint a successor escrow holder for
the Escrow Funds within fifteen (15) days following the
resignation or removal of Escrow Agent;
2.2.8 To be fully released and discharged from any obligation
to perform any further duties imposed upon it with
respect to this Escrow following its resignation or
removal and the appointment of a successor of the
deposit of the Escrow Funds under paragraph 2.2.7 above;
and
2
<PAGE> 3
2.2.9 To be free from any liabilities or change in duties,
other than as may be specifically described elsewhere
herein, for the action or inaction of a party to this
Escrow Agreement, or any other party, or the occurrence
or non-occurrence of an event outside of this Escrow.
ARTICLE III
INVESTMENT OF THE ESCROW FUND
3.1 Permitted Investments. Subject to the written directions of amdiv,
the Escrow Agent may invest and reinvest the principal and
accumulated income of the Escrow Fund in investment grade securities
(i.e., those ranking in the four highest investment grades issued by
a nationally recognized rating agency).
3.2 Escrow Agent Not Responsible for Investment Advice. The Escrow Agent
assumes no responsibility for advising Nutmeg, amdiv or their
respective representatives, with respect to the investment and
reinvestment of the Escrow Fund. The Escrow Agent shall as promptly
as possible comply with any direction given by amdiv; provided,
however, that the Escrow Agent shall have not duty to take any
action which, in the Escrow Agent's opinion, would expose the Escrow
Agent to liability unless and until amdiv indemnifies the Escrow
Agent to its satisfaction. The Escrow Agent shall neither be liable
in any manner nor for any reason for any losses or other unfavorable
investment result arising from its compliance with such direction,
nor be liable for failing to invest any assets of the Escrow Fund in
the absence of written investment directions regarding such assets.
3.3 Delegation of Responsibility and Authority for Investment of Escrow
Fund. amdiv may by written resolution delegate its authority over
the investments of the Escrow Fund to its designated representative
(the "amdiv Representative"), and Escrow Agent shall accept the
amdiv Representative's instructions to invest and reinvest the
assets of all or any portion of the Escrow Fund. amdiv may revoke
the delegation of any such investment responsibility and authority
by written notice to the Escrow Agent, and the amdiv Representative
may relinquish such responsibility and authority by written notice
to amdiv and Escrow Agent.
3.4 Notification of Rights Regarding Securities. Following receipt of
information, the Escrow Agent will notify amdiv of any conversion,
redemption, exchange, subscription or other right relating to any
securities purchased hereunder of which notice was given after the
acquisition of such securities by the Escrow Agent, and the Escrow
Agent shall have no obligation to exercise any such right unless it
is instructed by amdiv or the amdiv Representative in writing to
exercise such right, within a reasonable time prior to the
expiration of such right.
3.5 Uninvested Cash. Subject to the directions of amdiv or the amdiv
Representative, the Escrow Agent may hold any or all of the Escrow
Fund in cash, uninvested and nonproductive of income. The Escrow
Agent shall not be required to pay interest on any cash so held
uninvested. The Escrow Agent may deposit cash awaiting investment or
distribution in any interest-bearing account in any Bank (including
the Escrow Agent), subject to the collateral requirements set forth
in paragraph 3.1 above.
3.6 Shareholder Communications. amdiv directs the Escrow Agent not to
disclose to any company requesting shareholder information the name
and the address of amdiv or the share position of the securities of
the inquiring company in the Escrow Fund.
ARTICLE IV
ESCROW AGENT NOTICES AND INSTRUCTIONS
4.1 Instructions; Notices. Except as hereafter provided, any directions,
instructions or notices which amdiv or Nutmeg or any other duly
authorized person is required or permitted to give to the Escrow
Agent under this Escrow Agreement (the "Instructions") shall be in
writing and shall be deemed effective upon receipt by the Escrow
Agent; provided, however, that the Escrow Agent in its discretion
may act upon oral instructions if it believes them to be genuine,
but the Escrow Agent shall not be required to do so. If the Escrow
Agent requires, all oral instructions are to be promptly confirmed
in writing, but the Escrow Agent shall not be liable for any action
or any failure to act in accordance with oral Instructions, even
though it fails to receive written confirmation from partly giving
such Instructions. The Escrow Agent shall be entitled to rely in
good faith upon
3
<PAGE> 4
any Instruction signed by any authorized representative of amdiv or
Nutmeg, and shall incur no liability for the following such
directions. NOTWITHSTANDING ANYTHING HEREIN TO THE CONTRARY, NEITHER
NUTMEG NOR AMDIV SHALL GIVE, AND ESCROW AGENT MAY NOT RELY UPON, ANY
UNILATERAL INSTRUCTIONS CONTRARY TO SECTION 1.1 OF THIS AGREEMENT.
Any written notices, affidavits or the communications hereunder
shall be deemed to have been duly given if delivered or mailed first
class, certified mail, postage prepaid, addressed as follows:
<TABLE>
<S> <C>
IF TO NUTMEG, ADDRESSED TO: Christopher Daniels
Executive Vice President, Corporate Finance Department
Nutmeg Securities, Ltd.
495 Post Road East
Westport, Connecticut 06880
Telephone: (203) 226-1857
Facsimile: (203) 226-5343
WITH A COPY TO: Gerald A. Eppner, Esq.
Cadwalader, Wickersham & Taft
100 Maiden Lane
New York, NY 10038
Telephone: (212) 504-6323
Facsimile: (212) 504-6666
IF TO AMDIV, ADDRESSED TO: amdiv.com, inc.
10900 Wilshire Blvd., 9th Floor
Los Angeles, CA 90024
Telephone: (310) 209-5090
Facsimile: (310) 209-2610
WITH A COPY TO: Michael B. Jeffers, Esq.
Jeffers, Wilson, Shaff & Falk, LLP
18881 Von Karman Avenue, Suite 1400
Irvine, California 92612
Telephone: (949) 660-7700
Facsimile: (949) 660-7799
IF TO CITY NATIONAL BANK,
ADDRESSED TO: City National Bank, national association
Attn: Sue Behning/VP
400 North Roxbury Drive
Suite 600/CT
Beverly Hills, California 90210
Telephone: (310) 888-6283
Facsimile: (310) 888-6288
</TABLE>
4.2 Photostatic Teletransmission. The transmission of the instructions
by photostatic teletransmission with duplicate or facsimile
signatures shall be an authorized method of communication unless the
Escrow Agent is notified by both amdiv and Nutmeg in writing to the
contrary.
4.3 Electronic Affirmation. Notwithstanding any other provision of this
Article IV, the Escrow Agent may settle securities trades effected
by amdiv through a securities depository that utilizes an
institutional delivery system, in which event the Escrow Agent may
deliver or receive securities in accordance with appropriate trade
reports
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or statements given to the Escrow Agent by such depository without
having received direct communications or instructions from amdiv.
4.4 Additional Instructions. In any matter under this Escrow Agreement
in which the Escrow Agent is permitted or required to act upon
Instructions, the Escrow Agent, where it deems necessary, may
request further instructions from the person or entity giving the
original instructions, or from Nutmeg or amdiv, as the case may be,
and may defer any and all action pending receipt thereof.
ARTICLE V
COMPENSATION AND EXPENSES OF THE ESCROW AGENT
5.1 Escrow Agent's fees will be as set forth on the fee schedule
attached hereto, plus actual expenses incurred in performing its
duties hereunder, and Escrow Funds is hereby granted a lien on the
Escrow Funds for such amounts. Any setup fee will be payable in
advance. In addition, Escrow Agent will receive its usual sweep fee
for any Escrow Funds, which are invested in a sweep vehicle selected
by amdiv. Unless other payment arrangements are set forth herein or
are agreed to by Escrow Agent in writing. Escrow Agent may disburse
from the Escrow Funds sufficient funds to pay its compensation and
expenses. If any time cash is not available in the Escrow Funds to
pay the Escrow Agents compensation and expenses, and then Escrow
Agent may bill amdiv for such amounts. amdiv agrees to pay all
expenses of this Escrow Agreement.
ARTICLE VI
RECORDS AND ACCOUNTS
6.1 Accurate Records and Accounts. The Escrow Agent shall keep accurate
records and accounts with respect to all cash and other assets held
by it in the Escrow Fund, and all receipts and disbursements and
other transactions involving such cash, securities and other assets.
amdiv shall have access to all such accounts, books and records at
all reasonable times. All such accounts, books and records shall be
open for inspection and audit at all reasonable times by amdiv or by
any person or persons duly authorized by amdiv.
6.2 Periodic Reports. The Escrow Agent shall furnish amdiv and any third
party with such periodic reports, as the Escrow Agent shall mutually
agree, setting forth all receipts, disbursements and transactions
effected by the Escrow Agent.
6.3 Principal and Income. Except as otherwise specifically provided in
this Escrow, the determination of all matters with respect to what
is principal or income of the escrow Fund that the apportionment and
allocation of receipts and disbursements between these accounts (if
any), shall be governed by the provision of the California Revised
Uniform Principal and Income Act from time to time existing. Any
such matter not provided for herein or in the California Revised
Uniform Principal and Income Act shall be determined by the Escrow
Agent in the Escrow Agent's discretion.
6.4 Income Tax Reporting. amdiv assumes all duty in file any and all tax
reports and returns, except as noted below, as well as full
responsibility for the payment of all taxes assessed on or with
respect to any Escrow Property and all taxes due on the income
collected for amdiv on any and all transactions with respect to any
Escrow Property. For purposes of IRS form 1099 which Escrow Agent
may be required to prepare and file, all reportable income shall be
reported to the IRS as being attributable to amdiv.
ARTICLE VII
CANCELLATION AND CLOSING
7.1 This Agreement and the Escrow may not be terminated except as
follows:
(i) Upon the mutual written consent of each of Nutmeg
and amdiv;
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(ii) Upon payment in full of the Escrow funds to amdiv;
and
(iii) Upon appointment of a successor Escrow Agent and
the execution of an escrow agreement replacing and
terminating this Agreement.
ARTICLE VIII
RESIGNATION AND REMOVAL OF THE ESCROW AGENT
8.1 Resignation and Removal. The Escrow Agent may resign at any time
upon thirty-(30) days' written notice to amdiv, unless a shorter
period is acceptable to amdiv. amdiv, with Nutmeg's consent, may at
any time remove the Escrow Agent upon thirty-(30) days' written
notice to the Escrow Agent, unless a shorter period is acceptable to
the Escrow Agent.
8.2 Appointment of Successor. In the event of the removal or resignation
of the Escrow Agent, amdiv shall appoint a successor which, upon its
acceptance in writing of such appointment delivered to amdiv and the
former Escrow Agent, shall be vested with all the rights, powers and
duties of the Escrow Agent under this Escrow Agreement, and the
retiring Escrow Agent shall be released and discharged from all
further liability with respect to the Escrow. If amdiv fails to
appoint a successor Escrow Agent within thirty-(30) days after
removal or resignation of the Escrow Agent, the Escrow Agent is
authorized to deliver the Escrow Fund to a third party escrow agent
or company of Escrow Agent's selection; provided that such the
successor's escrow agent assumes all responsibilities hereunder. The
retiring Escrow Agent shall transfer, assign and deliver to its
successor all of the property then held by it under the Escrow,
except such reasonable compensation and expenses in connection with
the settlement of accounts and the delivery of the assets to the
successor Escrow Agent. After settlement of the retiring Escrow
Agent's final accounting, the retiring Escrow Agent shall also
transfer to the successor Escrow Agent true copies of it records as
relate to the Escrow Fund, as may be requested by the successor
Escrow Agent. The successor Escrow Agent shall not be liable or
responsible for anything done or omitted in the administration of
the Escrow Fund pursuant to this Escrow Agreement prior to the date
it shall have become Escrow Agent, nor to audit or otherwise inquire
into or take any action concerning the acts or any retiring Escrow
Agent.
8.3 Final Periodic Report. Within sixty (60) days after the transfer of
the assets of the Escrow Fund to the successor Escrow Agent, unless
a different period is mutually agreed to, the Escrow Agent shall
file with amdiv a final periodic report, covering the period since
the close of the last periodic report.
8.4 Deemed Acceptance. In the absence of any exception thereto filed in
writing with the Escrow Agent within ninety (90) days after the date
of filing with amdiv, any periodic report filed with amdiv shall
constitute a final periodic report by and discharge of the Escrow
Agent from all claims and liabilities with respect to the acts and
transactions as shown in such report, and shall be binding and
conclusive upon all persons.
ARTICLE IX
AMENDMENT
9.1 Amendment. This Escrow Agreement may be modified only by writing
signed by each of Nutmeg, amdiv and Escrow Agent.
ARTICLE X
LIMITATION ON LIABILITY
10.1 Liability of Escrow Agent. In performing any duties under this
Escrow Agreement, Escrow Agent shall not be liable for any damages,
losses, or expenses, except for gross negligence or willful
misconduct on the part of the Escrow Agent. Escrow Agent shall no
incur any liability for: (a) any act or failure to act made or
omitted in good faith, or (b) any action taken or omitted in
reliance upon any instrument, including any written statement or
affidavit provided for in this Escrow Agreement that the Escrow
Agent shall in good faith believe to be
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genuine, nor will the Escrow Agent be liable or responsible for
forgeries, fraud, impersonations or determining and verifying the
scope of any representative authority, or any person acting or
purporting to act on behalf of any party to this agreement.
10.2 Indemnification by amdiv. amdiv further agrees to pay on demand, and
to indemnify and hold Escrow Agent harmless from and against, all
costs, damages, judgments, attorneys fees, expenses, obligations and
liabilities of any kind or nature which, in good faith, Escrow Agent
may incur or sustain in connection with or arising out of the
Escrow, and Escrow Agent is hereby given a lien upon all the rights,
titles and interests of amdiv in the Escrow Funds, to protect Escrow
Agent's rights and to indemnify and reimburse Escrow Agent under
this Escrow Agreement.
10.3 Force Majeure. The Escrow Agent shall not be liable for any delay or
failure to act as may be required hereunder when such delay or
failure is due to fire, earthquake, any act of God, interruption or
suspension of any communication or wire facilities or services, war,
emergency conditions or other circumstances beyond its control,
provided it exercises such diligence as the circumstances may
reasonably require.
10.4 Scope. The Escrow Agent shall have no duties or obligations
hereunder except those specifically set forth herein and such duties
and obligations shall be determined solely by the express provisions
of this Escrow Agreement.
10.5 Controversies.
10.5.1 Upon receipt of conflicting demands or notices relating to
this Escrow, Escrow Agent, may at its election, without
liability to Nutmeg or amdiv, do either or both of the
following:
10.5.1.1 Withhold and stop all further proceedings in, and
performance of, this Escrow, until such conflict
is removed to Escrow Agent's satisfaction;
10.5.1.2 File a suit in interpleader and obtain an order
from the court requiring the parties too litigate
their several claims and rights among themselves,
in which case, Escrow Agent shall be fully
released and discharged from any obligation to
perform any further duties imposed upon it with
respect to this Escrow, and the parties shall pay
Escrow Agent all costs, expenses and reasonable
attorney fees expended or incurred by it, the
amount thereof to be fixed and a judgment thereof
to be rendered by the court in such suit.
10.5.2 Any dispute arising out of or relating to this Escrow
Agreement, including a breach of this Escrow Agreement, will
be decided by reference under California Code of Civil
Procedure Section 638 and related sections. A referee,
either an active attorney or retired judge, will be selected
according to the procedures of the American Arbitration
Association and then appointed by the court in which the
action regarding the dispute or controversy originated. The
dispute will be submitted to the referee for determination
in place of a trial before a judge and jury.
10.6 Legal Counsel. The Escrow Agent may consult with, and obtain advise
from, legal counsel of its own selection as to the construction of
any of the provisions of this Escrow Agreement or the Escrow Agent's
obligations and duties, and shall incur no liability in acting in
good faith in accordance with the reasonable advice and opinion of
such counsel.
ARTICLE XI
MISCELLANEOUS
11.1 Governing Law. This Escrow Agreement shall be governed, construed,
regulated and administered under the laws of the State of
California.
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11.2 Invalid Provisions. It is not the intention of any party to this
Escrow Agreement to violate any statute, regulation, ruling,
judicial decision, or other legal provision applicable to this
Escrow Agreement or the performance thereof. If any term of this
Escrow Agreement, or any act or omission in the performance thereof,
is or becomes violative of any such provision, such term, act or
omission shall be of no force or effect and any such term shall be
severed from this Escrow Agreement. Any such invalid term, act or
omission shall not affect the validity of any other term of this
Escrow Agreement that is otherwise valid, nor the validity of any
otherwise valid act or omission in the performance thereof, unless
such invalidity prevents accomplishment of the objectives and
purposes of this Escrow Agreement. In the event any such term, act
or omission is determined to be illegal or otherwise invalid, the
necessary steps to remedy such illegality or invalidity shall be
taken immediately by the parties.
11.3 Counterparts. This Escrow Agreement may be executed in several
counterparts, each of which shall be deemed an original, and said
counterparts shall constitute but one and the same instrument, which
may be sufficiently evidenced by any one counterpart.
11.4 Successors and Counterparts. This Escrow Agreement shall inure to
the benefit of, and be binding upon, the parties hereto and their
successors and assigns, except as is expressly provided in the
contrary herein.
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IN WITNESS WHEREOF, the parties hereto have caused this Escrow
Agreement to be executed by their respective duly authorized officers on the
dates set forth below.
Date: ____________________ "Nutmeg" - Nutmeg Securities, Ltd.
By: ____________________________________
Name: __________________________________
Title: _________________________________
Date: ____________________ "amdiv" - amdiv.com, inc.
By: ____________________________________
Name: __________________________________
Title: _________________________________
Date: ____________________ "Escrow Agent"
CITY NATIONAL BANK, national association
By: ____________________________________
By: ____________________________________
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EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the use in this Amended Registration Statement on Form
SB-2 of our report, dated October 16, 1998, except for Note 10 as to which the
date is December 3, 1998, relating to the consolidated financial statements of
amdiv.com, inc. and subsidiaries and our report dated March 16, 1998, except for
the last paragraph of Note 9 as to which the date is March 31, 1998, related to
the financial statements of James Buchanan Rea, Inc. We also consent to the
reference to our Firm under the caption "Experts" in the Prospectus.
/s/ MCGLADREY & PULLEN, LLP
--------------------------------------
MCGLADREY & PULLEN, LLP
New York, New York
December 9, 1998
