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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
AMENDMENT NO. 1 TO
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS
Under Section 12(b) or (g) of the Securities Exchange Act of 1934
AMERICAN DIVERSIFIED HOLDINGS, INC.
(Name of small business issuer in its charter)
NEVADA 86-0854150
(State or jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12100 Wilshire Boulevard, Suite 680
Los Angeles, California 90025
310-442-9931
(Address and telephone number of principal executive offices)
Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
NONE N/A
Securities to be registered under Section 12(g) of the Act:
Common Stock
(Title of class)
Series A Preferred Stock
(Title of class)
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DESCRIPTION OF BUSINESS
GENERAL
American Diversified Holdings, Inc. ("the Company"), was incorporated on
February 4, 1997 under Nevada law and is a holding company formed to engage in
the financial services business in the United States and Europe. The Company has
established two wholly-owned subsidiaries: American Diversified Asset
Management, Inc., (" ADAM"), a Nevada corporation formed in October 1997
(formerly named American Diversified Securities, Inc.); and American Diversified
AG Wertspapierhandelsbank a ("ADAG"), a German corporation formed on April 30,
1997 (together the Company and the subsidiaries, including the merged
operations of JBRI (see "JBRI-ADAM Merger" below) into ADAM, are referred to as
the "Group"). The principal business activities of the Group will be to provide
financial services and distribute financial service products to individual and
institutional investors in the United States, Germany and the European
Union ("EU") countries. The Group's initial principal activity will be to act
as investment manager and distributor in the United States and the EU for the
Rea-Graham Balanced Fund (the "Fund"), a series mutual fund of Rea-Graham Funds,
Inc., a diversified, open-end investment company registered under the Investment
Company Act of 1940. ADAG is located in Berlin and will provide financial
services and be the initial distributor of the Group's mutual fund products in
Germany and the EU. The Group intends to provide a wide range of commercial and
consumer financial services to customers in the United States and Europe.
JBRI-ADAM MERGER
The merger of James Buchanan Rea, Inc. ("JBRI"), a California
corporation, with and into ADAM became effective on March 31, 1998. (See
"Interest of Management and Others in Certain Transactions" for a discussion of
the terms of the merger and Notes 1 and 2 of the "Notes to Unaudited Proforma
Consolidated Financial Statements" of the Company as of February 28, 1998, for a
description of the financial accounting for the merger.) JBRI is a licensed
broker-dealer and a registered investment advisor under the Investment Advisers
Act of 1940. JBRI has served as the investment advisor and distributor to the
Fund since its inception in 1982. The shareholders of the Fund, at a meeting on
January 12, 1998, approved a new investment advisory agreement with ADAM,
effective upon completion of the merger. ADAM will succeed to the business
operations of JBRI and will operate as a broker-dealer and registered investment
advisor. ADAM will succeed as the investment advisor and distributor to the
Fund. James Buchanan Rea, Jr., the former President and registered securities
principal of JBRI has become the President and general securities principal of
ADAM. Other than through the merged operations of JBRI, ADAM does not have an
operating history and has not previously engaged in the investment management
business or in the operation and distribution of mutual funds. At March 31,
1998, the investment management business of ADAM acquired through the JBRI
merger, and the initial business activities of ADAG, represent the only active
business activities of the Company and the Group.
BUSINESS EXPANSION; CAPITAL GROWTH
The Company's management believes that an international financial
services group with management and offices in both the U.S. and Europe can
attract a clientele of institutional investors, banks, businesses and
individuals . The Group's business strategy is to provide customers of small-to
medium-sized European banks with direct access to American financial services
and an opportunity to invest in tailored U.S. mutual funds, such as the Fund.
The Company believes there is a new and growing market in Germany and the EU for
the distribution of U.S. investment products, particularly mutual fund shares to
individual investors and smaller financial institutions, as European investors
discover that other financial products are available as an alternative to
traditional savings account deposits in commercial banks.
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Further, the planned transition to a standard European currency
(the "EURO") in January 1999, is expected to increase the demand for investments
denominated in U.S. dollars. The Company intends to expand the mutual fund
management and distribution business of ADAM by organizing additional series
funds, initially a small cap value fund, for distribution to U.S. and European
investors. The Company intends to market the Fund and new series funds to
European investors through ADAG. The Company also intends to organize a German
growth fund and distribute it primarily to U.S. investors . The Company intends
to grow the Fund by marketing it in Europe . As the Fund grows in size, the
revenues and profitability of ADAM is expected to increase because ADAM's
revenues and income are variable with the net assets of the Fund and with other
mutual funds that it may manage in the future.
As of March 31, 1998, the Group had 20 full-time employees, 3 of whom
are in the U.S., consisting of the President of the Company and 2 former JBRI
employees, 1 of whom is now the Chief Operating Officer of the Company; and 17
employees in Berlin, Germany, including the Chief Financial Officer of the
Company and 16 ADAG employees, consisting of its Chief Executive Officer and 15
employees who are sales, managerial, asset management, brokerage and
administrative personnel.
ADAG is a fully licensed investment bank ("Wertpapierhandelsbank") in
Germany and is expected to begin operations on May 2, 1998, offering full
investment banking and financial services including:
- Full service securities brokerage
- Asset management
- Underwriting
- Online internet brokerage
ADAG has applied for membership on the Berlin Stock Exchange and the
European Association of Securities Dealers Automarket Quotation ("EASDAQ"), the
European equivalent to the NASDAQ Stock Market, located in Brussels, Belgium.
The memberships are expected to become effective during May 1998. ADAG has
completed all necessary preparations for the start of actual business
operations, including installation of computer networks. ADAG has received more
than 1,000 applications for brokerage accounts from private and commercial
clients in Germany. ADAG has 16 full time managerial and operational employees.
The Group has assembled a staff of management, brokerage, asset
management and marketing personnel, including several former key employees of
major German banks and their subsidiaries. The Group intends to engage
aggressively in the distribution of mutual funds and other financial products in
Europe through a systematic program of direct marketing to prospective customers
and through referral sources such as banks, insurance providers, attorneys,
accountants and to a lesser extent, personal business contacts.
The Company intends to finance its business expansion through sales of
equity capital in Europe and the U.S. On March 31, 1998, the Company completed a
$5,000,000 private placement of its Series A Preferred Stock at a price of $1
per share in Germany, in an offering that is exempt from U.S. securities laws
under Regulation S. The Company has authorized 50,000,000 shares of blank check
preferred stock and it anticipates future offerings of preferred stock and an
initial public offering of common stock in order to finance future business
expansion. There can be no assurance that the future offerings will be
successful.
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MARKET AREA
The Group's European subsidiaries, starting with ADAG, will offer
consumer focused financial services including private money management, full
service and online-brokerage, and U.S. mutual fund distribution to small and
medium sized institutional investors, banks and individual customers in its
immediate market area.
The Group's initial targeted market area for the distribution of the
Fund and other financial service products in Europe is Berlin, Germany's future
capital and the location of one of Germany's five regional stock exchanges, and
other financial centers in Germany. Over the next two years, the Company's
expansion plans include the formation of subsidiaries and commencement of
financial services businesses in Vienna, Austria, Madrid, Spain, Luxembourg and
Zurich, Switzerland. Initial steps have been taken to establish the Austrian
subsidiary.
LACK OF PROFITABILITY, POTENTIAL LOSSES
Because the Company was only recently formed, there is no history of
operations, other than the historical operations of JBRI prior to its merger
into ADAM. The Group's business expansion plans for Europe and the Untied States
are subject to the risks inherent in the establishment of a new business
enterprise.
From its inception on February 4, 1997 through February 28, 1998, the
Company has experienced aggregate losses of $792,278. (Please see the "Unaudited
Proforma Consolidated Statement of Operations" of the Company for an analysis of
the losses of the Company and JBRI on a proforma basis.) Further, a key element
of the Company's strategy consists of an aggressive marketing plan for its
financial products in Europe. This strategy may result in continued net losses
for the Company during its start-up phase due to start-up costs associated with
the anticipated high marketing costs for the promotion of mutual funds and other
financial services in its market area. Results of operations in the future will
be influenced by numerous factors including, among others, expansion, the
ability of the Company to manage its growth and maintain the quality of its
personnel, and the ability of the Company to implement its strategic plan. The
Company may incur problems, delays, expenses and difficulties in its development
stage, many of which may be beyond the Company's control. These include, but are
not limited to, unanticipated regulatory compliance, marketing problems and
intense competition that may exceed current estimates. There is no assurance
that the Company will ever operate profitably.
MANAGEMENT OF GROWTH
The Company plans to expand its business with the formation of
subsidiaries in Austria, Spain, Luxembourg and Switzerland. To a significant
extent, the Company's future success will be dependent upon its ability to
engage in a successful expansion program and will be dependent, in part, upon
its ability to secure regulatory approvals in its chosen markets, attract
customers for its financial products, maintain adequate financial controls and
reporting systems , manage its growth, and obtain additional capital upon
favorable terms. There can be no assurance that the Company will be able to
successfully implement its planned expansion, finance its growth or manage the
resulting larger operation.
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COMPETITION
The investment management business is highly competitive. The Company
encounters significant competition in connection with the operation of its
business in the U.S., but expects initially to encounter only limited
competition for brokerage services and the distribution of U.S. mutual funds to
its targeted potential clientele in its primary marketing area in Germany. As
discussed below, these services are typically provided in Germany today through
banks and savings institutions, which are not primarily engaged in providing
these services to individual investors. The Company will compete with a large
number of investment management firms, commercial banks, insurance companies,
broker-dealers and other financial services providers, which have greater
resources, assets under management, administration capability and offer a
broader array of investment products and services than the Company. Many
competitors devote substantial resources to advertising and marketing their
mutual funds which may adversely affect the ability of the Company's mutual
funds and other new funds to grow. The Company's competitors in the U.S. include
numerous enterprises with extensive experience in the financial services sector.
These competitive conditions may adversely affect the Company's revenues,
profitability and ability to meet its business objectives.
Management of the Company believes it has identified a niche market in
Germany and the EU for providing securities brokerage services to individual and
small institutional investors, including the marketing of U.S. mutual fund
products. Brokerage services offered by German banks are targeted for large
institutional customers, are expensive and do not address the needs of
individual investors. German banks typically encourage private clients to
maintain savings accounts, and bank personnel typically lack the incentives and
expertise to provide individual customers with U.S. style investment services.
The large U.S. investment firms operating in Germany typically market only to
large institutional clients and require minimum account balances typically in
the $100,000 range. ADAG intends to benefit from the experience and expertise of
ADAM, its U.S. sister subsidiary with an established mutual fund operation and
broker-dealer distribution network, in providing similar services in Germany and
the EU. On the investment banking side, there were only 31 public equity
securities offerings in Germany during 1997, and 58 are scheduled for 1998. The
Company believes there is a strong and growing demand for investment banking and
financial consulting services for emerging growth companies in Germany, from the
early financing through the initial public offering stage.
Factors affecting the Company's business expansion success include: 1)
the abilities, performance records and reputations of its investment managers;
and, 2) its ability to develop new investment products and implement marketing
strategies in the U.S. and Europe. The Company's ability to retain and increase
its investment assets under management could be adversely affected if client
accounts underperform the market or if key investment managers leave the Group.
The marketability of the Company's investment products, primarily mutual funds,
is also dependent, in part, on the relative attractiveness of their investment
strategies and practices under prevailing market conditions. There are
relatively few barriers to entry by new investment management firms or
distributors of U.S. mutual funds in the EU markets.
REGULATION
The Group's international investment management and broker-dealer
operations are subject to extensive regulation, supervision and licensing under
various U.S. federal and state laws and regulations and under the securities and
corporate laws and regulations of the European countries under which it will
market its financial services. Prior to completing the merger, JBRI received
approval from the National Association of Securities Dealers, Inc. ("NASD") to
its change of ownership through the merger with ADAM. ADAM has filed amendments
to the Form BD and Form ADV of JBRI to reflect the change of ownership and
provide required disclosure information. ADAM will continue the former
operations of JBRI as a registered broker-dealer under the
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Securities Exchange Act of 1934 (the "1934 Act"), as amended, and as a
registered investment advisor under the Investment Company Act of 1940, as
amended. The Company and various entities of the Group will also be subject to
securities regulation in Germany and the various EU jurisdictions where it
establishes business operations or distributes financial services products.
The securities and investment management laws and regulations generally
grant supervisory agencies and bodies broad administrative powers, including the
power to limit or restrict an investment management firm from conducting
business or distributing products in the event that it fails to comply with such
laws and regulations. Possible sanctions could include the suspension of
business activities for specified periods of time, revocations of licenses to
operate, and other censures and fines.
The Company has reviewed its computer systems and has determined that
they are in compliance with the requirements of the year 2000. The Company also
believes that because of its internal systems and controls and the nature of its
financial contracts, it is not likely to incur any material disruptions,
expenses or losses in connection with any external relationship related to the
year 2000.
SERVICEMARK APPLICATION
The Company has applied for, but not been issued any registered
servicemark for its "AMERICAN DIVERSIFIED(TM)" or "AmDiv(TM)" service-names. No
assurance can be given that the Company will be successful in obtaining these
marks, or that the servicemarks, if obtained, will afford the Company any
competitive advantages. ADAG owns the "AMERICAN DIVERSIFIED" trademark for
Germany, which was registered on February 26, 1998 with the German Patent and
Trademark Office in Munich, registration No. 39745648.
HISTORY OF JBRI
The initial business of the Company will be the continuation and
expansion of JBRI's investment management services. JBRI was founded in 1961 and
is a licensed broker-dealer and registered investment advisor engaged in
business as a sponsor, investment manager and distributor of mutual funds. JBRI
has served since 1982 as the investment advisor, underwriter and distributor of
the Fund, a series portfolio of Rea-Graham Funds, Inc., a mutual fund series
company founded by James Buchanan Rea, Sr. and Benjamin Graham. Over the past
three years, this has been the principal business activity of JBRI. JBRI
generates revenues through its management fees and distribution fees as
investment advisor, principal underwriter and distributor of the Fund. Prior to
the merger with ADAM, there was no affiliation between JBRI and the Company.
JBRI has served as the Fund's investment advisor since 1979. The Fund
was originally organized as a private limited partnership in 1976 by its two
general partners, Dr. James B. Rea and Benjamin Graham. Mr. Graham authored
"Security Analysis" and "The Intelligent Investor," which are recognized texts
on the fundamental value of common stocks. The Fund was subsequently
incorporated in Maryland and on August 19, 1982, effected a public offering of
its shares as an open end diversified investment company registered under the
Investment Company Act of 1940. The Fund has continued to operate as a separate
series of Rea-Graham Funds, Inc.
Pursuant to the investment advisory agreement, the Fund pays JBRI a
monthly advisory fee equal on an annual basis to 1% of the first $20,000,000 of
the Fund's net assets as of the close of business on the last business day of
each calendar month during the Fund's fiscal year; reduced to 0.75% of such net
assets in excess of $20,000,000 up to $100,000,000; 0.5% of such net assets in
excess of $100,000,000 up to $200,000,000; and 0.45% of all such net assets in
excess of $200,000,000.
The Fund also pays JBRI a distribution fee payable monthly equal on an
annual basis to .35% of the Fund's average daily net assets.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF JBRI'S FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion is based upon and should be read in conjunction
with JBRI's financial statements for the period ending December 31, 1996 and
December 31, 1997, together with the notes related thereto.
Results of Operations
Revenues for fiscal year-ended December 31, 1997 were $145,119 as
compared to revenues of $166,059 for the fiscal year-ended December 31, 1996,
representing a cumulative decrease of approximately 12.6%. The decrease in
revenues was primarily due to a reduction of advisory and distribution fees from
the Fund, as the Fund's net assets declined from $11,377,574 to $10,154,957
during this period.
Operating expenses consist of salary expenses, communications costs,
occupancy and equipment rental expenses and other operating expenses. Operating
expenses were $214,973 for the fiscal year-ended December 31, 1997 as compared
to operating expenses of $214,386 for the fiscal year-ended December 31, 1996.
However, operating expenses as a percentage of revenues increased approximately
19% to 148% for fiscal 1997 as compared to 129% for fiscal 1996, as a result of
the decline in revenues due to the decline in the Fund's net assets.
Net losses from operations for the fiscal year-ended 1997 were $69,854
as compared to $48,327 for the prior fiscal year, representing an increase in
net losses of approximately 44.5%. This increase in operating losses is directly
attributable to the decrease in revenues resulting from the reduction in
advisory and distribution fees generated during 1997, as the Fund's net assets
declined.
LIQUIDITY AND CAPITAL EXPENDITURES
As of December 31, 1997, JBRI had no outstanding long term obligations.
Short term obligations consisted of dealer service fees payable, accounts
payable and accrued expenses totaling $11,946. JBRI has historically funded
operations through cash flows from operations. The Company expects to increase
ADAM's net capital to approximately $200,000 during 1998, in connection with the
expansion of its broker-dealer and mutual fund activities.
JBRI is subject to the net capital rule (Rule 15c3-l) promulgated under
the 1934 Act, which prohibits a broker-dealer from engaging in securities
transactions when its aggregate indebtedness exceeds 15 times its net capital,
as those terms are defined in Rule 15c3-1. The net capital, required net capital
and net capital ratio for JBRI as of December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
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<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>
DESCRIPTION OF PROPERTY
The Group currently has two business offices under lease. ADAM has a
one-year lease for office space in Los Angeles from CB Commercial, Inc. at
$2,370 per month, which is the office space formerly occupied by JBRI. ADAG has
entered into a five- year lease expiring January 2003 for office space in Berlin
from 58
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Grundstucksverwalt Ungsgesellschaft - Bull and Liedtke, Hamburg, at $3,700 per
month. Both premises are in good condition and are adequately insured. It is
anticipated that the Company will enter into new office leases as additional
subsidiaries are formed and the Group's business activities are expanded into
additional EU countries.
DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES
MANAGEMENT
The Company is assembling an international team of managers and
entrepreneurs with experience in the Group's market area and a shared commitment
to its future growth and success.
Peter Hartmann, age 42, Chairman of the Board, President and Chief
Executive Officer, 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. Mr. Hartmann has only limited experience in the
financial services industry. He was engaged by the Company to structure and
develop its business and is expected to be replaced as Chief Executive Officer
later in 1998 by an experienced financial services professional.
James Buchanan Rea Jr., age 42, Director, Executive Vice-President and
Chief Operating Officer has over 20 years experience in the mutual fund
industry, especially in financial, accounting and operating positions. Mr. Rea
is President and Chief Executive Officer of ADAM, the Group's U.S. investment
advisory and brokerage subsidiary. He served as President of JBRI, the
predecessor of ADAM, since 1986.
Klaus Conradi, aged 27, Director, is also the Chief Executive Officer
of the Group's German subsidiary, ADAG, is a registered real estate appraiser
and a professional banker. Prior to joining the Group, Mr. Conradi served as a
Vice-President of the Dresdner Bank and managing director of Imofin, a property
development and management group in Berlin.
Roland Kuettner, age 43, Director, Chief Financial Officer and
Treasurer, qualified as a CPA in 1983 and gained ten years professional
experience in North America (the Pacific Northwest and eastern Canada) before
moving to Germany. As a Manager in the Accounting and Audit Division of Arthur
Andersen & Co., Mr. Kuettner gained extensive experience in dealing with matters
affecting financial reporting and control.
Thomas Corcovelos, age 47, Director and Secretary of the Company, is a
partner in the law firm of Corcovelos & Forry LLP in Long Beach, California.
Messrs. Rea, Hartmann, and Corcovelos reside in the U.S. Messrs. Conradi
and Kuettner reside in Berlin, Germany.
DEPENDENCE ON KEY MANAGEMENT
The Company will rely on the business and technical expertise of its
executive officers and certain other key employees, particularly its Chief
Executive Officer, Peter Hartmann and its Chief Operating Officer, James
Buchanan Rea, Jr. The loss of the services of any of these individuals could
have a material adverse effect on the Company, although it is anticipated that
Mr. Hartmann's replacement will be an experienced financial services
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professional. The Company does not maintain key man life insurance on these
individuals. No assurance can be given that their services will be available in
the future. The Company's success will also be dependent on its ability to
attract and retain additional qualified management personnel.
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 $91,765 during 1997, as
President and Chief Executive Officer of JBRI.
The following table sets forth information concerning the compensation
to be received for the fiscal year ending August 31, 1998 for services
rendered to the Company in all capacities by the Company's executives. The
Company had no executive officers under employment during 1997.
SUMMARY COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITION SALARY($)
- --------------------------- ---------
<S> <C>
Peter Hartmann, President and Chief
Executive Officer ......................................... $180,000
James Buchanan Rea, Jr., Executive Vice President, Chief
Operating Officer .......................................... $100,000(1)
Roland Kuettner, Chief Financial Officer
and Treasurer ............................................. $100,000(1)
Thomas Corcovelos, Secretary ................................... None
</TABLE>
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(1) See "Employment Agreements" below for a description of Mr. Rea's and Mr.
Kuettner's benefits entitlements. All other compensation in the form of
perquisites and other personal benefits has been omitted because the
aggregate amount of such perquisites and other personal benefits
constituted the lesser of $50,000 or 10% of the total annual salary and
bonus of the named executive for such year.
Directors of the Company who are also employees do not receive cash
compensation for their services as directors or members of committees of the
Board of Directors, but are reimbursed for their reasonable expenses incurred in
connections with attending meetings of the Board of Directors or management
committees. Non-employee directors are expected to be paid a fee of $1,000 per
Board meeting attended, and reimbursement
for expenses.
EMPLOYMENT AGREEMENTS
Mr. Rea has a three-year employment agreement with ADAM and the Company
to perform the duties of President and Chief Executive Officer of ADAM at an
initial annual salary of $100,000 per year, and an annual discretionary benefits
fund of $40,000, and the Company provides personal and family medical insurance
coverage. Mr. Rea will also be the designated general securities principal and
financial principal of ADAM. If Mr. Rea is terminated without cause or the
employment agreement is not renewed, he would receive a severance payment equal
to one-quarter of the average annual base salary during the term of his
employment plus an amount equal to one-quarter of the highest annual bonus or
profit-sharing received during his employment. The discretionary benefits fund
includes life and disability insurance, business automobile
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expenses, and business-associated memberships and expenses. Any portion of the
benefits fund not expended during a month is paid as additional compensation.
Mr. Rea is also entitled to participate in all employee plans and benefits that
may be established for executive employees. Bonuses are expected to be
determined in the future by the Board based upon an evaluation of performance
against the Company's strategic business plan and operating budget.
Mr. Kuettner has a three-year employment agreement with the Company to
perform the duties of Chief Financial Officer and Treasurer at an initial annual
salary of $100,000 per year, and an annual discretionary benefits fund of
$40,000, generally on the same terms as the employment contract for Mr. Rea
described above, including severance and bonus provisions.
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN SECURITYHOLDERS
The Company declared a 10:1 stock split of its common stock, effective
November 1, 1997. All amounts of common stock outstanding reflected herein give
effect to the stock split.
The following table sets forth the number of shares of the Company's
capital stock beneficially owned by its officers and directors, all officers and
directors as a group, and each shareholder who owns more than 10% of any class
of the Company's outstanding capital stock.
<TABLE>
<CAPTION>
Shares Beneficially
Owned(1)
-----------------------
Name and Address of Beneficial Owner(2) Number Percent
- ------------------------------------------------------------------ ----------- -------
<S> <C> <C>
COMMON STOCK
Peter Hartmann (3) ............................................... 92,375,000 89.6%
James Buchanan Rea, Jr ........................................... 2,375,000 2.3%
Klaus Conradi (3) ................................................ 90,000,000 87.3%
Roland Kuettner .................................................. 500,000 0.5%
Thomas Corcovelos ................................................ 500,000 0.5%
American Diversified Corporation (3) ............................. 90,000,000 87.3%
Officers and Directors as a Group (5 individuals) ............. 102,223,000 99.2%
</TABLE>
PREFERRED STOCK
As of March 31, 1998, the closing of the private placement, the Company
has sold 5,000,000 shares of Series A Preferred Stock to a total of 384
individual preferred shareholders. None of the holders of the shares of Series A
Preferred Stock owns more than 10% of the shares. All of these individuals are
residents of Germany and none are affiliated with the Company.
- ----------
(1) Beneficial ownership is determined in accordance with the applicable rules
under the 1934 Act. In computing the number of shares beneficially owned
by a person and the percentage ownership of that person, shares of Common
Stock subject to options held by that person that are currently
exercisable, or become exercisable within 60 days from the date hereof,
are deemed outstanding. However, such shares are not deemed outstanding
for purposes of computing the percentage ownership of any other person.
Percentage ownership is based on 103,027,000 shares of
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Common Stock outstanding (giving effect to the JBRI - ADAM Merger) and
5,000,000 Shares of Series A Preferred Stock.
(2) The address of each of the beneficial owners named above is 12100 Wilshire
Blvd., Suite 680, Los Angeles, California 90025.
(3) Mr. Conradi and Mr. Hartmann are shareholders, officers and directors of
American Diversified Corporation ("ADC"). However, they each disclaim
beneficial ownership of the Company's shares owned by ADC. ADC is a
Delaware corporation organized in 1997. No single shareholder beneficially
owns more than 10% of its outstanding capital stock. All of its
shareholders other then Mr. Hartmann are residents of Germany or other
European countries.
INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS
Effective March 31, 1998, the merger of JBRI into ADAM was completed and
became effective. 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 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. Mr. Rea is acquiring the
Company shares without registration in reliance on the exemption provided by
Section 4(2) under the Securities Act of 1933, as amended (the "Securities
Act"). Mr. Rea is a sophisticated investor knowledgeable in the securities
business. He will continue to serve as President of ADAM, the successor to JBRI.
The Company shares issued to Mr. Rea are "restricted securities" and may not be
publicly resold except pursuant to a registration under the Securities Act, Rule
144 or other exemption under the Securities Act that may be applicable.
A "Bearer Note" issued by Immofin Grundstuecksverwaltungsgessellschaft
Conradi & Hilger GbRmbH, a partnership consisting of Messrs. Klaus Conaradi and
Josef Hilger, two of the Company's founding shareholders, represents the
contributed capital of American Diversified Corporation, a Delaware corporation
owned by Messrs. Conradi, Hilger and Hartmann. The note is due on December 31,
1999, accumulates interest at 4% per annum and is secured by a first mortgage on
certain real estate holdings of the issuer in Berlin. (See Note 8 to
"Consolidated Financial Statements", page F-9).
SECURITIES BEING OFFERED
No securities are being offered in connection with this filing. There is
no public trading market for the Company's common or preferred stock and there
is no assurance that a trading market will develop. As of the date of this
filing, there were outstanding 103,027,000 shares of Common Stock (giving effect
to the JBRI-ADAM merger) held by 18 shareholders, all of which shares were
"restricted securities" under applicable U.S. securities laws and may not be
publicly resold except pursuant to a registration under the Securities Act, Rule
144 thereunder, or other applicable exception under the Securities Act. The
Company completed the sale of 5,000,000 shares of Series A Preferred Stock on
March 31, 1998 to 384 shareholders, at $1.00 per share pursuant to a private
placement conducted in Europe under the exemption from U.S. securities laws
provided under Regulation S.
DESCRIPTION OF CAPITAL STOCK
The following is a brief description of the material terms of the
Company's capital stock. This description does not purport to be complete and is
subject in all respects to applicable Nevada law and to the provisions of the
Company's Articles of Incorporation and Bylaws, copies of which are on file with
the Commission are incorporated by reference herein. General
The Company's authorized equity capitalization consists of 110,000,000
shares of voting common stock, $.001 par value, and 50,000,000 shares of
preferred stock, $.001 par value, of which
10
<PAGE> 12
5,000,000 shares have been designated Series A Preferred Stock, par value $1.00
per share. The shares of preferred sock may be issued from time to time in one
or more series. The Board of Directors is authorized to fix the number of shares
of any series of preferred stock and to determine the designation of any such
series. The Board of Directors is also authorized to determine or alter the
rights, preferences, privileges and restrictions granted to or imposed upon any
wholly unissued series of preferred stock and, within the limits and
restrictions stated in any resolution or resolutions of the Board of Directors
originally fixing the number of shares constituting any series, to increase or
decrease (but not below the number of shares of such series then outstanding)
the number of shares of any such series subsequent to the issue of shares of
that series.
COMMON STOCK
As of March 31, 1998, there were 103,027,000 outstanding shares of
common stock (giving effect to the 2,375,000 shares issued to Mr. Rea upon
completion of the JBRI-ADAM merger), issued to the Company's founders and Mr.
Rea. Holders of common stock are entitled to receive dividends when, as and if
declared by the Board of Directors, out of funds legally available therefor.
Dividends on any outstanding shares of preferred stock may be required to be
paid in full before payment of any dividends on the common stock. Upon
liquidation, dissolution or winding up of the Company, holders of common stock
are entitled to share ratably in assets available for distribution after payment
of all debts and other liabilities and subject to the prior rights of any
holders of any preferred stock then outstanding.
Holders of common stock are entitled to one vote per share with respect
to all matters submitted to a vote of shareholders and do not have cumulative
voting rights. Accordingly, holders of a majority of the common stock entitled
to vote in any election of directors may elect all of the directors standing for
election, subject to the voting rights (if any) of any series of preferred stock
that may be outstanding from time to time. The Company's Articles of
Incorporation and Bylaws contain no restrictions on the repurchase by the
Company of shares of the common stock or preferred stock. All the outstanding
shares of common stock are, and additional shares of common stock will be, when,
issued, validly issued, fully paid and nonassessable.
PREFERRED STOCK
As of March 31, 1998, the Company has sold 5,000,000 shares of Series A
Preferred Stock, par value $1 per share, pursuant to a private placement
conducted in Germany that is exempt from U. S. securities laws under Regulation
S. The Series A Preferred Stock is entitled to a cumulative preferential
dividend of $.09 per share, when and as declared by the Board of Directors. The
Series A Preferred Stock ranks prior to the common stock as to dividends and as
to distributions in the event of liquidation, dissolution or winding up of the
Company. The Company may redeem the Series A Preferred Stock at any time at the
price of $1 per share, as adjusted to give effect to anti-dilution, plus any
cumulated but unpaid dividends. The shares are convertible into common stock, at
any time in the ratio of three shares of Series A Preferred Stock into one share
of common stock and shall be automatically converted into common stock if the
Company effects a firm commitment public offering registered under the
Securities Act, that results in net proceeds to the Company of at least $10
million.
The Board of Directors is authorized to designate with respect to each
series of preferred stock the number of shares in each such series, the dividend
rates and dates of payment, voluntary and involuntary liquidation preferences,
redemption prices, if any, whether or not dividends shall be cumulative and, if
cumulative, the date or dates from which the same shall be cumulative, the
sinking fund provisions if any, and the terms and conditions on which shares can
be converted into or exchanged for shares of another class or series, and the
voting rights, if any. As of the date hereof, there were no shares of Preferred
Stock issued and outstanding. The Series A Preferred Stock is non-voting. Any
series preferred stock issued will rank prior to the common stock as to
dividends and as to distributions in the event or liquidation, dissolution or
winding up of the Company. The ability of the Board of Directors to issue
preferred stock, while providing flexibility in connection with possible
acquisitions and other
11
<PAGE> 13
corporate purposes, could, among other things, adversely affect the voting
powers of holders of common stock. The preferred stock will, when issued, be
fully paid and nonassessable.
12
<PAGE> 14
PART II
Item 1. Market Price of and Dividends on the Registrant's Common Equity and
Other Shareholder Matters.
There is no current market for the Company's shares of common and
preferred stock and the Company has not declared any cash
dividends.
As of March 31, 1998, there are 18 shareholders of record of the
Company's common stock and 384 shareholders of record of the
Series A Preferred Stock.
Item 2. Legal Proceedings.
None
Item 3. Changes in and Disagreements with Accountants.
None
Item 4. Recent Sales of Unregistered Securities.
See "Interest of Management and Others in Certain Transactions" above,
for a description of the Company's common stock issued in the JBRI-ADAM merger.
See "Security Ownership of Management and Certain Securityholders --
Preferred Stock," for a discussion of the 5,000,000 private placement of Series
A Preferred Stock to 384 shareholders, which was completed on March 31, 1998.
Mr. Peter Hartmann contributed $22,979 in cash and the remainder in
services for the 2,375,000 shares of common stock issued to him as of March
1997.
Item 5. Indemnification of Directors and Officers.
The Articles of Incorporation limit the liability of directors and
officers to the fullest extent permitted under Nevada General Corporation Law.
As allowed by Nevada Revised Statutes, the Articles of Incorporation and Bylaws
of the Company provide that the liability of the directors of the Company for
monetary damages shall be eliminated to the fullest extent permissible under
Nevada law. This is intended to eliminate the personal liability of a director
for monetary damages in an action brought by or in the right of the Company for
breach of a director's duties to the Company or its shareholders except for
liability for acts or omissions that involve intentional misconduct or knowing
and culpable violation of law, for acts or omissions that a director believes to
be contrary the best interests of the Company or its shareholders or that
involve the absence of good faith on the part of the director, for any
transaction from which a director derived an improper personal benefit, for acts
or omissions that show a reckless disregard for the director's duty to the
Company or its shareholders in circumstances in which the director was aware, or
should have been aware, in the ordinary course of performing a director's
duties, of a risk of serious injury to the Company or its shareholders, for acts
or omissions that constitute an unexcused pattern of inattention that amounts to
an abdication of the director's duty to the Company or its shareholders, with
respect to certain contracts in which a director has a material financial
interest and for approval of certain improper distributions to shareholders or
certain loans or guarantees. This provision does not limit or eliminate the
rights of the Company or any shareholder to seek non-monetary relief such as an
injunction or rescission in the event of a breach of a director's duty of care.
II-1
<PAGE> 15
PART F/S
FINANCIAL STATEMENTS
See "Index to Consolidated Financial Statements" for a listing of the
consolidated financial statements filed with this Form 10-SB.
<PAGE> 16
PART III
Item 2. Description of Exhibits
See "Exhibit Index"
III-1
<PAGE> 17
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AMERICAN DIVERSIFIED HOLDINGS INC. AND SUBSIDIARIES
Independent Auditor's Report ................................................... F-1
Consolidated Balance Sheet as of February 28, 1998
and August 31, 1997 ......................................................... F-2
Consolidated Statements of Operations For the Periods From
February 4, 1997 (inception) to August 31, 1997 and February 28, 1998
and the Six Months Ended February 28, 1998 .................................. F-3
Consolidated Statement of Stockholders Equity For the Period From
February 4, 1997 (inception) to August 31, 1997
and the Six Months Ended February 28, 1998 .................................. F-4
Consolidated Statement of Cash Flows For the Periods From
February 4, 1997 (inception) to August 31, 1997
and the Six Months Ended February 28, 1998 .................................. F-5
Notes to Consolidated Financial Statements ..................................... F-6 to F-9
Unaudited Proforma Consolidated Financial Statements ........................... F-10
Unaudited Proforma Consolidated Balance Sheet
as of February 28, 1998 ..................................................... F-11
Unaudited Proforma Consolidated Statement
of Operations For the Period From February 4, 1997 (inception)
to August 31, 1997 .......................................................... F-12
Unaudited Proforma Consolidated Statement
of Operations Six Months Ended February 28,1998 ............................. F-13
Notes to Unaudited Pro Forma Consolidated Financial Statements ................. F-14
JAMES BUCHANAN REA, INC
Independent Auditor's Report ................................................... F-15
Balance Sheets as of December 31, 1997 and 1996 ................................ F-16
Statements of Operations For the Years Ended December 31, 1997 and 1996 ........ F-17
</TABLE>
<PAGE> 18
<TABLE>
<S> <C>
Statements of Changes in Stockholders Equity For the
Years ended December 31, 1997 and 1996 ...................................... F-18
Statements of Cash Flows For the Years Ended December 31, 1997 and 1996 ....... F-19
Notes to Financial Statements .................................................. F-20 to F-22
</TABLE>
F-1
<PAGE> 19
[McGladrey & Pullen, LLP letterhead]
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
American Diversified Holdings, Inc.
Los Angeles, California
We have audited the accompanying consolidated balance sheet of American
Diversified Holdings, Inc. and subsidiaries as of August 31, 1997, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the period from February 4, 1997 (inception) to August 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of American Diversified
Holdings, Inc. and subsidiaries as of August 31, 1997, and the result of their
operations and their cash flows for the period indicated in conformity with
generally accepted accounting principles.
/s/ McGladrey & Pullen, LLP
--------------------------------------
MCGLADREY & PULLEN, LLP
New York, New York
December 22, 1997, except for the last
paragraph of Note 7 as to which the date
is March 31, 1998
F-2
<PAGE> 20
AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
FEBRUARY 28, AUGUST 31,
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 306,662 $ 2,264
Debt securities (Note 2) 1,193,049
Capital stock subscriptions receivable (Note 5) 1,842,464 117,000
Prepaid expenses and other 297,592 4,220
Equipment, net of accumulated depreciation of
1998 $3,429; 1997 -0- 40,930 14,320
------------ ------------
$ 3,680,697 $ 137,804
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses $ 615,038 $ 63,577
Bank overdraft 419,911
------------ ------------
1,034,949 63,577
------------ ------------
Stockholders' Equity (Note 5 and 6):
Series A 9% convertible redeemable cumulative
preferred stock, $1.00 par value; 5,000,000
shares authorized:
Issued and outstanding, 1,432,538 and no shares,
at February 28, 1998 and August 31, 1997,
respectively 1,427,058
Subscribed for but not paid for and not issued,
2,081,953 and 162,495 shares, at February 28,
1998 and August 31, 1997, respectively 2,081,953 150,545
Common stock, $.001 par value; 110,000,000 shares
authorized; issued and outstanding 100,652,000
and 10,000,000 shares at February 28, 1998 and
August 31, 1997, respectively 10,107,429 96,754
Unpaid subscriptions as of April 17, 1998 and
December 22, 1997, respectively (239,489) (33,545)
Deficit accumulated during the development stage (792,278) (139,527)
Notes receivable from stockholders (Note 7) (9,938,925)
------------ ------------
2,645,748 74,227
------------ ------------
$ 3,680,697 $ 137,804
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE> 21
AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(UNAUDITED)
-----------------------------
PERIOD FROM PERIOD FROM
FEBRUARY 4, FEBRUARY 4,
1997 SIX MONTHS 1997
(INCEPTION) TO ENDED (INCEPTION) TO
FEBRUARY 28, FEBRUARY 28, AUGUST 31,
1998 1998 1997
----------- ------------ ---------------
<S> <C> <C> <C>
Revenue $ $ $
Expenses (Note 3):
Travel and entertainment 93,331 70,845 22,486
Employee compensation and benefits 215,743 194,902 20,841
Professional fees 227,996 161,522 66,474
Advertising and promotion 102,519 95,299 7,220
Administrative 152,669 130,183 22,506
----------- ------------ -------------
792,278 652,751 139,527
----------- ------------ -------------
(Loss) before income taxes (792,278) (652,751) (139,527)
Income taxes
Net (loss) $ (792,278) $ (652,751) $ (139,527)
----------- ------------ -------------
Average common shares outstanding 51,727,384 100,409,333 10,000,000
----------- ------------ -------------
Basic and fully diluted (loss)
per common share $ (0.02) $ (0.01) $ (0.01)
=========== ============ =============
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE> 22
AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Period from February 4, 1997 (inception) to August 31, 1997 and Six Months Ended
February 28, 1998
<TABLE>
<CAPTION>
Series A 9%
Convertible Cumulative Deficit
Preferred Stock Common Stock Accumulated Notes
--------------------- -------------------- During the Receivable
Number of Number of Development Unpaid From
Shares Amount Shares Amount Stage Subscriptions Stockholder Total
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance February 4, 1997, $ -- $ -- $ -- $ -- $ -- $
date of inception
Stock Issued:
Common Stock:
For cash at $.01/share 4,750,000 47,795 47,795
For legal and other
services at $.01/share 5,250,000 48,959 48,959
Preferred Stock:
For cash at $1.00 share
paid by December 22, 1997 126,287 117,000 117,000
Unpaid for at December 22,
1997 36,208 33,545 (33,545)
Net (loss) (139,527) (139,527)
--------------------------------------------------------------------------------------------------------
Balance, August 31, 1997 162,495 150,545 10,000,000 96,754 (139,527) (33,545) 74,227
(UNAUDITED)
Stock issued:
Common stock:
For cash at $.10/share 142,000 15,550 15,550
In exchange for note
receivable from affiliate
at $.10/share 90,000,000 9,773,260 (9,773,260)
For legal and other
services at $.11/share 510,000 56,100 56,100
Interest on notes
receivable 165,665 (165,665) --
Preferred stock:
For cash and securities
at $1.00/share, as of
February 28, 1998 1,267,043 1,276,513 33,545 1,310,058
For cash at $1.00/share
paid after February 28,
1998 but before April
17, 1998 1,814,688 1,842,464 1,842,464
Unpaid for by April 17,
1998 270,265 239,489 (239,489)
Net (loss) (652,751) (652,551)
-----------------------------------------------------------------------------------------------------------
Balance, February 28,
1998 3,514,491 $3,509,011 100,652,000 $10,107,429 $(792,278) $(239,489) $(9,938,925) $2,645,748
</TABLE>
See Notes to Consolidated Financial Statements
F-5
<PAGE> 23
AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Unaudited)
--------------------------------
PERIOD FROM PERIOD FROM
FEBRUARY 4, FEBRUARY 4,
1997 SIX MONTHS 1997
(INCEPTION) TO ENDED (INCEPTION) TO
FEBRUARY 28, FEBRUARY 28, AUGUST 31,
1998 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net (loss) $ (792,278) $ (652,751) $ (139,527)
Adjustments to reconcile net (loss) to
net cash (used in) operating activities:
Noncash expenses, professional fees 105,059 56,100 48,959
Depreciation 3,529 3,529
Change in assets and liabilities:
Increase in prepaid expenses and other (297,592) (293,372) (4,220)
Increase in accounts payable and accrued
expenses 615,038 551,461 63,577
------------ ------------ ------------
Net cash (used in) operating activities (366,244) (335,033) (31,211)
------------ ------------ ------------
Cash Flows from Investing Activities
Purchase of equipment $ (44,459) $ (30,139) $ (14,320)
------------ ------------ ------------
Cash Flows from Financing Activities
Proceeds from issuance of preferred stock 234,009 234,009
Proceeds from issuance of common stock 63,345 15,550 47,795
Increase in bank overdraft 419,911 419,911
------------ ------------ ------------
Net cash provided by financing activities 712,264 669,470 47,795
------------ ------------ ------------
Increase in cash and cash equivalents 306,662 304,398 2,264
Cash and Cash Equivalents
Beginning -- 2,264 --
------------ ------------ ------------
Ending $ 306,662 $ 306,662 $ 2,264
============ ============ ============
Supplemental schedule of noncash financing
activities
Issuance of 510,000 for the six months
ended February 28, 1998 and 5,250,000
common shares for the period ended
August 31, 1997 in exchange for
services rendered $ 105,059 $ 56,100 $ 48,959
============ ============ ============
Issuance of 90,000,000 common shares in
exchange for notes receivable $ 9,773,260 $ 9,773,260 $ --
============ ============ ============
Issuance of 1,196,049 preferred shares in
exchange for debt securities $ 1,193,048 $ 1,193,048 $ --
============ ============ ============
</TABLE>
F-6
<PAGE> 24
AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF FEBRUARY 28, 1998 AND FOR THE SIX MONTHS ENDED FEBRUARY 28,
1998 IS UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF THE BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS:
American Diversified Holdings, Inc. (the "Company") was organized on
February 4, 1997 as a provider of financial services in the United States and
Europe. As a development-stage enterprise, the Company has devoted most of its
resources since inception to raising capital and implementing the first stages
of its business plan. The Company's fiscal year ends on the last day of each
August.
The Company has established two wholly owned subsidiaries since its inception:
<TABLE>
<CAPTION>
PLANNED OPERATION
---------------------------------------
<S> <C>
American Diversified AG Wertpapierhandelsbank
("ADAG") Provider of financial services in Germany
American Diversified Asset Management, Inc.
("ADAM") Investment adviser to planned mutual funds
</TABLE>
A SUMMARY OF THE COMPANY'S SIGNIFICANT ACCOUNTING POLICIES FOLLOWS:
Principles of consolidation: The consolidated financial statements include the
accounts of the Company and its subsidiaries, all of which are wholly owned. All
material intercompany accounts and transactions are eliminated in consolidation.
Cash and cash equivalents: Cash equivalents include highly liquid debt
instruments which have a maturity of three months or less from the date of
purchase and other highly liquid investments which are readily convertible into
cash. Cash equivalents are stated at cost which approximates market value.
Equipment: Equipment is reported at cost and includes expenditures for major
improvements. Depreciation will be determined using accelerated methods based on
three to five year estimated useful lives. The equipment was placed in service
during the six months ended February 28, 1998.
Foreign currency transactions: The Company has agreed to fund any cash flow
deficits incurred by ADAG, its European subsidiary. Until such time that ADAG
generates sales revenue the parents functional currency (U.S. $) will be
considered ADAG's functional currency for financial reporting purposes.
Investment in debt securities: The Company's investment in debt securities
consists of mortgage-backed securities which are classified as
available-for-sale. Available-for-sale securities are stated at fair value, and
unrealized holding gains and losses, net of the related deferred tax effect, are
reported as a separate component of stockholders' equity.
Premiums and discounts on investments in debt securities are amortized over the
contractual lives of those securities, except for mortgage-backed securities for
which prepayments are probable and predictable which are amortized over the
estimated expected lives of those securities. The method of amortization results
in a constant effect yield on those securities (the interest method). Interest
on debt securities is recognized in income as earned. Realized gains and losses
are determined on the basis of specific identification.
F-7
<PAGE> 25
AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF FEBRUARY 28, 1998 AND FOR THE SIX MONTHS ENDED FEBRUARY 28,
1998 IS UNAUDITED)
- --------------------------------------------------------------------------------
Income taxes: Deferred taxes are provided on a liability method whereby deferred
tax assets are recognized for deductible temporary differences and operating
loss and tax credit carry forwards and deferred tax liabilities are recognized
for taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Deferred tax assets and liabilities are
adjusted for the effects of changes in tax laws and rates on the date of
enactment.
Fair value of financial instruments: The fair value of cash and cash
equivalents, debt securities and capital stock subscriptions receivable
approximates carrying amounts because of the short term nature of those
instruments.
Basic loss per common share: The basic loss per common share is based on the net
loss from operations and the weighted average number of shares of common stock
outstanding during the period. Common shares issuable upon conversion of
preferred stock have not been included in the computation because their
inclusion would have had an antidilutive effect (reduced the loss per common
share).
Estimates: The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expense during the reporting
period. Actual results could differ from those estimates.
Interim Financial Statements: The accompanying financial statements as of
February 28, 1998 and for the six months ended February 28, 1998 are unaudited,
but in the opinion of management, include all adjustments consisting of normal
recurring adjustments necessary for a fair presentation of results of operations
for the interim period. Results for the six months ended February 28, 1998 are
not necessarily indicative of the results
that may be expected for the year ending August 31, 1998.
NOTE 2. INVESTMENT IN DEBT SECURITIES
The following is a summary of the Company's investment in available-for-sale
securities which consist entirely of mortgage-backed securities as of February
28, 1998:
<TABLE>
<S> <C>
Amortized cost $1,193,049
Gross unrealized gains --
Gross unrealized losses --
----------
Fair value $1,193,049
==========
</TABLE>
NOTE 3. RELATED PARTY TRANSACTIONS
The Company has effectively operated out of the offices and residences of the
founding stockholders in the United States and Germany. Legal and other services
provided by the Company's stockholders and reported as operating expenses in the
accompanying financial statements totaled $166,822 (unaudited) during the six
months ended February 28, 1998 and $19,639 in the period ended August 31, 1997.
F-8
<PAGE> 26
AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF FEBRUARY 28, 1998 AND FOR THE SIX MONTHS ENDED FEBRUARY 28,
1998 IS UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 4. LEASE COMMITMENT
In July 1997, ADAG entered into a long term lease for office facilities in
Berlin, Germany. The lease provides for a monthly payment of 5,642 Deutschmarks
and expires in 2002. The lease agreement also requires ADAG to pay monthly
utilities and value added taxes. Future minimum lease commitments at August 31,
1997 are as follows:
<TABLE>
<S> <C>
1998 $ 38,827
1999 40,667
2000 42,467
2001 44,287
2002 14,964
--------
$181,212
========
</TABLE>
NOTE 5. PREFERRED STOCK OFFERING
The Company's Board of Directors has authorized the issuance of 5,000,000 shares
of Series A 9% cumulative convertible redeemable preferred stock. The cumulative
dividends are payable semi-annually, when and as declared, at an annual rate of
$.09 per share commencing January 1, 1998. The Company may at its option, and
subject to certain notification provisions, redeem all or a portion of the
preferred stock at the price of $1.00 per share, plus any accrued and unpaid
dividends. The stockholders do not have the right to demand redemption of the
Series A 9% cumulative convertible preferred stock. Each share is convertible at
the option of the holder into common stock at the rate of three preferred shares
for one share of common stock. In addition, each share of preferred stock shall
be automatically converted into shares of common stock at a conversion price
equal to the initial issue price of the preferred shares, subject to certain
adjustments, immediately upon the closing of a sale of the Company's common
stock in a public offering under the Securities Act of 1933, that results in net
proceeds to the Company of at least $10,000,000.
The Company commenced the sale of preferred stock in Germany under Regulation S,
guidelines established under the Securities Act of 1933 for Securities offers
made outside of the United States during August 1997. The Offering is registered
with the ABundesaufsichtsamt fuer Wertpapierhandel@, the German governmental
agency which regulates German securities transactions. As of August 31, 1997 the
Company received subscriptions for 162,495 preferred shares. Subscriptions
receivable of $117,000 for these shares were collected by September 1997.
Unaudited: During the six months ended February 1998 the Company received
subscriptions for an additional 3,351,996 shares of Series A 9% cumulative
convertible redeemable preferred stock of which $1,427,058 were collected before
February 28, 1998 and $1,842,464 collected before April 14, 1998. All
subscriptions for the preferred stock were from unaffiliated investors.
NOTE 6. INCOME TAXES
The Company has approximately $30,000 of federal and state operating loss
carryforwards, which may be
F-9
<PAGE> 27
AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF FEBRUARY 28, 1998 AND FOR THE SIX MONTHS ENDED FEBRUARY 28,
1998 IS UNAUDITED)
- --------------------------------------------------------------------------------
utilized to offset future taxable income. The federal operating loss
carryforwards expire in 2012 and the state operating loss carryforwards expire
in 2002. The tax benefit recognized for the net operating loss has been offset
by an equal increase in the valuation allowance for deferred taxes resulting in
no income tax expense or benefit reflected in the accompanying statement of
operations.
F-10
<PAGE> 28
AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF FEBRUARY 28, 1998 AND FOR THE SIX MONTHS ENDED FEBRUARY 28,
1998 IS UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 7. EVENTS SUBSEQUENT TO AUGUST 31, 1997
In September 1997, the Company received additional subscriptions for 1,358,547
additional shares of preferred stock. Also in September 1997, the Company issued
9,000,000 (prior to ten-for-one stock split, see below) shares of its common
stock in exchange for a note receivable (see Note 8) from an affiliate of one of
the Company's shareholders.
In November 1997, the Company's Board of Directors approved a ten-for-one stock
split which increased the number of authorized voting and non-voting shares to
110,000,000. All transactions in the Company's common stock and the earnings per
common share for the periods presented have been adjusted to give retroactive
effect to the stock split as if it had occurred at inception.
On November 24, 1997, the Company signed an agreement to effect a merger with
James Buchanan Rea, Inc. ("JBRI") the investment advisor and distributor of the
Rea-Graham Balanced Fund (the "Fund") since 1982. The merger is subject to the
approval of the Fund's shareholders. The merger, which will be accounted for as
a purchase, will be affected by an exchange of 2,375,000 shares of common stock
and cash of $160,875 for the common stock of JBRI.
On March 31, 1998, the merger of JBRI with and into ADAM became effective.
NOTE 8. NOTE RECEIVABLE FROM STOCKHOLDERS (UNAUDITED)
In connection with the Company's founding, a group of stockholders contributed
their ownership of a "Bearer Note" secured by a first mortgage on certain real
property in Berlin. The note with a face amount 17.5 million Deutschmarks was
valued at $9,773,260 is due on December 31, 1999 and accumulates interest at 4%
per annum. For U.S. accounting purposes the capital contribution and the
accumulated interest thereon of $165,665 are reported as common stock issued and
the note receivable from stockholders is reflected as a reduction of
stockholders' equity until such time the note and accumulated interest are
converted to cash.
F-11
<PAGE> 29
AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF FEBRUARY 28, 1998 AND FOR THE SIX MONTHS ENDED FEBRUARY 28,
1998 IS UNAUDITED)
- --------------------------------------------------------------------------------
UNAUDITED PROFORMA CONSOLIDATED FINANCIAL STATEMENTS
The unaudited proforma consolidated financial statements presented on the
following pages reflect the proforma effect of the acquisition of James Buchanan
Rea, Inc. ("JBRI") and the issuance of notes payable and common stock, as
described in the accompanying notes. The proforma adjustments have been applied
to the historical unaudited consolidated balance sheet of the Company as of
February 28, 1998, the historical consolidated statement of operations for the
fiscal periods ended August 31, 1997 and February 28, 1998, the audited balance
sheet of JBRI as of December 31, 1997 and the unaudited statements of operations
of JBRI for the nine months ended September 30, 1997 and six months ended
December 31, 1997. The acquisition will be accounted for using the purchase
method of accounting. For purposes of the proforma statements, the purchase
price of the assets of JBRI has been allocated to the acquired net assets based
on information currently available with regard to the values of such net assets.
Final adjustments to recorded amounts may differ from the proforma adjustments
presented herein. The proforma statements should be read in connection with the
notes thereto.
F-12
<PAGE> 30
AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED PROFORMA CONSOLIDATED BALANCE SHEET
FEBRUARY 28, 1998
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS AS ADJUSTED
------------ ------------ ------------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 306,662 $ 11,366(1)(2) $ 317,998
Debt securities 1,193,049 -- 1,193,049
Accounts receivable -- 13,922(2) 13,922
Capital stock subscriptions receivable 1,842,464 -- 1,842,464
Prepaid expenses 297,592 3,823(2) 301,415
Equipment 40,930 45,344(2) 86,274
Goodwill -- 335,866(2) 335,866
------------ ------------ ------------
$ 3,680,697 410,321 4,091,018
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses $ 615,038 $ 11,946(2) $ 626,984
Bank overdraft 419,911 -- 419,911
Note payable to affiliate -- 160,875(1) 160,875
------------ ------------ ------------
1,034,949 172,821 1,207,770
============ ============ ============
Stockholders Equity:
Series A 9% convertible redeemable cumulative
preferred stock, $.001 par value: 5,000,000
shares authorized
Issued and outstanding, 1,432,538 shares 1,427,058 -- 1,427,058
Subscription for but not paid for and
not issued, 2,081,953 shares 2,081,953 -- 2,081,953
Common stock, $.001 par value
110,000,000 shares
authorized; issued and outstanding 100,652,000 10,107,429 237,500(2) 10,344,929
Unpaid subscription as of April 17,1998 (239,489) -- (239,489)
Deficit accumulated during the development stage (792,278) -- (792,278)
Note receivable from stockholders (9,938,925) -- (9,938,925)
------------ ------------ ------------
2,645,748 237,500 2,883,248
------------ ------------ ------------
$ 3,680,697 $ 410,321 $ 4,091,018
============ ============ ============
</TABLE>
F-13
<PAGE> 31
AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF FEBRUARY 28, 1998 AND FOR THE SIX MONTHS ENDED FEBRUARY 28,
1998 IS UNAUDITED)
- --------------------------------------------------------------------------------
See Notes to Unaudited Proforma Consolidated Financial Statements
F-14
<PAGE> 32
AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED PROFORMA CONSOLIDATED STATEMENT OF OPERATIONS
PERIOD FROM FEBRUARY 4, 1997 (INCEPTION) TO AUGUST 31, 1997
<TABLE>
<CAPTION>
HISTORICAL PURCHASE
AMERICAN JBRI ACCOUNTING
DIVERSIFIED NOTE (A) ADJUSTMENTS PROFORMA
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue $ -- $ 96,968 $ -- $ 96,968
Expenses(Note 2):
Travel and entertainment 22,486 -- -- 22,486
Employee compensation and
benefits 20,841 84,027 -- 104,868
Professional fees 66,474 9,075 -- 75,549
Advertising and promotion 7,220 16,087 -- 23,307
Insurance -- 17,344 -- 17,344
Administrative 22,506 17,796 -- 40,302
Depreciation and amortization -- 2,663 13,062(4) 15,725
Interest -- -- 7,900(3) 7,900
139,527 146,992 20,962 307,481
(Loss) before income taxes (139,527) (50,024) (20,962) (210,513)
Income taxes -- -- -- (7) --
Net (loss) $ (139,527) $ (50,024) $ (20,962) $ (210,513)
Average common shares
outstanding 10,000,000 2,375,000 12,375,000
Basic and fully diluted (loss)
per common share $ (0.01) $ -- $ -- $ (0.01)
</TABLE>
Note A - JBRI unaudited results of operations are for the nine months ended
September 30, 1997
See Notes to Unaudited Proforma Consolidated Financial Statements.
F-15
<PAGE> 33
AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED PROFORMA CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED FEBRUARY 28, 1998
<TABLE>
<CAPTION>
HISTORICAL PURCHASE
AMERICAN JBRI ACCOUNTING
DIVERSIFIED NOTE (B) ADJUSTMENTS PROFORMA
------------- ------------- ------------- -------------
<S> <C> <C> <C>
Revenue $ -- $ 82,010 $ -- $ 82,010
Expenses(Note 2):
Travel and entertainment 70,845 -- -- 70,845
Employee compensation and
benefits 194,902 57,245 -- 252,147
Professional fees 161,522 2,685 -- 164,207
Advertising and promotion 95,299 2,631 -- 97,930
Administrative 130,183 17,796 -- 147,979
Depreciation and amortization -- 1,775 11,196(6) 12,971
Interest -- -- 6,837(5) 6,837
652,751 111,411 18,033 781,995
(Loss) before income taxes (652,751) (29,401) (18,033) (700,185)
Income taxes -- -- --(7) --
Net (loss) $ (652,751) $ (29,401) $ (18,033) $ (700,185)
Average common shares
outstanding 100,409,333 2,375,000 102,784,333
Basic and fully diluted (loss)
per common share $ (0.01) $ -- $ -- $ (0.01)
</TABLE>
Note B- JBRI unaudited results of operations are for the six months ended
December 31, 1997
See Notes to Unaudited Proforma Consolidated Financial Statements.
F-16
<PAGE> 34
AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED PROFORMA CONSOLIDATED FINANCIAL STATEMENTS
The unaudited proforma consolidated balance sheet is presented as if the
acquisition and financing had occurred on February 28, 1998. The unaudited
proforma consolidated statement of operations for the period from February 4,
1997 (inception) through August 31, 1997 was prepared as if the acquisition and
financing had occurred on February 4, 1997. The unaudited proforma consolidated
statement of operations for the six months ended February 28, 1998 was prepared
as if the acquisition and financing had occurred on September 1, 1997.
These proforma financial statements are not necessarily indicative of the
financial position or results of operations that might have occurred had the
acquisition and financing taken place at the beginning of the period or as of
February 28, 1998, or to project the Company's financial position or results of
operations at any future date or for any future period.
Adjustments were made as follows:
<TABLE>
<S> <C> <C> <C>
(1) Record issuance of notes payable to affiliate for cash portion of purchase price
Cash 160,875
Notes payable 160,875
(2) Record purchase of the net assets of JBRI in exchange for cash and stock.
Value assigned to common stock issued for majority interest reflects a
premium of 45% over the cash paid to minority shareholders of JBRI.
Purchase price allocated as follows:
Cash, receivables and other assets 29,111
Property and equipment 45,344
Goodwill 335,866
Accounts payable 11,946
Cash 160,875
Common stock 237,500
(3) Record interest on notes payable at an annual rate of 8.5%, for the
period from February 4, 1997 through August 31, 1997.
Interest expense 7,900
(4) Record amortization of goodwill over a period of 15 years for the
period February 4, 1997 through August 31,1997
Amortization expense 13,062
(5) Record interest on notes payable at an annual rate of 8.5%, for the
six months ended February 28, 1998.
Interest expense 6,837
(6) Record amortization of goodwill over a period of 15 years for the
six months ended February 28, 1998
</TABLE>
F-17
<PAGE> 35
AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF FEBRUARY 28, 1998 AND FOR THE SIX MONTHS ENDED FEBRUARY 28,
1998 IS UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Amortization expense 11,196
(7) The tax benefit for the proforma adjustments has been offset by an equal
increase in the valuation allowance for deferred taxes resulting in no income
tax expense or benefit reflected in the purchase accounting adjustments
</TABLE>
F-18
<PAGE> 36
[McGladrey & Pullen, LLP letterhead]
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
James Buchanan Rea, Inc.
Los Angeles, California
We have audited the accompanying balance sheets of James Buchanan Rea, Inc. as
of December 31, 1997 and 1996, and the related statements of operations, changes
in stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of James Buchanan Rea, Inc. as of
December 31, 1997 and 1996, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
/s/ McGladrey & Pullen, LLP
--------------------------------------
MCGLADREY & PULLEN, LLP
New York, New York
March 16, 1998, except
for the last paragraph
of Note 9 as to which the
date is March 31, 1998
F-19
<PAGE> 37
JAMES BUCHANAN REA, INC.
BALANCE SHEETS
December 31, 1997 and 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
---------- ----------
<S> <C> <C>
Cash and cash equivalents $ 11,336 $ 60,838
Accounts receivable:
Investment advisory fees 8,462 12,043
Distribution fees 2,951 3,363
Other 2,539
Prepaid expenses 2,136 2,527
Property and equipment, net (Note 2) 45,344 48,495
Deposits 1,687 1,387
---------- ----------
$ 74,455 $ 128,653
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses $ 7,744 $ 5,233
Dealer service fees payable 4,202 5,057
---------- ----------
11,946 10,290
---------- ----------
Stockholders' Equity (Note 6):
Common stock, no par value; authorized, issued and
outstanding 100,000 shares 7,500 7,500
Additional paid-in capital 198,735 184,735
Accumulated deficit (143,726) (73,872)
---------- ----------
62,509 118,363
---------- ----------
$ 74,455 $ 128,653
========== ==========
</TABLE>
See Notes to Financial Statements.
F-20
<PAGE> 38
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-21
<PAGE> 39
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-22
<PAGE> 40
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-23
<PAGE> 41
JAMES BUCHANAN REA, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies
Nature of business
James Buchanan Rea, Inc. (the Company) is engaged as the investment advisor and
principal underwriter of the Rea-Graham Funds Inc. (the Fund). The Company also
conducts business as an authorized dealer in Fund shares.
The Company operates under the provisions of Paragraph (k)(2)(ii) of Rule 15c3-3
of the Securities and Exchange Commission and, accordingly, is exempt from the
remaining provisions of that Rule.
Significant accounting policies
Securities transactions: Securities transactions and related commission income
and expense are recorded on a trade date basis.
Revenue recognition: Advisory fees and distribution fees are recognized as
earned.
Cash equivalents: Cash equivalents include debt instruments which have a
maturity of three months or less from the date of purchase and other highly
liquid investments which are readily convertible into cash. Cash equivalents are
stated at cost which approximates market value.
Property and equipment: Property and equipment are stated at cost and include
expenditures for additions and major improvements. Depreciation is determined
principally by the double-declining-balance method and is based on the following
estimated useful lives:
<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.
F-24
<PAGE> 42
JAMES BUCHANAN REA, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 2. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1997 and 1996 is summarized as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Automobiles $ -- $ 7,525
Capital improvements to executive office 66,925 66,925
Furniture and equipment 29,371 28,972
---------- ----------
96,296 103,422
Less accumulated depreciation (50,952) 54,927
---------- ----------
$ 45,344 $ 48,495
========== ==========
</TABLE>
NOTE 3. PROFIT SHARING PLAN
The Company participates in an employee profit sharing plan which covers all
full-time employees. Annual contributions to the profit sharing plan are
determined by the Board of Directors. No contributions were made to the profit
sharing plan for 1997 and 1996.
NOTE 4. RELATED PARTY TRANSACTIONS
The Company is retained as the investment advisor to the Rea-Graham Fund, Inc.
(the "Fund"). Under the terms of the agreement, the Company receives a monthly
fee of 1/12 of 1% of the first $20,000,000 of the Fund's net assets on the last
business day of the month, 1/12 of .75% of the next $80,000,000, 1/12 of .5% of
the next $100,000,000, and 1/12 of .45% of monthly net assets in excess of
$200,000,000.
The Company shares office space, personnel and other administrative costs with
the Fund. Total administrative expenses allocated to the Fund for the years
ended December 31, 1997 and 1996 aggregated $31,233 and $30,004, respectively.
On February 28, 1990, the shareholders of the Fund approved a Plan of
Distribution for the Fund (the Plan). The Plan provides that the Fund will pay
monthly to the Company a distribution fee charged against the assets of the Fund
and equal on an annual basis to .35% of the Fund's average daily net assets,
commencing on April 1, 1990. Distribution fees received for the years ended
December 31, 1997 and 1996 were $36,647 and $42,582, respectively. Included in
other operating expenses is $17,309 and $22,269 representing trail commissions
passed on to other dealers in 1997 and 1996, respectively.
As principal underwriter and authorized dealer in Fund shares, the Company
received commissions of $304 and $590, during 1997 and 1996, respectively.
NOTE 5. TOTAL RENTAL EXPENSE
Total rent expense, exclusive of Fund allocated expenses (Note 4) and net of
sublease rental income of $14,119 in 1995, amounted to $9,133 and $9,380 for the
years ended December 31, 1997 and 1996, respectively.
F-25
<PAGE> 43
JAMES BUCHANAN REA, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 6. NET CAPITAL
The Company is subject to the net capital rule of the Securities and Exchange
Commission. This rule prohibits a broker-dealer from engaging in securities
transactions when its aggregate indebtedness exceeds 15 times its net capital as
those terms are defined in the Rule 15c3-1. Rule 15c3-1 also provides that
equity capital may not be withdrawn or cash dividends paid if the resulting net
capital ratio would exceed ten to one.
The Company's net capital, required net capital, and net capital ratio as of
December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
----------- ---------
<S> <C> <C>
Net Capital $ 10,199 $ 58,920
----------- ---------
Required net capital $ 5,000 $ 5,000
----------- ---------
Net capital ratio 1.17 to 1 .17 to 1
----------- ---------
</TABLE>
NOTE 7. INCOME TAXES
The Company has approximately $195,000 and $181,000 of federal and state
operating loss carryforwards, respectively, which may be utilized to offset
future taxable income as of December 31, 1997. The federal operating loss
carryforwards expire from years 2009 to 2012 and the state operating loss
carryforwards from years 1999 to 2002. For the years ended December 31, 1997 and
1996, tax benefits recognized for net operating losses were offset by equal
increase in the valuation allowance for deferred taxes resulting in no income
tax expense or benefit reflected on the Statements of Operations.
NOTE 8. OFF-BALANCE-SHEET RISK
As discussed in Note 1, the Company's customers' securities transactions are
introduced on a fully disclosed basis with its clearing broker-dealer. The
clearing broker-dealer carries all accounts of the Company's customers and is
responsible for execution, collection and payment of funds, and receipt and
delivery of securities, relative to customer transactions. Off-balance-sheet
risk exists due to the possibility that customers may be unable to fulfill their
contractual commitments, in which case the clearing broker-dealer may charge to
the Company any losses it incurs. The Company seeks to minimize this risk
through procedures designed to monitor the creditworthiness of its customers and
to ensure that customer transactions are executed properly by the clearing
broker-dealer.
NOTE 9. PENDING MERGER
On November 24, 1997, the Company entered into an agreement to merge with
American Diversified Asset Management, Inc. (American Diversified) with American
Diversified to be the survivor of the merger. The merger will be affected by an
exchange of 2,375,000 shares of common stock of American Diversified and cash of
$160,875 for the common stock of the Company. The cash proceeds will be utilized
to retire the stock of the minority shareholders of the Company. The merger was
approved by the shareholders of the Fund on January 12, 1998.
On March 31, 1998, the Company's merger into American Diversified Holdings, Inc.
became effective.
F-26
<PAGE> 44
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED
- ------ ----------- ------------
<S> <C> <C>
2.1 Articles of Incorporation *
2.1.1 Amendment to Articles of Incorporation dated April 1, 1997**
2.1.2 Amendment to Articles of Incorporation dated November 20, 1997**
2.1.3 Amendment to Articles of Incorporation dated January 12, 1998**
2.1.4 Certificate of Designation re: Series A Preferred
Stock, dated February 4, 1998**
2.2 Bylaws of the registrant*
4.1 Specimen of Common Stock of Registrant*
4.2 Specimen of Series A Preferred Stock of Registrant**
6.1 Form of Investment Management Contract of ADAM
with Rea-Graham Balanced Fund, Inc.**
6.2 Form of Investment Sub-Advisory Agreement of ADAM
with Ladas & Hulings, Inc.
8.1 Plan and Agreement of Merger and Reorganization
among JBRI, ADAM, the Company and certain
shareholders of JBRI.*
9.1 Employment Agreement among Registrant, ADAM and James B. Rea, Jr.**
9.1.2 Employment Agreement between Registrant and Roland Kuettner.**
</TABLE>
- ----------
* Previously filed with the original Registration Statement on January 14,
1998
** Being filed herewith
<PAGE> 45
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant has caused this amendment to its registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized.
AMERICAN DIVERSIFIED HOLDINGS, INC.
(Registrant)
Date: May 7, 1998
By /s/ PETER HARTMANN
-------------------------------
Peter Hartmann, President
<PAGE> 1
EXHIBIT 2.1.1
Certificate of Amendment of
Articles of Incorporation
of
AMERICAN DIVERSIFIED HOLDINGS, INC.
Pursuant to the provisions of Nevada Revised Statutes, Title 7, Chapter 78, the
undersigned officers do hereby certify:
FIRST: The name of the Corporation is American Diversified Holdings, Inc.
SECOND: The Board of Directors of the Corporation duly adopted the following
resolutions on March 27, 1997:
RESOLVED, that it is advisable in the judgment of the Board of
Directors of the Corporation that number of authorized shares be
increased, and that in order to accomplish the same, Article third the
Articles of Incorporation be amended to read as follows:
"THIRD: The corporation is authorized to issue two classes of common
stock, to be designated as "voting" and "non-voting." The total number
of voting shares authorized is 1,000,000, all of which are without
nominal or par value, and are designated as Voting Common Stock. The
total number of non-voting shares authorized is 1,000,000, all of which
are without nominal or par value, and are designated as Non-Voting
Common Stock."
FURTHER RESOLVED, that a special meeting of stockholders having voting
power be and it is hereby called and that notice be given in the manner
prescribed by the Bylaws of the Corporation and by Nevada Revised
Statutes, Title 7, Chapter 78, unless the said stockholders shall waive
the notice of meeting in writing or unless all of said stockholders
shall dispense with the holding of a meeting and shall take action upon
the proposed amendments by a consent in writing signed by them; and
<PAGE> 2
FURTHER RESOLVED, that, in the event that the said stockholders shall
adopt the aforesaid proposed amendments by a vote to favor thereof by at
least a majority of the voting power or by a written consent in favor
thereof signed by all of them without a meeting, the Corporation is hereby
authorized to make by the hands of its President or a Vice President and
by its Secretary or an Assistant Secretary a certificate setting forth the
said amendments and to cause the name to be filed pursuant to the
provisions of Nevada Revised Statutes, Title 7, Chapter 72.
THIRD: The total number of outstanding shares having voting power of the
corporation is 1,000,000, and the total number of votes entitled to be cast by
the holders of all of said outstanding shares is .
FOURTH: The holders of all of the aforesaid total number of outstanding shares
having voting power, to wit, shares, dispensed with the holding of a meeting of
stockholders and adopted the amendments herein certified by a consent in
writing signed by all of them in accordance with the provisions of Nevada
Revised Statutes, Title 7, Section 78.320.
<PAGE> 3
Signed on March 27, 1997.
AMERICAN DIVERSIFIED HOLDINGS, INC.
By: /s/ PETER HARTMANN
------------------------------------
Peter Hartmann, President
/s/ WILLIAM SMITH
------------------------------------
William Smith, Secretary
STATE OF CALIFORNIA )
) SS.:
COUNTY OF )
On March 27, 1997, personally appeared before me, a Notary Public, for the State
and County aforesaid, Peter Hartmann, as President of American Diversified
Holdings, Inc. and William Smith as Secretary of American Diversified Holding,
Inc. who acknowledged that they executed the above instrument.
/s/ MARIA P. HOLANDEZ
------------------------------------
Notary Public
See Attached
"California All-Purpose Acknowledgment"
[Notarial Seal]
<PAGE> 4
CALIFORNIA ALL-PURPOSE ACKNOWLEDGEMENT
State of California
----------
County of San Diego
---------
On March 31, 1997 before me, MARIA P. HOLANDEZ, Notary Public
-------------- --------------------------------
Date Name and Title of Officer
(e.g., "Jane Doe, Notary Public")
personally appeared WILLIAM SMITH AND PETER HARTMANN
--------------------------------
???? of ????
[X] proved to me on the basis of satisfactory evidence to be the person(s) whose
name(s) are subscribed to the within
instrument and acknowledged to me that
they executed the same in their
authorized capacity(ies), and that by
their signature(s) on the instrument the
person(s) or the entity upon behalf of
[SEAL] which the person(s) acted, executed the
instrument.
WITNESS my hand and official seal.
/s/ MARIA P. HOLANDEZ
----------------------------------------
Signature of Notary Public
- ----------------------------------- OPTIONAL -----------------------------------
Though the information below is not required by law, it may prove valuable to
persons relying on the document and could prevent fraudulent removal and
???? of this form to another another document.
DESCRIPTION OF ATTACHED DOCUMENT
Title or Type of Document ______________________________________________________
Document Date: __________________________________ Number of Pages: _____________
Signer(s) Other Than Named Above: ______________________________________________
CAPACITY(IES) CLAIMED BY SIGNER(S)
<TABLE>
<S> <C>
Signer's Name: ________________________ Signer's Name: _______________________
[ ] Individual [ ] Individual
[ ] Corporate Officer [ ] Corporate Officer
Title(s): _________________________ Title(s): _________________________
[ ] Partner -- [ ] Limited [ ] General [ ] Partner -- [ ] Limited [ ] General
[ ] Attorney-in-Fact __________ [ ] Attorney-in-Fact __________
[ ] Trustee Right [ ] Trustee Left
[ ] Guardian or Conservator Thumbprint [ ] Guardian or Conservator Thumbprint
[ ] Other: ________________ of [ ] Other: ________________ of
Signer Signer
Top of thumb Top of thumb
here here
_______________________ __________ _______________________ __________
Signer Is Representing: Signer Is Representing:
___________________________ ___________________________
___________________________ __________ ___________________________ __________
illegible
</TABLE>
<PAGE> 1
EXHIBIT 2.1.2
FILED
BY THE OFFICE OF THE
SECRETARY OF STATE OF THE
STATE OF NEVADA
NOV 20 1997
NO. C2343-97
/s/ JEAN HELLER
- -------------------------------
JEAN HELLER, SECRETARY OF STATE
CERTIFICATE OF AMENDMENT OF
ARTICLES OF INCORPORATION
OF
AMERICAN DIVERSIFIED HOLDINGS, INC.
Pursuant to the provisions of Nevada Revised Statutes, Title 7, Chapter 78, the
undersigned officers do hereby certify:
FIRST: The name of the Corporation is: American Diversified Holdings, Inc.
SECOND: The Board of Directors of the Corporation duly adopted the following
resolutions on June 16, 1997:
RESOLVED, that it is advisable in the judgment of the Board of
Directors of the Corporation that number of authorized shares be
increased, and that, in order to accomplish the same, Article third
the Articles of Incorporation be amended to read as follows:
"THIRD: The corporation is authorized to issue two classes of common
stock, to be designated as "voting" and "non-voting" and one class of
non-voting preferred shares. The total number of voting shares
authorized is 11,000,000, all of which are without nominal or par
value, and are designated as Voting Common Stock. The total number of
non-voting shares authorized is 1,000,000, all of which are without
nominal or par value, and are designated as Non-Voting Common Stock.
The total number of preferred non-voting shares is 15,000,000, all of
which are with one dollar par value, and are designated as "Non-Voting
Preferred Stock."
FURTHER RESOLVED, that a special meeting of stockholders having voting
power be and it is hereby called and that notice be given in the
manner prescribed by the Bylaws of the Corporation and by Nevada
Revised Statutes, Title 78, Chapter 78, unless the said stockholders
shall waive the notice of meeting in writing or unless all of said
stockholders shall dispense with the holding of a meeting and shall
take action upon the proposed amendments by a consent in writing
signed by them; and
<PAGE> 2
- -2-
FURTHER RESOLVED, that in the event the said stockholders shall adopt
the aforesaid proposed amendments by a vote in favor thereof by at
least a majority of the voting power or by a written consent in favor
thereof signed by all of them without a meeting, the Corporation is
hereby authorized to make by the hands of its President or a Vice
President and by its Secretary or an Assistant Secretary a certificate
setting forth the said amendments and to cause the same to be filed
pursuant to the provisions of Nevada Revised Statutes, Title 7,
Chapter 78.
THIRD: The total number of outstanding shares having voting power of the
corporation is 1,000,000, and the total number of votes entitled to be cast by
the holders of all of said outstanding shares is 1,000,000.
FOURTH: The holders of all of the aforesaid total number of outstanding shares
having voting power, to wit, shares, dispensed with the holding of a meeting of
stockholders and adopted the amendments herein certified by a consent in writing
signed by all of them in accordance with the provisions of Nevada Revised
Statutes, Title 7, Section 78.320.
<PAGE> 3
AMERICAN DIVERSIFIED
Signed on June 16, 1997
AMERICAN DIVERSIFIED HOLDINGS, INC.
By: /s/ Peter Hartmann
-------------------------------
Peter Hartmann, President
/s/ Torsten Dittrich
-------------------------------
Torsten Dittrich, Secretary
STATE OF CALIFORNIA )
) SS:
COUNTY OF SAN DIEGO )
On September 15, 1997, personally appeared before me, a Notary Public, for the
State and County aforesaid, Peter Hartmann, as President of AMERICAN
DIVERSIFIED HOLDINGS, INC., who acknowledged that he executed the above
instrument.
/s/ Peter Hartmann
Subscribed and sworn to before me this /s/ Lydia O. San Jose
15th day of September, 1997 -------------------------------
Notary Public
/s/ Lydia O. San Jose
- -------------------------------
Notary Public to and for the
County of San Diego,
State of California
Notarial Seal
- -----------------------------
LYDIA O. SAN JOSE
COMM. #1087783
NOTARY PUBLIC CALIFORNIA
SAN DIEGO COUNTY
[ILLEGIBLE]
- -----------------------------
<PAGE> 4
AMERICAN DIVERSIFIED
Signed on June 16, 1997
AMERICAN DIVERSIFIED HOLDINGS, INC.
By: /s/ PETER HARTMANN
------------------------------------
Peter Hartmann, President
/s/ TORSTEN DITTRICH
------------------------------------
Torsten Dittrich, Secretary
On September 11, 1997, personally appeared before me, Notary in Berlin, Federal
Republic of Germany, Torsten Dittrich, as Secretary of AMERICAN DIVERSIFIED
HOLDINGS, INC., who acknowledged that he executed the above instrument.
[SIG]
------------------------------------
Notary
[Notarial Seal]
<PAGE> 5
AMERICAN DIVERSIFIED
Signed on June 16, 1997
AMERICAN DIVERSIFIED HOLDINGS, INC.
By: /s/ PETER HARTMANN
------------------------------------
Peter Hartmann, President
/s/ TORSTEN DITTRICH
------------------------------------
Torsten Dittrich, Secretary
On September 11, 1997, personally appeared before me, Notary in Berlin, Federal
Republic of Germany, Torsten Dittrich, as Secretary of AMERICAN DIVERSIFIED
HOLDINGS, INC., who acknowledged that he executed the above instrument.
[SIG]
------------------------------------
Notary
[Notarial Seal]
<PAGE> 1
EXHIBIT 2.1.3
CERTIFICATE OF AMENDMENT
(AFTER ISSUANCE OF STOCK)
TO
ARTICLES OF INCORPORATION
OF
AMERICAN DIVERSIFIED HOLDINGS, INC.
The undersigned, being the President and Secretary of American Diversified
Holdings, Inc., (the "Corporation") hereby declare that the original Articles of
Incorporation were filed with the Secretary of State of the State of Nevada on
February 5, 1997 under the name AMERICAN DIVERSIFIED HOLDINGS, INC. The Board of
Directors has subsequently amended the Articles of Incorporation on April 1,
1997 and November 20, 1997. The Board of Directors of said Corporation by
unanimous written consent, effected on the 20th day of December, 1997, adopted a
resolution to amend the Articles of Incorporation, as amended. The number of
shares of the Corporation's outstanding common stock entitled to vote on an
amendment to the Articles is 10,000,000. The following change and amendment have
been consented to and approved by a majority vote of the common stock
outstanding and entitled to vote thereon. The Third Article of the Corporation's
Articles of Incorporation is hereby amended and restated in its entirety as
follows:
"THIRD:
Section 1. Authorized Shares. This Corporation is authorized to
issue two classes of shares designated respectively "Common Stock"
and "Preferred Stock." The authorized number of shares of Common
Stock is 110,000,000 shares, having a par value of $.001 per share,
and the authorized number of shares of Preferred Stock is 50,000,000
shares, having a par value of $.001 per share.
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.
Section 2. Voting Rights of Stockholders. Each holder of the Common
Stock shall be entitled to one vote for each share of stock standing
in his name on the books of the Corporation. Each holder of
Preferred Stock shall be entitled to vote in the manner prescribed
by the Board of Directors.
1
<PAGE> 2
Section 3. Consideration for Shares. The Common Stock and Preferred
Stock shall be issued for such consideration, as shall be fixed from
time to time by the Board of Directors. In the absence of fraud, the
judgment of the Directors as to the value of any property for shares
shall be conclusive. When shares are issued upon payment of the
consideration fixed by the Board of Directors, such shares shall be
taken to be fully paid stock and shall be non-assessable. The
Articles shall not be amended in this particular."
THE UNDERSIGNED, being the President and Secretary of AMERICAN DIVERSIFIED
HOLDINGS, INC. hereby declare and certify that the facts herein stated are true,
and, accordingly, have each set their hand this 20th day of December, 1997.
2
<PAGE> 3
American Diversified Holdings, Inc.
Executed December 20, 1997. /s/ PETER HARTMANN
--------------------------------------
Peter Hartmann, President
STATE OF CALIFORNIA )
) ss.
COUNTY OF )
On December 20, 1997, before me, the undersigned, a notary public,
personally appeard Peter Hartmann, known to me, or proved to me on the basis of
satisfactory evidence, to be the person whose name is subscribed to this
instrument and acknowledged that he executed it.
/s/ WILLIAM J. ROBISON
--------------------------------------------
(Signature)
William J. Robison
----------------------------------------------
(Printed Name)
Notary Public in and for the State of
California.
My commission expires on Jan. 30, 2001.
(SEAL)
3
<PAGE> 4
American Diversified Holdings, Inc.
Executed December 24, 1997. By: /s/ THOMAS CORCOVELOS
----------------------------------
Thomas Corcovelos, Secretary
STATE OF CALIFORNIA )
) ss.
COUNTY OF )
On December 24, 1997, before me, the undersigned, a notary public,
personally appeard Peter Hartmann, known to me, or proved to me on the basis of
satisfactory evidence, to be the person whose name is subscribed to this
instrument and acknowledged that he executed it.
/s/ NANCY J. SCHUTTEE
--------------------------------------------
(Signature)
Nancy J. Schuttee
----------------------------------------------
(Printed Name)
Notary Public in and for the State of
California.
My commission expires on January 29, 1998.
(SEAL)
<PAGE> 1
EXHIBIT 2.1.4
CERTIFICATE OF DESIGNATION
OF
AMERICAN DIVERSIFIED HOLDINGS, INC.
Providing for the Powers, Designations, Preferences and
Relative, Participating, Optional and Other Special Rights,
and the Qualifications, Limitations or Restrictions Thereof
of Series A Preferred Stock
The undersigned James B. Rea, Jr. and Thomas Corcovelos, hereby certify
that:
ONE: They are the duly elected and acting Executive Vice President and
Secretary, respectively, of said Corporation.
TWO: The Board of Directors of the corporation (the "Corporation"),
pursuant to the provisions of its Articles of Incorporation, duly adopted the
following resolutions:
RESOLVED, that there is hereby established a series of the
Corporation's Series A Preferred Stock, par value $1.00 per share (the
"Series A Preferred Stock"), and to the extent that the powers,
designation, preferences and relative, participating, optional and other
special rights, and the qualifications, limitations and restrictions
thereof, of such series, are not fixed by the amended Articles of
Incorporation, they are hereby fixed as set forth as Exhibit 1 below.
THREE: The number of Series A Preferred Stock authorized shall be
5,000,000 shares and none of such shares are currently outstanding.
IN WITNESS WHEREOF, the undersigned have executed this certificate on this
3rd day of February, 1998.
American Diversified Holdings, Inc.
<PAGE> 2
American Diversified Holdings, Inc.
Executed February 3, 1998 By: /s/ JAMES B. REA, JR.
----------------------------------
James B. Rea, Jr.
Executive Vice President
State of California)
) ss.
County of Orange )
On February 3, 1998, before me, the undersigned, a notary public,
personally appeared James B. Rea, Jr. known to me, or proved to me on the basis
of satisfactory evidence, to be the person whose name is subscribed to this
instrument and acknowledged that he executed it.
/s/ KELLY J. WOODWARD
--------------------------------------------
(Signature)
Kelly J. Woodward
----------------------------------------------
(Printed Name)
Notary Public in and for the State of
California.
My commission expires 12-17-99.
(SEAL)
2
<PAGE> 3
American Diversified Holdings, Inc.
Executed January 28, 1998 By: /s/ THOMAS CORCOVELOS
-----------------------------------------
Thomas Corcovelos, Secretary
State of California )
) ss.
County of Los Angeles )
On January 28, 1998, before me, the undersigned, a notary public,
personally appeared Thomas Corcovelos, known to me, or proved to me on the basis
of satisfactory evidence, to be the person whose name is subscribed to this
instrument and acknowledged that he executed it.
/s/ R. STUART JOHNSON
--------------------------------------------
(Signature)
R. Stuart Johnson
----------------------------------------------
(Printed Name)
Notary Public in and for the State of
California.
My commission expires 12-5-2001.
(SEAL)
3
<PAGE> 4
EXHIBIT 1
TERMS AND CONDITIONS OF
SERIES A PREFERRED STOCK
I. Designation and Amount.
1. The distinctive serial designation of this series of Preferred
Stock shall be "Series A Convertible Redeemable Preferred Stock" (hereinafter
called "Series A Preferred Stock"). Each share of Series A Preferred Stock shall
be identical in all respects with the other shares of Series A Preferred Stock.
2. The number of shares in Series A Preferred Stock shall initially
be 5,000,000 shares of Series A Preferred Stock, par value $1.00 per share.
II. Dividend Provisions.
1. The holders of shares of Series A Preferred Stock shall be
entitled to receive, when and as declared by the Board of Directors, but only
out of funds legally available therefor, cumulative dividends at an annual rate
of Nine Cents ($0.09) per share, payable in two semi-annual installments in
arrears on the 1st day of January and July of each year, commencing January 1,
1998, unless such date is not a business day, in which event the dividend shall
be payable on the next business day. Such dividends shall accrue on each share
of Series A Preferred Stock from the date of its original issuance and shall
accrue from day to day, whether or not earned or declared.
2. Dividends on Series A Preferred Stock shall be cumulative. If any
dividend in respect of any previous semi-annual period or periods shall not have
been paid on, or declared and set apart for, all shares of Series A Preferred
Stock at the time outstanding, the deficiency shall be fully paid or declared
and set apart for such shares before the Corporation makes any "distribution"
(as hereinafter defined) to holders of any Common stock, or any other series or
class of the Corporation's stock hereafter issued that ranks junior as to
dividends payable solely in Common stock or junior dividend stock. As used in
this paragraph, the term "distribution" shall mean the transfer of such cash or
property without consideration, whether by way of dividend or otherwise (except
a dividend in shares of the Corporation) or the purchase or redemption of shares
of the Corporation for cash or property, including any such transfer, purchase
or redemption by a subsidiary of the Corporation. The time of any distribution
by way of dividend shall be the date of declaration thereof and the time of
distribution by purchase or redemption of shares shall be the day cash or
property is transferred by the Corporation, whether or not pursuant to a
contract of an earlier date; provided that where a negotiable debt security is
issued in exchange for shares the time of distribution is the date when the
Corporation acquires the shares in such exchange.
3. Dividends in arrears for any past dividend period may be declared
and paid at any time. The amount of dividends payable per share of Series A
Preferred Stock for each semi-annual period will be computed by dividing the
annual dividend amount by two. The amount of dividends payable for the initial
dividend period and any period shorter than full semi-annual dividend period
4
<PAGE> 5
shall be computed on the basis of a 365-day year. No interest will be payable in
respect of any dividend on the Series A Preferred Stock which may be in arrears.
4. The Series A Preferred Stock will have priority as to dividends
over the Common Stock. The Corporation shall not hereafter create any class or
series of its stock on a parity with or senior to the Series A Preferred Stock
with respect to the payment of dividends ("parity dividend stock") so long as
any shares of the Series A Preferred Stock are outstanding.
III. Liquidation Preference.
(a) In the event of any liquidation, dissolution or winding up of
this Corporation, either voluntary or involuntary, the holders of Series A
Preferred Stock shall be entitled to receive, out of the assets of the
Corporation available for distribution to its shareholders, prior and in
preference to any distribution of any of the assets of this Corporation to the
holders of Common Stock by reason of their ownership thereof, an amount per
share equal to the sum of (i) $1.00 for each outstanding share of Series A
Preferred Stock (the "Original Series A Issue Price"). If upon the occurrence of
such event, the assets and funds thus distributed among the holders of the
Series A Preferred Stock shall be insufficient to permit the payment to such
holders of the full aforesaid preferential amounts, then, the entire assets and
funds of the Corporation legally available for distribution shall be distributed
ratably among the holders of the Series A Preferred Stock in proportion to the
amount of such stock owned by each such holder.
(b) After the distributions to the holders of Series A Preferred
Stock required in subparagraph (a) of this Article III above have been paid, the
remaining assets of the Corporation available for distribution to shareholders
shall be distributed ratably among the holders of other series of preferred
stock, if any, and then among holders of Common Stock based on the number of
shares of Common Stock and such shares of preferred stock held by each such
holder.
(c)(i) For purposes of this Article III, a liquidation, dissolution
or winding up of this Corporation shall be deemed to be occasioned by, or to
include, (A) the acquisition of the Corporation by another entity by means of
any transaction or series of related transactions (including, without
limitation, any reorganization, merger or consolidation but, excluding any
merger effected exclusively for the purpose of changing the domicile of the
Corporation or merger into or consolidation with a wholly-owned subsidiary of
the Corporation); or (B) a sale of all or substantially all of the assets of the
Corporation (with the transaction set forth in (A) and (B) collectively referred
to herein as a "Corporate Transaction"), unless the Corporation's shareholders
of record as constituted immediately prior to such Corporate Transaction,
immediately after such Corporate Transaction (by virtue of securities issued as
consideration for the Corporate Transaction or otherwise) hold at least 50% of
the voting power of the surviving or acquiring entity.
(ii) In any of such events, if the consideration received by the
Corporation in a Corporate Transaction is other than cash, its value will be
deemed by its fair market value. Any securities shall be valued as follows:
(A) Securities not subject to investment letter or other
similar restrictions on free marketability covered by (B) below:
5
<PAGE> 6
(1) If traded on a securities exchange or through the
Nasdaq National Market System or Nasdaq SmallCap, the value shall be deemed to
be the average of the closing prices of the securities on such exchange over the
thirty (30) day period ending three (3) days prior to the closing;
(2) If actively traded over-the-counter, the value shall
be deemed to be the average of the closing bid or sale prices (whichever is
applicable) over the thirty (30) day period ending three (3) days prior to the
closing; and
(3) If there is no active public market, the value shall
be the fair market value thereof, as mutually determined by the Corporation
(acting by its Board of Directors) and the holders of at least a majority of the
voting power of all then outstanding shares of Series A Preferred Stock.
(B) The method of valuation of securities subject to
investment letter or other restrictions on free marketability (other than
restrictions arising solely by virtue of a shareholder's status as an affiliate
or former affiliate) shall be to make an appropriate discount (as mutually
determined by the Corporation and the holders of at least a majority of the
voting power of all then outstanding shares of Series A Preferred Stock or which
shall be based upon the opinion of an independent investment banking firm
retained by the Corporation) from the market value determined as above in
(A)(1), (2) or (3) to reflect the approximate fair market value thereof, as
mutually determined by the Corporation and the holders of at least a majority of
the voting power of all then outstanding shares of Series A Preferred Stock.
(iii) The Corporation shall give each holder of record of Series
A Preferred Stock written notice of such impending transaction not later than
twenty (20) days prior to the shareholders' meeting called to approve such
transaction, or twenty (20) days prior to the closing of such transaction,
whichever is earlier, and shall also notify such holders in writing of the final
approval of such transaction. The first of such notices shall describe the
material terms and conditions of the impending transaction and the provisions of
this Article III, and the Corporation shall thereafter give such holders prompt
notice of any material changes. The transaction shall in no event take place
sooner than twenty (20) days after the Corporation has given the first notice
provided for herein or sooner than ten (10) days after the Corporation has given
notice of any material changes provided for herein; provided, however, that such
periods may be shortened upon the written consent of the holders of Series A
Preferred Stock that are entitled to such notice rights or similar notice rights
and that represent at least a majority of all then outstanding shares of such
Series A Preferred Stock.
IV. Redemption.
(a) The Corporation may at its option, (subject to all of the
provision of this Article IV) redeem all or any portion of the Series A
Preferred Stock then outstanding, at the price of one dollar ($1.00) per share,
payable in cash, plus any accrued and unpaid dividends as of the date set for
such redemption.
(b) At least 30 but not more than 60 days prior to the date fixed by
the Corporation's Board of Directors for redemption of any of the Series A
Preferred Stock ( the "Redemption Date"), written notice shall be hand delivered
or mailed, first class postage prepaid, to
6
<PAGE> 7
each holder of record of the Series A Preferred Stock to be redeemed at the
address last shown on the records of the Corporation for such holder or given by
the holder to the Corporation for the purpose of notice, notifying such holder
of the redemption to be effected and specifying (a) the Redemption Date, (b) the
redemption price, (c) the place or places at which payment may be obtained, (d)
the method used or to be used in determining what shares are to be redeemed in
the event that less than all share are to be redeemed, (e) that on and after the
Redemption Date dividends will cease to accrue on such shares, (f) the then
effective conversion rate of the shares to be redeemed, (g) the date on which
such holder's conversion rights as to such shares terminate, and (h) calling
upon such holder to surrender to the Corporation, in the manner and at the place
designated, his certificate or certificates represent the shares to be redeemed
(the "Redemption Notice").
(c) Any Redemption Notice that is mailed as herein provided shall be
conclusively presumed to have been duly given, whether or not the holder
receives it; and failure to give a Redemption Notice by mail to the holders of
any shares designated for redemption, or any defect in such Redemption Notice,
shall not effect the validity of the proceeding for the redemption of any other
share of Series A Preferred Stock.
(d) Any holder of a share of Series A Preferred Stock shall have the
right, following the mailing of any Redemption Notice, to convert such shares of
Series A Preferred Stock into shares of Common Stock of the Corporation as
provided in Article V below provided only that such holder shall have given the
Corporation written notice of intent to so convert prior to the close of
business on the business day prior to the Redemption Date relating to such
share.
(e) On or after the date fixed for redemption as stated in such
notice, each holder of the shares called for redemption shall surrender the
certificates evidencing such shares to the Corporation at the place designated
in such notice and shall thereupon be entitled to receive payment of the
redemption price. If less than all the shares represented by any such
surrendered certificate or certificates are redeemed, a new certificate shall be
issued representing the unredeemed shares.
(f) From and after the Redemption Date, all rights of the holders of
the Series A Preferred Stock so redeemed (except the right to receive the
redemption price without interest upon surrender of their certificate or
certificates) shall terminate with respect to such shares, and such shares shall
not thereafter be transferred on the books of the Corporation or be deemed to be
outstanding for any purpose whatsoever, unless, (a) a given holder shall have
given notice of intention to convert as provided in Article V, below or (b)
there shall have been a default in payment of the redemption price. Any shares
of Series A Preferred Stock not redeemed, shall remain outstanding and entitled
to all the rights and preferences provided herein.
(g) If fewer than all of the outstanding shares of Series A
Preferred Stock are to be redeemed, the Corporation shall designates those
shares to be redeemed pro rata or by lot or in such other manner as the Board of
Directors may determine. There shall be no mandatory redemption, retirement or
sinking fund obligation of the Corporation with respect to the Series A
Preferred Stock. In the event that the Corporation is in arrears on the payment
of accrued and unpaid dividends on the Series A Preferred Stock, it may not
redeem any of the then outstanding shares of the Series A Preferred Stock until
all such accrued and unpaid dividends have been paid in full on all outstanding
shares of Series A Preferred Stock, unless the holders of a majority of the then
outstanding shares of Series A Preferred Stock shall otherwise consent, in
writing.
7
<PAGE> 8
V. Conversion. The holders of the Series A Preferred Stock shall have
conversion rights as follows (the "Conversion Rights"):
(a) Right to Convert. The Series A Preferred Stock shall be
convertible, at the option of the holder thereof, at any time, at the office of
this Corporation or any transfer agent for such stock, into fully paid and
nonassessable shares of Common Stock by converting three (3) shares of Series A
Preferred Stock for one (1) share of Common Stock. The initial Conversion Price
per share for shares of Series A Preferred Stock will be the Original Series A
Issue Price; provided, however, that the Conversion Price for the Series A
Preferred Stock shall be subject to adjustment as set forth in subsections V(d)
and V(e).
(b) Automatic Conversion. Each share of Series A Preferred Stock
shall automatically be converted into shares of Common Stock at the Conversion
Price at the time in effect for such Series A Preferred Stock immediately upon
the closing of a sale of the Corporation's Common Stock in a firm commitment,
underwritten public offering pursuant to an effective registration statement
under the Securities Act of 1933, as amended, that results in net proceeds to
the Corporation of at least $10,000,000.
(c) Mechanics of Conversion. Before any holder of Series A Preferred
Stock shall be entitled to convert the same into shares of Common Stock, he
shall surrender the certificate or certificates therefor, duly endorsed, at the
offices of this Corporation or of any transfer agent for the Series A Preferred
Stock, and shall give written notice to this Corporation at its principal
corporate office, of the election to convert the same and shall state therein
the number of shares of Preferred Stock to be converted and the name or names in
which the certificate or certificates for shares of Common Stock are to be
issued. This Corporation shall, as soon as practicable thereafter, issue and
deliver at such office to such holder of Series A Preferred Stock, or to the
nominee or nominees of such holder, a certificate or certificates for the number
of shares of Common Stock to which such holder shall be entitled as aforesaid.
Such conversion shall be deemed to have been made immediately prior to the close
of business on the date of such surrender of the shares of Series A Preferred
Stock to be converted, and the person or persons entitled to receive the shares
of Common Stock issuable upon such conversion shall be treated for all purposes
as the record holder or holders of such shares of Common Stock as of such date.
If the conversion is in connection with an underwritten offering of securities
registered pursuant to the Securities Act of 1933 as provided for in paragraph
V(b) above, the conversion may, at the option of any holder tendering Series A
Preferred Stock for conversion, be conditioned upon the closing with the
underwriters of the sale of securities pursuant to such offering, in which event
the person(s) entitled to receive the Common Stock upon conversion of the Series
A Preferred Stock shall not be deemed to have converted such Series A Preferred
Stock until immediately prior to the closing of such sale of securities.
(d) Conversion Price Adjustments of Series A Preferred Stock for
Certain Dilutive Issuances, Splits and Combinations. The Conversion Price of the
Series A Preferred Stock shall be subject to adjustment from time to time as
follows:
(i)(A) If the Corporation shall issue, after the date upon which
any shares of Series A Preferred Stock were first issued (the "Purchase Date"
with respect to such series), any Additional Stock (as defined below) without
consideration or for a consideration per share less than the Conversion Price
for such series in effect immediately prior to the issuance of such Additional
Stock,
8
<PAGE> 9
the Conversion Price for such series in effect immediately prior to each such
issuance shall forthwith (except as otherwise provided in this clause (i)) be
adjusted to a price equal to the price paid per share determined by multiplying
the Conversion Price by a fraction (x) the numerator of which shall be the
number of shares of Common Stock outstanding immediately prior to the issuance
of such Additional Stock plus the number of shares of Common Stock which the
aggregate consideration received by the Corporation for the total number of
shares of Additional Stock so issued would purchase at the Conversion Price in
effect immediately prior to such issuance, and (y) the denominator of which
shall be the number of shares of Common Stock outstanding immediately prior to
such issuance of Additional Stock plus the number of shares of such Additional
Stock so issued. For purposes of the above determination, the number of shares
of Common Stock outstanding immediately prior to such issuance shall be
calculated as if all shares of Series A Preferred Stock had been fully converted
into shares of Common Stock immediately prior to such issuance at the Conversion
Price then in effect.
(B) No adjustment of the Conversion Price for the Series A
Preferred Stock shall be made in an amount less than one cent ($0.01) per share,
provided that any adjustments which are not required to be made by reason of
this sentence shall be carried forward and shall be either taken into account in
any subsequent adjustment made prior to three (3) years from the date of the
event giving rise to the adjustment being carried forward, or shall be made at
the end of three (3) years from the date of the event giving rise to the
adjustment being carried forward, and upon such adjustment the Conversion Price
shall be rounded up or down to the nearest cent. Except to the limited extent
provided for in subsections (E)(3) and (E)(4), no adjustment of such Conversion
Price pursuant to this subsection V(d)(i) shall have the effect of increasing
the Conversion Price above the Conversion Price in effect immediately prior to
such adjustment.
(C) In the case of the issuance of Common Stock for cash, the
consideration shall be deemed to be the amount of cash paid therefor before
deducting any reasonable discounts, commissions or other expenses allowed, paid
or incurred by this Corporation for any underwriting or otherwise in connection
with the issuance and sale thereof.
(D) In the case of the issuance of the Common Stock for a
consideration in whole or in part other than cash, the consideration other than
cash shall be deemed to be the fair value thereof as determined by the Board of
Directors irrespective of any accounting treatment.
(E) In the case of the issuance of options (whether before, on
or after the applicable Purchase Date) to purchase or rights to subscribe for
Common Stock, securities by their terms convertible into or exchangeable for
Common Stock or options to purchase or rights to subscribe for such convertible
or exchangeable securities, the following provisions shall apply for all
purposes of this subsection V(d)(i) and subsection V(d)(ii):
(1) The aggregate maximum number of shares of Common Stock
deliverable upon exercise (assuming the satisfaction of any conditions to
exercisability, including without limitation, the passage of time, but without
taking into account potential antidilution adjustments) of such options to
purchase or rights to subscribe for Common Stock shall be deemed to have been
issued at the time such options or rights were issued and for a consideration
equal to the consideration (determined in the manner provided in subsections
V(d)(i)(C) and (d)(i)(D)), if any, received by the Corporation upon the issuance
of such options or rights plus the minimum exercise
9
<PAGE> 10
price provided in such options or rights (without taking into account potential
antidilution adjustments) for the Common Stock covered thereby.
(2) The aggregate maximum number of shares of Common Stock
deliverable upon conversion of or in exchange (assuming the satisfaction of any
conditions to convertibility or exchangeability, including, without limitation,
the passage of time, but without taking into account potential antidilution
adjustments) for any such convertible or exchangeable securities or upon the
exercise of options to purchase or rights to subscribe for such convertible or
exchangeable securities and subsequent conversion or exchange thereof shall be
deemed to have been issued at the time such securities were issued or such
options or rights were issued and for a consideration equal to the
consideration, if any, received by the Corporation for any such securities and
related options or rights (excluding any cash received on account of accrued
interest or accrued dividends), plus the minimum additional consideration, if
any, to be received by the Corporation (without taking into account potential
antidilution adjustments) upon the conversion or exchange of such securities or
the exercise of any related options or rights (the consideration in each case to
be determined in the manner provided in subsections V(d)(i)(C) and (d)(i)(D)).
(3) In the event of any change in the number of shares of
Common Stock deliverable or in the consideration payable to this Corporation
upon exercise of such options or rights or upon conversion of or in exchange for
such convertible or exchangeable securities, including, but not limited to, a
change resulting from the antidilution provisions thereof, the Conversion Price
of the Series A Preferred Stock, to the extent in any way affected by or
computed using such options, rights or securities, shall be recomputed to
reflect such change, but no further adjustment shall be made for the actual
issuance of Common Stock or any payment of such consideration upon the exercise
of any such options or rights or the conversion or exchange of such securities.
(4) Upon the expiration of any such options or rights, the
termination of any such rights to convert or exchange or the expiration of any
options or rights related to such convertible or exchangeable securities, the
Conversion Price of the Series A Preferred Stock, to the extent in any way
affected by or computed using such options, rights or securities or options or
rights related to such securities, shall be recomputed to reflect the issuance
of only the number of shares of Common Stock (and convertible or exchangeable
securities which remain in effect) actually issued upon the exercise of such
options or rights, upon the conversion or exchange of such securities or upon
the exercise of the options or rights related to such securities.
(5) The number of shares of Common Stock deemed issued and
the consideration deemed paid therefor pursuant to subsections V(d)(i)(E)(1) and
(2) shall be appropriately adjusted to reflect any change, termination or
expiration of the type described in either subsection V(d)(i)(E)(3) or (4).
(ii) "Additional Stock" shall mean any shares of Common Stock
issued (or deemed to have been issued pursuant to subsection V(d)(i)(E)) by this
Corporation after the Purchase Date other than:
(A) Upon conversion of the Series A Preferred Stock or as a
dividend or distribution thereon;
10
<PAGE> 11
(B) Common Stock issued pursuant to a transaction described in
subsection V(d)(iii) hereof;
(C) shares of Common Stock issuable to or issued to employees,
consultants, directors or vendors (if in transactions with primarily
non-financing purposes) of this Corporation directly or pursuant to a stock
option plan or restricted stock plan approved by the Board of Directors of this
Corporation at any time when the total number of shares of Common Stock so
issuable or issued (and not repurchased at cost by the Corporation in connection
with the termination of employment) does not exceed One Million (1,000,000)
shares, in the aggregate.
(D) shares of Common Stock issued or issuable in a firm
commitment public offering in connection with which all outstanding shares of
Series A preferred Stock will be converted to Common Stock as provided in
Section V(b) above.
(iii) In the event the Corporation should at any time or from
time to time after the Purchase Date fix a record date for the effectuation of a
split or subdivision of the outstanding shares of Common Stock, receive a
dividend or other distribution payable in additional shares of Common Stock or
other securities or rights convertible into, or entitling the holder thereof to
receive directly or indirectly, additional shares of Common Stock (hereinafter
referred to as "Common Stock Equivalents") without payment of any consideration
by such holder for the additional shares of Common Stock or the Common Stock
Equivalents (including the additional shares of Common Stock issuable upon
conversion or exercise thereof), then, as of such record date (or the date of
such dividend distribution, split or subdivision if no record date is fixed),
the Conversion Price of the Series A Preferred Stock shall be appropriately
decreased so that the number of shares of Common Stock issuable on conversion of
each share of such series shall be increased in proportion to such increase of
the aggregate of shares of Common Stock outstanding and those issuable with
respect to such Common Stock Equivalents with the number of shares issuable with
respect to Common Stock Equivalents determined from time to time in the manner
provided for deemed issuances in subsection V(d)(i)(E).
(iv) If the number of shares of Common Stock outstanding at any
time after the Purchase Date is decreased by a combination of the outstanding
shares of Common Stock, then, following the record date of such combination, the
Conversion Price for the Series A Preferred Stock shall be appropriately
increased so that the number of shares of Common Stock issuable on conversion of
each share of such series shall be decreased in proportion to such decrease in
outstanding shares.
(e) Other Distributions. In the event this Corporation shall declare
a distribution payable in securities of other persons, evidences of indebtedness
issued by this Corporation or other persons, assets (excluding cash dividends)
or options or rights not referred to in subsection 4(d)(iii), then, in each such
case for the purpose of this subsection 4(e), the holders of the Series A
Preferred Stock shall be entitled to a proportionate share of any such
distribution as though they were the holders of the number of shares of Common
Stock of the Corporation into which their shares of Series A Preferred Stock are
convertible as of the record date fixed for the determination of the holders of
Common Stock of the Corporation entitled to receive such distribution.
11
<PAGE> 12
(f) Recapitalization. If at any time or from time to time there
shall be a recapitalization of the Common Stock (other than a subdivision,
combination or merger or sale of assets transaction provided for elsewhere in
this Section 4 or Section 2) provision shall be made so that the holders of the
Series A Preferred Stock shall thereafter be entitled to receive upon conversion
of the Series A Preferred Stock the number of shares of stock or other
securities or property of the Corporation or otherwise, to which a holder of
Common Stock deliverable upon conversion would have been entitled on such
recapitalization. In any such case, appropriate adjustment shall be made in the
application of the provisions of this Section 4 with respect to the rights of
the holders of the Series A Preferred Stock after the recapitalization to the
end that the provisions of this Section 4 (including adjustment of the
Conversion Price then in effect and the number of shares purchasable upon
conversion of the Series A Preferred Stock) shall be applicable after that event
as nearly equivalent as may be practicable.
(g) No Impairment. This Corporation will not, by amendment of its
Articles of Incorporation or through any reorganization, recapitalization,
transfer or assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed hereunder by this
Corporation, but will at all times in good faith assist in the carrying out of
all the provisions of this Section 4 and in the taking of all such action as may
be necessary or appropriate in order to protect the conversion rights of the
holders of the Series A Preferred Stock against impairment.
(h) No Fractional Shares and Certificate as to Adjustments.
(i) No fractional shares shall be issued upon the conversion of
any share or shares of the Series A Preferred Stock, and the number of shares of
Common Stock to be issued shall be rounded to the nearest whole share. Whether
or not fractional shares are issuable upon such conversion shall be determined
on the basis of the total number of shares of Series A Preferred Stock the
holder is at the time converting into Common Stock and the number of shares of
Common Stock issuable upon such aggregate conversion.
(ii) Upon the occurrence of each adjustment or readjustment of
the Conversion Price of Series A Preferred Stock pursuant to this Section 4,
this Corporation, at its expense, shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and prepare and furnish to each
holder of Series A Preferred Stock a certificate setting forth such adjustment
or readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. This Corporation shall, upon the written request at any
time of any holder of Series A Preferred Stock, furnish or cause to be furnished
to such holder a like certificate setting forth (A) such adjustment and
readjustment, (B) the Conversion Price for such series of Preferred Stock at the
time in effect, and (C) the number of shares of Common Stock and the amount, if
any, of other property which at the time would be received upon the conversion
of a share of Series A Preferred Stock.
(i) Notices of Record Date. In the event of any taking by this
Corporation of a record of the holder of any class of securities for the purpose
of determining the holders thereof who are entitled to receive any dividend
(other than a cash dividend) or other distribution, any right to subscribe for,
purchase or otherwise acquire any shares of stock of any class or any other
securities or property, or to receive any other right, this Corporation shall
mail to each holder of Series A Preferred Stock, at least twenty (20) days prior
to the date specified therein, a notice specifying the date on which
12
<PAGE> 13
any such record is to be taken for the purpose of such dividend, distribution or
right, and the amount and character of such dividend, distribution or right.
(j) Reservation of Stock Issuable Upon Conversion. This Corporation
shall at all times reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the conversion of
the shares of the Series A Preferred Stock, such number of its share of Common
Stock as shall from time to time be sufficient to effect the conversion of all
outstanding shares of the Series A Preferred Stock; and if at any time the
number of authorized but unissued shares of Common Stock shall not be sufficient
to effect the conversion of all then outstanding shares of the Series A
Preferred Stock, in addition to such other remedies as shall be available to the
holder of such Series A Preferred Stock, this Corporation will take such
corporate action as may, in the opinion of its counsel, be necessary to increase
its authorized but unissued shares of Common Stock to such number of shares as
shall be sufficient for such purposes, including without limitation, engaging in
best efforts to obtain the requisite shareholder approval of any necessary
amendment to these articles.
(k) Notices. Any notice required by the provisions of this Section 4
to be given to the holders of shares of Series A Preferred Stock shall be deemed
given if deposited in the United States mail, postage prepaid, and addressed to
each holder of record at his address appearing on the books of this Corporation.
VI. Voting Rights. The holders of each share of Series A Preferred Stock
shall have no voting rights until such time as the shares of Series A Preferred
Stock are converted into shares of Common Stock in accordance with Article V.
VII. Status of Converted or Redeemed Stock. In the event any shares of
Series A Preferred Stock are redeemed, purchased or otherwise acquired by the
Corporation (including shares surrendered for conversion) such shares shall be
canceled and thereupon restored to the status of authorized but unissued shares
of preferred stock undesignated as to series, and such shares may thereafter be
reissued as part of a new series of preferred stock to be created by the Board
of Directors, but not as shares of Series A Preferred Stock.
13
<PAGE> 1
EXHIBIT 4.2
ADH- AMERICAN DIVERSIFIED HOLDINGS, INC. SERIES
SERIES A SERIES A
PREFERRED STOCK PREFERRED STOCK
INCORPORATED UNDER THE LAWS SEE REVERSE FOR CURRENT DEFINITIONS
OF THE STATE OF NEVADA CUSIP 02541N20 0
THIS CERTIFIES THAT
is the Owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE SERIES A PREFERRED STOCK,
$1.00 PAR VALUE PER SHARE OF
AMERICAN DIVERSIFIED HOLDINGS, INC.
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this Certificate properly
endorsed. This Certificate is not valid unless countersigned by the Transfer
Agent and registered by the Registrar.
Witness the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
SECRETARY [SEAL] PRESIDENT
COUNTERSIGNED AND REGISTERED:
CONTINENTAL STOCK TRANSFER & TRUST COMPANY
(JERSEY CITY, N.J.)
TRANSFER AGENT
AND REGISTRAR
BY
AUTHORIZED OFFICER
<PAGE> 2
AMERICAN DIVERSIFIED HOLDINGS, INC.
THE SHARES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE
"SECURITIES ACT") AND MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO,
OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS (AS DEFINED IN REGULATION S UNDER
THE SECURITIES ACT) EXCEPT PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION
NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT.
In addition, the Corporation will furnish to any shareholder, upon request
and without charge, a statement of the designations, preferences, limitations
and relative rights of the shares of each class authorized to be issued, and the
variations in the relative rights and preferences between the shares of each
class or series of any class so far as the same have been fixed and determined
by the Board of Directors, pursuant to the authority vested by the Certificate
of Incorporation in the Board to fix and determine the relative rights and
preferences of such class or series and any subsequent class or series.
The following abbreviations, when used in the inscription on the face of
this Certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT - _______________ Custodian _______________
(Cust) (Minor)
TEN ENT - as tenants by the entireties under Uniform Gifts to Minors
Act _________________________
JT TEN - as joint tenants with right of (State)
survivorship and not as tenants
in common
</TABLE>
Additional abbreviations may also be used though not in the above list.
For Value Received, ______________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
______________________________________
| |
| |
|____________________________________|__________________________________________
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE)
________________________________________________________________________________
_________________________________________________________________________ Shares
of the Stock represented by the within Certificate, and do hereby irrevocably
constitute and appoint
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within-named Corporation with
full power of substitution in the premises.
Dated: ________________________________
_________________________________________
NOTICE: THE SIGNATURE OF THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME AS WRITTEN
UPON THE FACE OF THE CERTIFICATE IN
EVERY PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER.
SIGNATURE(S) GUARANTEED
By _______________________________________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(Banks, Stockbrokers, Savings and Loan Associations and Credit Unions) WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM PURSUANT TO
S.E.C. RULE 17Ad-15.
<PAGE> 1
EXHIBIT 6.1
INVESTMENT ADVISORY AGREEMENT
AGREEMENT made as of the 1st day of April, 1998, between REA-GRAHAM FUNDS,
INC. (hereinafter referred to as the "Fund") and AMERICAN DIVERSIFIED ASSET
MANAGEMENT, INC., a corporation organized under the laws of the State of Nevada
(hereinafter referred to as the "Investment Adviser").
1. The Investment Adviser agrees, during the life of this Agreement, to
furnish the Fund with investment research, advice and supervision
and will continuously furnish the Fund with an investment program
for the assets of the Fund consistent with the provisions of the
Articles of Incorporation of the Fund and the investment policies
adopted and declared by its Board of Directors.
2. The Investment Adviser is not required to furnish any overhead items
or facilities for the Fund including trading desk facilities or
daily pricing. In rendering such advisory services to the Fund
pursuant to this Agreement, the Investment Adviser may employ,
retain or otherwise avail itself of the services or facilities of
other persons or organizations for the purpose of providing itself
or the Fund with such statistical and other factual information,
such advice regarding economic factors and trends, such advice as to
occasional transactions in specific securities and other properties
and assets, or such other information, advice or assistance as the
Adviser may deem necessary, appropriate or convenient for the
discharge of its overall responsibilities with respect to the Fund
and the other accounts which it or its affiliates serve as
investment adviser.
3. In addition to being responsible for supplying recommendations
regarding the purchase and sale of securities by the Fund, the
Adviser shall recommend brokers and dealers for execution of the
Fund's portfolio transactions. The foremost consideration in making
such recommendations will be the Fund's obtaining best price and
execution. Secondarily, the Adviser may take into account certain
additional services provided by broker-dealers to the Fund. The
Adviser and any person performing executive, administrative or
trading functions for the Fund, whose services are made available to
the Fund by the Adviser, are specifically authorized to recommend to
the Fund that it allocate brokerage and principal business to firms
that provide such services or facilities which, if accepted, might
cause the Fund to pay a member of a securities exchange or any other
securities broker or dealer an amount of commission or "mark-up" for
effecting the securities transaction in excess of the amount of
commission, or at a less advantageous price another member of the
exchange, broker or dealer would have charged for effecting that
transaction, if the Adviser or such person determine in good faith
that such amount of commission, or "mark-up", as the case may be, is
reasonable in relation to the value of the brokerage and research
(as such services
<PAGE> 2
are defined in Section 28(e) of the securities and Exchange Act of
1934) provided by ouch member, broker or dealer, viewed in terms of
either that particular transaction or the Adviser's evaluation of
such person's overall responsibilities with respect to accounts as
to which the Adviser or such person exercise investment discretion
(as that term is defined in Section 3(a)(35) of the Securities
Exchange Act of 1934).
4. The Fund may purchase and/or sell many securities which are also
purchased or sold by the Investment Adviser, or its affiliates or
other investment advisory clients. The orders for all such
securities transactions will be placed for execution by methods so
as to be impartial and fair for all parties.
5. In the absence of willful misfeasance, bad faith or gross negligence
on the part of the Investment Adviser, or of reckless disregard of
its obligations hereunder, the Investment Adviser shall have no
liability to the Fund or any shareholder of the Fund for any error
of judgment, mistake of law, or any loss arising out of any
investment or for any other act or omission in the performance by
the Investment Adviser of its duties under this Agreement.
6. The Fund agrees, during the life of this Agreement, to pay to the
investment Adviser as compensation for such services a fee of 1/12th
of 1% monthly (equivalent to 1% annually) on the first $20,000,000
of the net assets of the Fund as of the close of business on the
last business day of each calendar month during the Fund's fiscal
year, reduced to 1/12th of .75% monthly (equivalent to .75%
annually) of such net assets in excess of $20,000,000 up to
$100,000,000, reduced to 1/12th of .5% monthly (equivalent to .5%
annually) of such net assets in excess of $100,000,000 up to
$200,000,000, and reduced to 1/12th of .45% monthly (equivalent to
.45% annually) of all such net assets in excess of $200,000,000.
7. This Agreement shall remain in full force and effect until two years
from the date hereof and thereafter from year to year to the extent
such continuance is approved annually by the Board of Directors of
the Fund or by vote of a majority of the outstanding voting
securities of the Fund (as defined by the Investment Company Act of
1940) and also, in either event, approval by a majority of those
Directors who are not parties to the Contract or interested persons
of any such party.
8. This Agreement may be terminated by the Fund at any time on sixty
(60) day's written notice without payment of penalty, provided that
such termination by the Fund shall be directed or approved by the
vote of a majority of the Directors of the Fund in office at the
time or by the vote of a majority of the outstanding voting
securities of the Fund (as defined by the Investment Company Act of
1940).
<PAGE> 3
9. This Agreement shall automatically and immediately terminate in the
event of its assignment.
10. The Investment Adviser will maintain its books and records or
duplicate copies thereof relating to the Fund and will comply with
Section 31 of the Investment Company Act of 1940 and the rules
thereunder.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their duly authorized officers and their respective corporate
seals to be hereunto duly affixed and attested.
(Seal) REA-GRAHAM FUNDS, INC., on behalf of
ATTEST: Rea-Graham Balanced Fund
By:
- --------------------------- ------------------------------------
Assistant Secretary James B. Rea, Jr., President
(Seal) AMERICAN DIVERSIFIED ASSET
ATTEST: MANAGEMENT, INC.
By:
- --------------------------- ------------------------------------
Secretary James B. Rea, Jr., President
<PAGE> 1
EXHIBIT 6.2
SUB-ADVISORY AGREEMENT
AGREEMENT made this 1st day of April, 1998, between American
Diversified Asset Management, Inc. (the "Adviser") and Ladas & Hulings, Inc.
(the "Sub-Adviser").
WHEREAS, Rea-Graham Funds, Inc. (the "Company") is registered as an
open-end, management investment company under the Investment Company Act of
1940, as amended (the "1940 Act"); and
WHEREAS, Rea-Graham Balanced Fund (the "Fund") is a separate
investment series of the Company; and
WHEREAS, the Adviser has been appointed investment adviser to the
Fund; and
WHEREAS, the Adviser desires to retain the Sub-Adviser to assist it
in the provision of a continuous investment program for the Fund and the
Sub-Adviser is willing to do so upon the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the promises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. Appointment. The Adviser hereby appoints the Sub-Adviser to act as
sub-adviser to the Fund as permitted by the Adviser's Investment Advisory
Agreement with the Company pertaining to the Fund. Intending to be legally
bound, the Sub-Adviser accepts such appointment and agrees to render the
services herein set forth for the compensation herein provided.
2. Sub-Advisory Services. Subject to the supervision of the Board of
Directors, the Sub-Adviser shall assist the Adviser in providing a continuous
investment program with respect to the Fund's portfolio, including investment
research and management with respect to all securities and investments and cash
equivalents in the Fund. The Sub-Adviser may, subject to the Adviser's review,
determine the securities and investments to be purchased, sold or retained by
the Fund, and the Sub-Adviser may place orders directly with the issuer or any
broker or dealer for such securities and investments. The Sub-Adviser will
provide services under this Agreement in accordance with the Fund's investment
objective, policies and restrictions as stated in the Fund's prospectus and
Statement of Additional Information, which shall be forwarded to the Sub-Adviser
by the Adviser from time to time, and resolutions of the Board of Directors
applicable to the Fund provided those resolutions are communicated to the
Sub-Adviser and a reasonable amount of time is provided in order for it to
comply.
Without limiting the generality of the foregoing, the Sub-Adviser
further agrees that it:
(a) will use the same skill and care in providing such services as it
uses in providing services to fiduciary accounts for which it has
investment responsibilities;
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<PAGE> 2
(b) will conform with all applicable Rules and Regulations of the
Securities and Exchange Commission under the 1940 Act applicable to
sub-advisers to registered investment companies and in addition will
conduct its activities under this Agreement in accordance with any
applicable regulations of any governmental authority pertaining to
the investment advisory activities of the Sub-Adviser;
(c) will place or cause to be placed orders for the Fund either directly
with the issuer or with any broker or dealer. In placing orders with
brokers and dealers, the Sub-Adviser will attempt to obtain prompt
execution of orders in an effective manner at the most favorable
price. Consistent with this obligation and to the extent permitted by
the 1940 Act, when the execution and price offered by two or more
brokers or dealers are comparable, the Sub-Adviser may, in its
discretion, purchase and sell portfolio securities to and from
brokers and dealers who provide the Sub-Adviser with research advice
and other services;
(d) will maintain or cause to be maintained all books and records with
respect to the securities transactions of the Fund and will furnish
the Board of Directors with such periodic and special reports as the
Board may request; and
(e) will treat confidentially and as proprietary information of the
Company all records and other information relative to the Company and
the Fund and prior, present, or potential shareholders, and will not
use such records and information for any purpose other than
performance of its responsibilities and duties hereunder.
3. Services Not Exclusive. Except as provided herein, the services
furnished by the Sub-Adviser hereunder are deemed not to be exclusive, and the
Sub-Adviser shall be free to furnish similar services to others so long as its
services under this Agreement are not impaired thereby.
4. Books and Records. In compliance with the requirements of Rule
31a-3 under the 1940 Act, the Sub-Adviser hereby agrees that all records which
it maintains for the Company are the property of the Company and further agrees
to surrender promptly to the Company any of such records upon the Company's
request. The Sub-Adviser further agrees to preserve for the periods prescribed
by Rule 31a-2 under the 1940 Act the records required to be maintained by Rule
31a-1 under the 1940 Act.
5. Expenses. During the term of this Agreement, the Sub-Adviser will
pay all expenses incurred by it in connection with its activities under this
Agreement other than the cost of securities, commodities and other investments
(including brokerage commissions and other transaction charges, if any)
purchased for the Fund.
6. Compensation. For the services provided and the expenses assumed
with respect to the Fund pursuant to this Agreement, the Sub-Adviser will be
entitled to a fee of 1/12th of .50% monthly (equivalent to .50% annually) on the
first $20,000,000 of the net assets of the Fund as of the close of business on
the last business day of each calendar month during the Fund's fiscal
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<PAGE> 3
year, reduced to 1/12th of .375% monthly (equivalent to .375% annually) of such
net assets in excess of $20,000,000 up to $100,000,000, reduced to 1/12th of
.25% monthly (equivalent to .25% annually) of such net assets in excess of
$100,000,000 up to $200,000,000, and reduced to 1/12th of .225% monthly
(equivalent to .225% annually) of all such net assets in excess of $200,000,000.
7. Limitation of Liability. The Sub-Adviser shall not be liable for
any error of judgment or mistake of law or for any loss suffered by the Fund in
connection with the performance of this Agreement, except a loss resulting from
a breach of fiduciary duty with respect to the receipt of compensation for
services or a loss resulting from willful misfeasance, bad faith or gross
negligence on the part of the Sub-Adviser in the performance of its duties or
from reckless disregard by it of its obligations and duties under this
Agreement. Notwithstanding the foregoing or any other provision of this
Agreement, nothing herein shall in any way constitute a waiver or limitation of
any rights that the Company, the Fund or the Adviser may have under the United
States federal or State securities laws, which may impose liability on persons
who act in good faith.
8. Duration and Termination. Unless sooner terminated, this Agreement
shall continue until ____________, 2000, and thereafter shall continue
automatically for successive annual periods, provided such continuance is
specifically approved at least annually by the Company's Board of Directors or
vote of the lesser of (a) 67% of the shares of the Fund represented at a meeting
if holders of more than 50% of the outstanding shares of the Fund are present
in person or by proxy or (b) more than 50% of the outstanding shares of the
Fund, provided that in either event its continuance also is approved by a
majority of the Directors who are not "interested persons" (as defined in the
1940 Act) of any party to this Agreement (the "Independent Directors"), by vote
cast in person at a meeting called for the purpose of voting on such approval.
This Agreement is terminable at any time without penalty, on 60 days' notice, by
the Adviser, the Sub-Adviser or by the Board of Directors or by vote of the
lesser of (a) 67% of the shares of the Fund represented at a meeting if holders
of more than 50% of the outstanding shares of the Fund are present in person or
by proxy or (b) more than 50% of the outstanding shares of the Fund. This
Agreement will terminate automatically in the event of its assignment (as
defined in the 1940 Act).
9. Amendment of this Agreement. No provision of this Agreement may be
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought.
10. Governing Law. This Agreement shall be governed by and its
provisions shall be construed in accordance with the laws of the State of
California.
11. Possession of Fund Assets. At all times the assets of the Fund
(consisting of all cash, securities and other instruments held by the Fund)
shall remain exclusively under the management and control of the Fund's
custodian. At no time will the Sub-Adviser have custody or possession of any
such assets of the Fund.
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<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
AMERICAN DIVERSIFIED ASSET
MANAGEMENT, INC.
By:
------------------------------------------
Name: James B. Rea, Jr.
------------------------------------------
Title: President
------------------------------------------
LADAS & HULINGS, INC.
By: /s/ WILLIAM R. HULINGS
------------------------------------------
Name: William R. Hulings
------------------------------------------
Title: President
------------------------------------------
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<PAGE> 1
EXHIBIT 9.1
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of
January 2, 1998, by and between American Diversified Securities, Inc., a Nevada
corporation (the "Company"), American Diversified Holdings. Inc., a Nevada
corporation and the parent corporation of the Company("ADH" or the "Parent") and
JAMES BUCHANAN REA, Jr. ("Executive").
1. EMPLOYMENT
The Company and ADH (hereinafter referred to collectively as the
"Employers") hereby employ Executive and Executive hereby accepts employment
upon the terms and conditions set forth below.
2. TERM AND RENEWAL
2.1 TERM. The term of this Agreement shall commence on the date of
this Agreement (the "Effective Date"), and shall continue for three years from
the Effective Date (the "Original Employment Term"), on the terms and conditions
set forth below, unless sooner terminated as provided in Section 5.
2.2 EXTENSION. Following the expiration of the Original Employment
Term and provided that this Agreement has not been terminated pursuant to
Section 5, and every year thereafter, the Agreement shall be automatically
renewed for an additional 12-month period, effective on each anniversary date of
the Effective Date.
3. COMPENSATION
3.1 BASE COMPENSATION. For the services to be rendered by Executive
under this Agreement, Executive shall be entitled to receive, commencing as of
the Effective Date, an initial annual base compensation ("Base Compensation") of
$ 100,000, payable in 12 equal monthly installments. Executive shall have the
option of taking a bi-monthly advance (not to exceed 1/2 of the monthly
installment) against each monthly installment and each discretionary benefits
fund payment under Section 3.2 below.
3.2 ANNUAL DISCRETIONARY BENEFITS FUND. Executive shall be
entitled to an annual discretionary benefits fund of $40,000 which shall be used
for such benefits and perquisites as the Executive shall determine in his sole
discretion, including life and disability insurance, car allowances and club
memberships. The Executive and Employer shall agree on the amounts and
allocations of the benefits and the allowance shall be payable monthly in equal
installments. Medical insurance and expenses for the Executive as well as his
spouse and children shall be provided under the Company's medical insurance
policy, or if not so obtained, shall be reimbursable to Executive. Any shortfall
in the amount of the benefits of less than $40,000 shall be paid to Executive as
a bonus. The Employee may not carry over unused portions of the annual
discretionary benefits fund from year to year.
<PAGE> 2
3.3 PENSION/PROFIT SHARING PLANS, ETC. The Executive shall be
entitled to participate in all pension, profit sharing, 401(k) and other
employee plans and benefits established by the Employers.
3.4 METHOD OF PAYMENT. The monetary compensation payable and any
benefits due to Executive hereunder may be paid or provided in whole or in part,
from time to time, by the Employers and/or their respective subsidiaries and
affiliates, but shall at all times remain the responsibility of the Employers.
4. POSITION AND DUTIES
4.1 POSITION. Executive shall serve as a Director, the President,
Chief Executive Officer, and Chief Financial Officer of the Company as well as
the designated General and Financial Principal of the Company. Executive shall
have such duties as are the usual and customary duties of the such offices.
Executive shall have such executive power and authority as shall reasonably be
required to enable Executive to discharge the duties of such offices. Executive
may, at Executive's discretion, serve the Employers and/or their respective
subsidiaries and affiliates in such other offices and capacities as they shall
mutually agree. In the event the Employers and Executive mutually agree that
Executive shall terminate Executive's service in any one or more of the
aforementioned capacities, or Executive's service in one or more of the
aforementioned capacities is terminated, Executive's compensation, as specified
in this Agreement, shall not be diminished or reduced in any manner.
4.2 DEVOTION OF TIME AND EFFORT. Executive shall use Executive's good
faith best efforts and judgment in performing Executive's duties as required
hereunder and in the best interests of the Employers. Executive shall devote
such time, attention and energies to the business of the Employers as are
reasonably necessary to satisfy Executive's required responsibilities and duties
hereunder.
4.3 OTHER ACTIVITIES. Executive may engage in other personal and
civic activities while employed hereunder, including without limitation
charitable, community and other business activities, provided that such other
activities do not interfere with the performance of Executive's duties
hereunder.
4.4 VACATION. It is understood and agreed that Executive shall be
entitled to five (5) weeks vacation per year. During such vacation periods,
Executive shall not be relieved of Executive's duties under this Agreement and
there will be no abatement or reduction of Executive's compensation hereunder.
4.5 BUSINESS EXPENSES. The Employers shall promptly, but in no event
later than ten days after submission of a claim of expenditure, reimburse
Executive for all reasonable business expenses including, without limitation,
business seminar fees, professional association dues and other reasonable
entertainment expenses incurred by Executive in connection
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<PAGE> 3
with the business of the Employers and/or their respective subsidiaries and
affiliates, upon presentation to the Employers of written receipts for such
expenses. Such reimbursement shall also include, but not be limited to,
reimbursement for all reasonable travel expenses, including all airfare, hotel
and rental car expenses, incurred by Executive in traveling in connection with
the business of the Employers.
4.6 EMPLOYERS' OBLIGATIONS. The Employers shall provide Executive
with any and all necessary or appropriate current financial information and
access to current information and records regarding all material transactions
involving the Employers and/or their representative subsidiaries and affiliates,
including but not limited to acquisition of assets, personnel contracts,
dispositions of assets, service agreements and registration statements or other
state or federal filings or disclosures, reasonably necessary for Executive to
carry out Executive's duties and responsibilities hereunder. In addition, the
Employers agree to provide Executive, as a condition to Executive's services
hereunder, such staff, equipment and office space as is reasonably necessary for
Executive to perform Executive's duties hereunder.
5. TERMINATION
5.1 BY EMPLOYERS WITHOUT CAUSE. The Employers may terminate this
Agreement without "cause" (as hereinafter defined) at any time following the
third anniversary of the Effective Date, provided that the Employers first
deliver to Executive the Employers' written election to terminate this Agreement
at least 90 days prior to the effective date of termination.
5.2 SEVERANCE PAYMENT.
(a) AMOUNT. In the event the Employers terminate Executive's
services hereunder pursuant to Section 5.1, Executive shall continue to render
services to the Employers pursuant to this Agreement until the date of
termination and shall continue to receive compensation, as provided hereunder,
through the termination date. In addition to other compensation payable to
Executive for services rendered through the termination date, the Employers
shall pay Executive no later than the date of such termination, as a single
severance payment, an amount equal to the sum of: (i) one-quarter of the
Executive's average annual Base Compensation paid hereunder for the preceding
thirty-six month period; plus (ii) an amount equal to one-quarter of the highest
annual bonus or profit sharing received by Executive during the preceding
thirty-six month period (the "Severance Amount").
(b) BENEFITS. In the event Executive's employment hereunder is
terminated by the Employers without cause pursuant to Section 5.1 or by
Executive pursuant to Section 5.4 or 5.6, then in addition to paying Executive
the Severance Amount, the Employers shall continue to provide to Executive and
Executive's spouse and children, as applicable, all of the benefits described in
Section 3.3 for a period three months commencing on the date of such termination
(the "Severance Benefits").
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<PAGE> 4
(c) LIMITATION. The total of such severance payments shall be
reduced to the extent that the payment of such amount would cause Executive's
total termination benefits (as determined by Executive's tax advisor) to
constitute an "excess" parachute payment under Section 280G of the Internal
Revenue Code of 1986, as amended (the "Code"), and by reason of such excess
parachute payment Executive would be subject to an excise tax under Section
4999(a) of the Code, but only if Executive determines that the after-tax value
of the termination benefits calculated with the foregoing restriction exceed
those calculated without the foregoing restriction.
5.3 BY THE EMPLOYERS FOR CAUSE. The Employers may terminate
Executive for cause at any time, upon written notice to Executive. For purposes
of this Agreement, "cause" shall mean:
(a) Executive's conviction for commission of a felony or a crime
involving moral turpitude;
(b) Executive's willful commission of any act of theft,
embezzlement or misappropriation against the Employers which, in any such case,
is materially and demonstrably injurious to the Employers;
(c) Executive's willful and continued failure to substantially
perform Executive's duties hereunder (other than such failure resulting from
Executive's incapacity due to physical or mental illness), which failure is not
remedied within a reasonable time after demand for substantial performance is
delivered by the Employers which specifically identifies the manner in which the
Employers believe that Executive has not substantially performed Executive's
duties; or
(d) Executive's death or Disability (as hereinafter defined). In
the event Executive is terminated for cause pursuant to this Section 5.3,
Executive shall have the right to receive Executive's compensation as otherwise
provided under this Agreement through the effective date of termination.
Executive shall have no further right to receive compensation or other
consideration from the Employers or have any other remedy whatsoever against the
Employers as a result of this Agreement or the termination of Executive pursuant
to this Section 5.3, except as set forth below with respect to a termination due
to Executive's Disability.
In the event Executive is terminated by reason of Executive's Disability
(but not death), the Employers shall immediately pay Executive a single
severance payment equal to the Severance Amount. Said payment shall be in
addition to any disability insurance payments to which Executive is otherwise
entitled and any other compensation earned by Executive hereunder. For purposes
of this Agreement, the term "Disability" shall mean a physical or mental
incapacity as a result of which Executive becomes unable to continue the proper
performance of Executive's duties hereunder for six consecutive calendar months
or for shorter periods aggregating 180 business days in any 12 month period, but
only to the extent that such definition does not violate the Americans with
Disabilities Act.
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<PAGE> 5
5.4 BY EXECUTIVE FOR GOOD REASON. Executive may terminate this
Agreement for good reason upon at least 30 days prior written notice to the
Employers. For purposes of this Agreement, "good reason" shall mean:
(a) the Employers' material breach of any of their respective
obligations hereunder and either such breach is incurable or, if curable, has
not been cured within fifteen (15) days following receipt of written notice by
Executive to the Employers of such breach by either of the Employers;
(b) any removal of Executive from the office specified in the
first sentence of Section 4.1 without cause and without Executive's prior
written consent; or
(c) any material decrease in Executive's authority or
responsibilities hereunder without Executive's prior written consent.
In the event that Executive terminates this Agreement for good reason
pursuant to this Section 5.4, Executive shall have the right to receive
Executive's compensation as provided hereunder through the effective date of
termination and shall also have the same rights and remedies against the
Employers as Executive would have had if the Employers had terminated
Executive's employment without cause pursuant to Section 5.1 (including the
right to receive the Severance Amount payable and the Severance Benefits to be
provided under Section 5.2).
5.5 EXECUTIVE'S VOLUNTARY TERMINATION. Executive may, at any time,
terminate this Agreement without good reason upon written notice delivered to
the Employers at least ninety (90) days prior to the effective date of
termination. In the event of such voluntary termination of this Agreement by
Executive: (i) Executive shall have the right to receive Executive's
compensation as provided hereunder through the effective date of termination,
and (ii) the Employers on the one hand, and Executive, on the other hand, shall
not have any further right or remedy against one another except as provided in
Sections 6, 7 and 8 hereof which shall remain in full force and effect.
5.6 CHANGE OF CONTROL. Executive may terminate this Agreement, upon
at least ten (10) days' prior written notice to the Employers at any time within
one (1) year after a "change in control" (as hereinafter defined) of either of
the Employers. In the event Executive terminates this Agreement within one (1)
year after a change in control pursuant to this Section 5.6, (i) Executive shall
continue to render services pursuant hereto and shall continue to receive
compensation, as provided hereunder, through the termination date, (ii) the
Employers shall pay Executive no later than the date of such termination, as a
single severance payment, an amount equal to the Severance Amount and (iii)
following such termination, the Employers shall provide the Severance Benefits
as required by Section 5.2. For purposes of this Agreement, (a "change in
control") shall mean the occurrence of any of the following events:
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(a) a merger, consolidation, share exchange or reorganization
involving the Parent, unless
(i) the stockholders of the Parent, immediately before such
merger, consolidation, share exchange or reorganization, own, directly or
indirectly immediately following such merger, consolidation, share exchange or
reorganization, at least 80% of the combined voting power of the outstanding
voting securities of the corporation that is the successor in such merger,
consolidation, share exchange or reorganization (the "Surviving Company") in
substantially the same proportion as their ownership of the Voting Securities
immediately before such merger, consolidation, share exchange or reorganization;
(ii) the individuals who were members of the Incumbent
Board immediately prior to the execution of the agreement providing for such
merger, consolidation, share exchange or reorganization constitute at least
two-thirds (2/3rds) of the members of the board of directors of the Surviving
Company;
(b) a complete liquidation or dissolution of the Parent; or
(c) an agreement for the sale or other disposition of all or
substantially all of the assets of the Company or the Parent.
A change in control shall not be deemed to occur upon the dilution of
existing shareholders through the issuance of capital stocks in one or more
successive series of public or private offerings of securities.
5.7 STOCK REPURCHASE
(a) The Company hereby irrevocably grants and issues to
Executive the right and option to sell to the Company (the "Put") all of the
Company's shares of Common Stock now or hereafter owned by Executive (the
"Shares") at a purchase price (the "Purchase Price") in the event of any of the
following transactions (a "Corporate Transaction") occur:
(i) on the date the Executive ceases for any reason to be
an employee of the company or its Parent;
(ii) a Change in Control as defined in Section 5.6 above;
(iii) the sale, transfer or other disposition of all or
substantially all of the assets of the Company; or
(iv) withdrawal, suspension or termination of the Company
as a registered broker dealer under the Securities Exchange Act of 1934; as a
registered Investment Advisor under the Investment Company Act of 1940, or as an
Investment Advisor to investment companies registered under the Investment
Company Act of 1940.
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(b) For purposes of Section 5.7(a) above, the "Purchase Price"
shall mean the greater of (i) the price paid for the Shares or (ii) the Fair
Market Value of the Shares on the date of such Corporate Transaction
(c) Unless otherwise mutually agreeable to the Company and the
Executive, for purposes of Section 5(b) above the "Fair Market Value" shall
mean:
(i) The Company and the Executive shall each appoint an
independent, experienced appraiser who is a member of a recognized professional
association of business appraisers. The two appraisers shall determine the value
of the Shares assuming that the sale would be between a willing buyer and a
willing seller, both of whom have full knowledge of the financial and other
affairs of the Company. and neither of whom is under any compulsion to sell or
buy. The appraisers will value the Company as a whole and determine the value of
Executive's Shares as a pro rata portion of the whole without regard to any
minority interest valuation.
(ii) If the higher of the two appraisals is not more than
10% more than the lower of the appraisals, the Fair Market Value shall be the
average of the two appraisals. If the higher of the two appraisals is 10% or
more than the lower of the two appraisals, then the third appraiser shall be
appointed by the two appraisers, and if they cannot agree on a third appraiser,
the American Arbitration Association shall appoint the third appraiser. The
third appraiser, regardless of who appoints him or her, shall have the same
qualifications as the first two appraisers.
(iii) The Fair Market Value after the appointment of the
third appraiser shall be the mean of the three appraisals.
(iv) The fees and expenses of the appraisers shall be paid
one-half by the Company and one-half by the Executive.
(d) This provision of this Section 5.7, shall not be applicable
in the event Parent has effected a registration and public offering of its
Common Stock in the amount of at least $5 million under the Securities Act of
1933, as amended, and there exists a public trading market for the Common Stock.
6. CONFIDENTIALITY
During the term of Executive's employment under this Agreement, Executive
will have access to and become acquainted with various information relating to
the Employers' business operations, marketing data, business plans, strategies,
employees, contracts, financial records and accounts, projections and budgets,
and similar information. Executive agrees that to the extent such information is
not generally available to the public and gives either of the Employers an
advantage over competitors who do not know of or use such information, such
information and documents constitute "trade secrets" of the Employers. Executive
further agrees that all such
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information and documents relating to the business of the Employers whether they
are prepared by Executive or come into Executive's possession in any other way,
are owned by the Employers and shall remain the exclusive property of the
Employers. Executive shall not misuse, misappropriate or disclose any trade
secrets of the Employers directly or indirectly, or use them for Executive's own
benefit, either during the term of this Agreement or at any time thereafter,
except as may be necessary or appropriate in the course of Executive's
employment with the Employers unless such action is either previously agreed to
in writing by the Employers or required by law.
7. NON-SOLICITATION
For a period of three (3) months following the date Executive's employment
hereunder is terminated, Executive shall not solicit or induce any of the
Employers' employees, agents or independent contractors to end their
relationship with either of the Employers, or recruit, hire or otherwise induce
any such person to perform services for Executive, or any other person, firm or
company. The restrictions set forth in this Section 7 shall not apply if
Executive's employment is terminated pursuant to Section 5.1, 5.4 or 5.6.
8. INDEMNIFICATION
To the fullest extent permitted under applicable law, the Employers shall
indemnify, defend and hold Executive harmless from and against any and all
causes of action, claims, demands, liabilities, damages, costs and expenses of
any nature whatsoever (collectively, "Damages") directly or indirectly arising
out of or relating to Executive discharging Executive's duties hereunder on
behalf of the Employers and/or their respective subsidiaries and affiliates, so
long as Executive acted in good faith within the course and scope of Executive's
duties with respect to the matter giving rise to the claim or Damages for which
Executive seeks indemnification.
9. PAYMENT OF FINANCIAL OBLIGATIONS BY EMPLOYERS
The payment or provision to the Executive by the Employers of any
remuneration, benefits or other financial obligations pursuant to this
Agreement, including, without limitation, the payment of Executive's Base
Compensation, any cash bonuses or profit sharing, the provision of benefits and
perquisites set forth in Section 3.3, the reimbursement of business expenses
pursuant to Section 4.5, the payment (if applicable) of the Severance Amount and
provision of the Severance Benefits and any indemnification obligations, shall
be the joint and several obligations of the Employer.
10. GENERAL PROVISIONS
10.1 ASSIGNMENT; BINDING EFFECT. None of the Employers or Executive
may assign, delegate or otherwise transfer this Agreement or any of their
respective rights or obligations hereunder without the prior written consent of
the other party. Any attempted
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prohibited assignment or delegation shall be void. This Agreement shall be
binding upon and inure to the benefit of any permitted successors or assigns of
the parties and the heirs, executors, administrators and/or personal
representatives of Executive.
10.2 NOTICES. All notices, requests, demands and other communications
that are required or may be given under this Agreement shall be in writing and
shall be deemed to have been duly given when received if personally delivered;
when transmitted if transmitted by telecopy, electronic or digital transmission
method with electronic confirmation of receipt; the day after it is sent, if
sent for next-day delivery to a domestic address by recognized overnight
delivery service (E.G., FEDEX); and upon receipt, if sent by certified or
registered mail, return receipt requested. In each case notice shall be sent to:
If to the Company
or ADH:
American Diversified Holdings, Inc.
3525 Del Mar Heights Road, #145
San Diego, California 92130
Attention: Peter Hartmann
Telephone: (619) 759-3552
Telecopy: (619) 759-3563
If to Executive: James Rea
James Buchanan Rea, Inc.
12100 Wilshire Blvd., #680
Los Angeles, CA 90025
Attention: James Buchanan Rea, Jr.
Telephone: (310) 442-2660
Telecopy: (310) 442-2661
Any party may change its address for the purpose of this Section 10.2 by
giving the other party written notice of its new address in the manner set forth
above.
10.3 ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement of the parties, and supersedes all prior agreements, understandings
and negotiations, whether written or oral, between the Employers and Executive
with respect to the employment of Executive by the Employers.
10.4 AMENDMENTS; WAIVERS. This Agreement may be amended or modified,
and any of the terms and covenants may be waived, only by a written instrument
executed by the parties hereto, or, in the case of a waiver, by the party
waiving compliance. Any waiver by any party in any one or more instances of any
term or covenant contained in this Agreement shall neither be deemed to be nor
construed as a further or continuing waiver of any such term or covenant of this
Agreement.
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10.5 PROVISIONS SEVERABLE. In case any one or more provisions of this
Agreement shall be invalid, illegal or unenforceable, in any respect, the
validity, legality and enforceability of the remaining provisions contained
herein shall not, in any way, be affected or impaired thereby. If any provision
hereof is determined by any court of competent jurisdiction to be invalid or
unenforceable by reason of such provision extending the covenants and agreements
contained herein for too great a period of time or over too great a geographical
area, or being too extensive in any other respect, such provision shall be
interpreted to extend only over the maximum period of time and geographical
area, and to the maximum extent in all other respects, as to which it is valid
and enforceable, all as determined by such court in such action.
10.6 ATTORNEY'S FEES. If any legal action, arbitration or other
proceeding, is brought for the enforcement of this Agreement, or because of an
alleged dispute, breach or default in connection with any of the provisions of
this Agreement, the prevailing party shall be entitled to recover reasonable
attorneys' fees and other costs incurred in that action or proceeding, including
any appeal of such action or proceeding, in addition to any other relief to
which that party may be entitled.
10.7 GOVERNING LAW. This Agreement shall be construed, performed and
enforced in accordance with, and governed by the laws of the State of California
without giving effect to the principles of conflict of laws thereof.
10.8 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which shall
constitute the same instrument.
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IN WITNESS WHEREOF, the parties hereto have executed this Employment
Agreement effective as of the date first written above.
AMERICAN DIVERSIFIED HOLDINGS, INC.,
a Nevada corporation
By: /s/ Peter Hartmann
-----------------------------------------
Name: Peter Hartmann
-----------------------------------------
Title: President
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AMERICAN DIVERSIFIED SECURITIES, INC.,
a Nevada corporation
By: /s/ James Buchanan Rea, Jr.
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Name: James Buchanan Rea, Jr.
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Title: President
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EXECUTIVE:
/s/ James Buchanan Rea, Jr.
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James Buchanan Rea, Jr.
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EXHIBIT 9.1.2
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of
January 1, 1998, by and between American Diversified Holdings. Inc., its
subsidiaries and Roland O. Kuettner ("Executive").
1. EMPLOYMENT
ADH (hereinafter referred to collectively as the "Employers") hereby
employs Executive and Executive hereby accepts employment upon the terms and
conditions set forth below.
2. TERM AND RENEWAL
2.1 TERM. The term of this Agreement shall commence on the date of
this Agreement (the "Effective Date"), and shall continue for three years from
the Effective Date (the "Original Employment Term"), on the terms and conditions
set forth below, unless sooner terminated as provided in Section 5.
2.2 EXTENSION. Following the expiration of the Original Employment
Term and provided that this Agreement has not been terminated pursuant to
Section 5, and every year thereafter, the Agreement shall be automatically
renewed for an additional 12-month period, effective on each anniversary date of
the Effective Date.
3. COMPENSATION
3.1 BASE COMPENSATION. For the services to be rendered by Executive
under this Agreement, Executive shall be entitled to receive, commencing as of
the Effective Date, an initial annual base compensation ("Base Compensation") of
$99,996 payable in 12 equal monthly installments of $8.333.
3.2 ANNUAL DISCRETIONARY BENEFITS FUND. Executive shall be
entitled to an annual discretionary benefits fund of $40,000 which shall be used
for such benefits and perquisites as the Executive shall determine in his sole
discretion, including medical insurance and expenses for the Executive as well
as his spouse and children, life and disability insurance, car allowances and
club memberships. The Executive and Employer shall agree on the amounts, payment
and allocations of the benefits. Any shortfall in the amount of the benefits of
less than $40,000 shall be paid to Executive as a bonus. The Employee may not
carry over unused portions of the annual discretionary benefits fund from year
to year.
3.3 PENSION/PROFIT SHARING PLANS, ETC. The Executive shall be
entitled to participate in all pension, profit sharing, 401(k) and other
employee plans and benefits established by the Employers.
3.4 METHOD OF PAYMENT. The monetary compensation payable and any
benefits due to Executive hereunder may be paid or provided in whole or in part,
from time to
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time, by the Employers and/or their respective subsidiaries and affiliates, but
shall at all times remain the responsibility of the Employers.
4. POSITION AND DUTIES
4.1 POSITION. Executive shall serve as a Director, Treasurer and
Chief Financial Officer of the Company and its Subsidiaries. Executive shall
have such duties as are the usual and customary duties of the such offices.
Executive shall have such executive power and authority as shall reasonably be
required to enable Executive to discharge the duties of such offices. Executive
may, at Executive's discretion, serve the Employers and/or their respective
subsidiaries and affiliates in such other offices and capacities as they shall
mutually agree. In the event the Employers and Executive mutually agree that
Executive shall terminate Executive's service in any one or more of the
aforementioned capacities, or Executive's service in one or more of the
aforementioned capacities is terminated, Executive's compensation, as specified
in this Agreement, shall not be diminished or reduced in any manner.
4.2 DEVOTION OF TIME AND EFFORT. Executive shall use Executive's good
faith best efforts and judgment in performing Executive's duties as required
hereunder and in the best interests of the Employers. Executive shall devote
such time, attention and energies to the business of the Employers as are
reasonably necessary to satisfy Executive's required responsibilities and duties
hereunder.
4.3 OTHER ACTIVITIES. Executive may engage in other personal and
civic activities while employed hereunder, including without limitation
charitable, community and other business activities, provided that such other
activities do not interfere with the performance of Executive's duties
hereunder.
4.4 VACATION. It is understood and agreed that Executive shall be
entitled to four weeks vacation per year. During such vacation periods,
Executive shall not be relieved of Executive's duties under this Agreement and
there will be no abatement or reduction of Executive's compensation hereunder.
4.5 BUSINESS EXPENSES. The Employers shall promptly, but in no event
later than ten days after submission of a claim of expenditure, reimburse
Executive for all reasonable business expenses including, without limitation,
business seminar fees, professional association dues and other reasonable
entertainment expenses incurred by Executive in connection with the business of
the Employers and/or their respective subsidiaries and affiliates, upon
presentation to the Employers of written receipts for such expenses. Such
reimbursement shall also include, but not be limited to, reimbursement for all
reasonable travel expenses, including all airfare, hotel and rental car
expenses, incurred by Executive in traveling in connection with the business of
the Employers.
4.6 EMPLOYERS' OBLIGATIONS. The Employers shall provide Executive
with any and all necessary or appropriate current financial information and
access to current information and records regarding all material transactions
involving the Employers and/or their
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representative subsidiaries and affiliates, including but not limited to
acquisition of assets, personnel contracts, dispositions of assets, service
agreements and registration statements or other state or federal filings or
disclosures, reasonably necessary for Executive to carry out Executive's duties
and responsibilities hereunder. In addition, the Employers agree to provide
Executive, as a condition to Executive's services hereunder, such staff,
equipment and office space as is reasonably necessary for Executive to perform
Executive's duties hereunder.
5. TERMINATION
5.1 BY EMPLOYERS WITHOUT CAUSE. The Employers may terminate this
Agreement without "cause" (as hereinafter defined) at any time following the
third anniversary of the Effective Date, provided that the Employers first
deliver to Executive the Employers' written election to terminate this Agreement
at least 90 days prior to the effective date of termination.
5.2 SEVERANCE PAYMENT.
(a) AMOUNT. In the event the Employers terminate Executive's
services hereunder pursuant to Section 5.1, Executive shall continue to render
services to the Employers pursuant to this Agreement until the date of
termination and shall continue to receive compensation, as provided hereunder,
through the termination date. In addition to other compensation payable to
Executive for services rendered through the termination date, the Employers
shall pay Executive no later than the date of such termination, as a single
severance payment, an amount equal to the sum of: (i) one-quarter of the
Executive's average annual Base Compensation paid hereunder for the preceding
thirty-six month period; plus (ii) an amount equal to one-quarter of the highest
annual bonus or profit sharing received by Executive during the preceding
thirty-six month period (the "Severance Amount").
(b) BENEFITS. In the event Executive's employment hereunder is
terminated by the Employers without cause pursuant to Section 5.1 or by
Executive pursuant to Section 5.4 or 5.6, then in addition to paying Executive
the Severance Amount, the Employers shall continue to provide to Executive and
Executive's spouse and children, as applicable, all of the benefits described in
Section 3.3 for a period one year commencing on the date of such termination
(the "Severance Benefits").
(c) LIMITATION. The total of such severance payments shall be
reduced to the extent that the payment of such amount would cause Executive's
total termination benefits (as determined by Executive's tax advisor) to
constitute an "excess" parachute payment under Section 280G of the Internal
Revenue Code of 1986, as amended (the "Code"), and by reason of such excess
parachute payment Executive would be subject to an excise tax under Section
4999(a) of the Code, but only if Executive determines that the after-tax value
of the termination benefits calculated with the foregoing restriction exceed
those calculated without the foregoing restriction.
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5.3 BY THE EMPLOYERS FOR CAUSE. The Employers may terminate Executive
for cause at any time, upon written notice to Executive. For purposes of this
Agreement, "cause" shall mean:
(a) Executive's conviction for commission of a felony or a crime
involving moral turpitude;
(b) Executive's willful commission of any act of theft,
embezzlement or misappropriation against the Employers which, in any such case,
is materially and demonstrably injurious to the Employers;
(c) Executive's willful and continued failure to substantially
perform Executive's duties hereunder (other than such failure resulting from
Executive's incapacity due to physical or mental illness), which failure is not
remedied within a reasonable time after demand for substantial performance is
delivered by the Employers which specifically identifies the manner in which the
Employers believe that Executive has not substantially performed Executive's
duties; or
(d) Executive's death or Disability (as hereinafter defined). In
the event Executive is terminated for cause pursuant to this Section 5.3,
Executive shall have the right to receive Executive's compensation as otherwise
provided under this Agreement through the effective date of termination.
Executive shall have no further right to receive compensation or other
consideration from the Employers or have any other remedy whatsoever against the
Employers as a result of this Agreement or the termination of Executive pursuant
to this Section 5.3, except as set forth below with respect to a termination due
to Executive's Disability.
In the event Executive is terminated by reason of Executive's Disability
(but not death), the Employers shall immediately pay Executive a single
severance payment equal to the Severance Amount. Said payment shall be in
addition to any disability insurance payments to which Executive is otherwise
entitled and any other compensation earned by Executive hereunder. For purposes
of this Agreement, the term "Disability" shall mean a physical or mental
incapacity as a result of which Executive becomes unable to continue the proper
performance of Executive's duties hereunder for six consecutive calendar months
or for shorter periods aggregating 180 business days in any 12 month period, but
only to the extent that such definition does not violate the Americans with
Disabilities Act.
5.4 BY EXECUTIVE FOR GOOD REASON. Executive may terminate this
Agreement for good reason upon at least 30 days prior written notice to the
Employers. For purposes of this Agreement, "good reason" shall mean:
(a) the Employers' material breach of any of their respective
obligations hereunder and either such breach is incurable or, if curable, has
not been cured within fifteen (15)
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days following receipt of written notice by Executive to the Employers of such
breach by either of the Employers;
(b) any removal of Executive from the office specified in the
first sentence of Section 4.1 without cause and without Executive's prior
written consent; or
(c) any material decrease in Executive's authority or
responsibilities hereunder without Executive's prior written consent.
In the event that Executive terminates this Agreement for good reason
pursuant to this Section 5.4, Executive shall have the right to receive
Executive's compensation as provided hereunder through the effective date of
termination and shall also have the same rights and remedies against the
Employers as Executive would have had if the Employers had terminated
Executive's employment without cause pursuant to Section 5.1 (including the
right to receive the Severance Amount payable and the Severance Benefits to be
provided under Section 5.2).
5.5 EXECUTIVE'S VOLUNTARY TERMINATION. Executive may, at any time,
terminate this Agreement without good reason upon written notice delivered to
the Employers at least ninety (90) days prior to the effective date of
termination. In the event of such voluntary termination of this Agreement by
Executive: (i) Executive shall have the right to receive Executive's
compensation as provided hereunder through the effective date of termination,
and (ii) the Employers on the one hand, and Executive, on the other hand, shall
not have any further right or remedy against one another except as provided in
Sections 6, 7 and 8 hereof which shall remain in full force and effect.
5.6 CHANGE OF CONTROL. Executive may terminate this Agreement, upon
at least ten (10) days' prior written notice to the Employers at any time within
one (1) year after a "change in control" (as hereinafter defined) of either of
the Employers. In the event Executive terminates this Agreement within one (1)
year after a change in control pursuant to this Section 5.6, (i) Executive shall
continue to render services pursuant hereto and shall continue to receive
compensation, as provided hereunder, through the termination date, (ii) the
Employers shall pay Executive no later than the date of such termination, as a
single severance payment, an amount equal to the Severance Amount and (iii)
following such termination, the Employers shall provide the Severance Benefits
as required by Section 5.2. For purposes of this Agreement, (a "change in
control") shall mean the occurrence of any of the following events:
(a) a merger, consolidation, share exchange or reorganization
involving the Parent, unless
(i) the stockholders of the Parent, immediately before such
merger, consolidation, share exchange or reorganization, own, directly or
indirectly immediately following such merger, consolidation, share exchange or
reorganization, at least 55% of the combined voting power of the outstanding
voting securities of the corporation that is the successor in such merger,
consolidation, share exchange or reorganization (the "Surviving Company") in
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substantially the same proportion as their ownership of the Voting Securities
immediately before such merger, consolidation, share exchange or reorganization;
(ii) the individuals who were members of the Incumbent
Board immediately prior to the execution of the agreement providing for such
merger, consolidation, share exchange or reorganization constitute at least
two-thirds (2/3rds) of the members of the board of directors of the Surviving
Company;
(b) a complete liquidation or dissolution of the Parent; or
(c) an agreement for the sale or other disposition of all or
substantially all of the assets of the Company or the Parent.
6. CONFIDENTIALITY
During the term of Executive's employment under this Agreement, Executive
will have access to and become acquainted with various information relating to
the Employers' business operations, marketing data, business plans, strategies,
employees, contracts, financial records and accounts, projections and budgets,
and similar information. Executive agrees that to the extent such information is
not generally available to the public and gives either of the Employers an
advantage over competitors who do not know of or use such information, such
information and documents constitute "trade secrets" of the Employers. Executive
further agrees that all such information and documents relating to the business
of the Employers whether they are prepared by Executive or come into Executive's
possession in any other way, are owned by the Employers and shall remain the
exclusive property of the Employers. Executive shall not misuse, misappropriate
or disclose any trade secrets of the Employers directly or indirectly, or use
them for Executive's own benefit, either during the term of this Agreement or at
any time thereafter, except as may be necessary or appropriate in the course of
Executive's employment with the Employers unless such action is either
previously agreed to in writing by the Employers or required by law.
7. NON-SOLICITATION
For a period of one (1) year following the date Executive's employment
hereunder is terminated, Executive shall not solicit or induce any of the
Employers' employees, agents or independent contractors to end their
relationship with either of the Employers, or recruit, hire or otherwise induce
any such person to perform services for Executive, or any other person, firm or
company. The restrictions set forth in this Section 7 shall not apply if
Executive's employment is terminated pursuant to Section 5.1, 5.4 or 5.6.
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8. INDEMNIFICATION
To the fullest extent permitted under applicable law, the Employers shall
indemnify, defend and hold Executive harmless from and against any and all
causes of action, claims, demands, liabilities, damages, costs and expenses of
any nature whatsoever (collectively, "Damages") directly or indirectly arising
out of or relating to Executive discharging Executive's duties hereunder on
behalf of the Employers and/or their respective subsidiaries and affiliates, so
long as Executive acted in good faith within the course and scope of Executive's
duties with respect to the matter giving rise to the claim or Damages for which
Executive seeks indemnification.
9. PAYMENT OF FINANCIAL OBLIGATIONS BY EMPLOYERS
The payment or provision to the Executive by the Employers of any
remuneration, benefits or other financial obligations pursuant to this
Agreement, including, without limitation, the payment of Executive's Base
Compensation, any cash bonuses or profit sharing, the provision of benefits and
perquisites set forth in Section 3.3, the reimbursement of business expenses
pursuant to Section 4.5, the payment (if applicable) of the Severance Amount and
provision of the Severance Benefits and any indemnification obligations, shall
be the joint and several obligations of the Employer.
10. GENERAL PROVISIONS
10.1 ASSIGNMENT; BINDING EFFECT. None of the Employers or Executive
may assign, delegate or otherwise transfer this Agreement or any of their
respective rights or obligations hereunder without the prior written consent of
the other party. Any attempted prohibited assignment or delegation shall be
void. This Agreement shall be binding upon and inure to the benefit of any
permitted successors or assigns of the parties and the heirs, executors,
administrators and/or personal representatives of Executive.
10.2 NOTICES. All notices, requests, demands and other communications
that are required or may be given under this Agreement shall be in writing and
shall be deemed to have been duly given when received if personally delivered;
when transmitted if transmitted by telecopy, electronic or digital transmission
method with electronic confirmation of receipt; the day after it is sent, if
sent for next-day delivery to a domestic address by recognized overnight
delivery service (E.G., FEDEX); and upon receipt, if sent by certified or
registered mail, return receipt requested. In each case notice shall be sent to:
If to the Company
or ADH:
American Diversified Holdings, Inc.
3525 Del Mar Heights Road, #145
San Diego, California 92130
Attention: Peter Hartmann
Telephone: (619) 759-3552
Telecopy: (619) 759-3563
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If to Executive:
Roland O. Kuettner
Aachener Str. 1
10713 Berlin
Telephone:(30) 821 94 46 or (172) 80 95 027
Telecopy: (30) 612 70 96
Any party may change its address for the purpose of this Section 10.2 by
giving the other party written notice of its new address in the manner set forth
above.
10.3 ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement of the parties, and supersedes all prior agreements, understandings
and negotiations, whether written or oral, between the Employers and Executive
with respect to the employment of Executive by the Employers.
10.4 AMENDMENTS; WAIVERS. This Agreement may be amended or modified,
and any of the terms and covenants may be waived, only by a written instrument
executed by the parties hereto, or, in the case of a waiver, by the party
waiving compliance. Any waiver by any party in any one or more instances of any
term or covenant contained in this Agreement shall neither be deemed to be nor
construed as a further or continuing waiver of any such term or covenant of this
Agreement.
10.5 PROVISIONS SEVERABLE. In case any one or more provisions of this
Agreement shall be invalid, illegal or unenforceable, in any respect, the
validity, legality and enforceability of the remaining provisions contained
herein shall not, in any way, be affected or impaired thereby. If any provision
hereof is determined by any court of competent jurisdiction to be invalid or
unenforceable by reason of such provision extending the covenants and agreements
contained herein for too great a period of time or over too great a geographical
area, or being too extensive in any other respect, such provision shall be
interpreted to extend only over the maximum period of time and geographical
area, and to the maximum extent in all other respects, as to which it is valid
and enforceable, all as determined by such court in such action.
10.6 ATTORNEY'S FEES. If any legal action, arbitration or other
proceeding, is brought for the enforcement of this Agreement, or because of an
alleged dispute, breach or default in connection with any of the provisions of
this Agreement, the prevailing party shall be entitled to recover reasonable
attorneys' fees and other costs incurred in that action or proceeding, including
any appeal of such action or proceeding, in addition to any other relief to
which that party may be entitled.
10.7 GOVERNING LAW. This Agreement shall be construed, performed and
enforced in accordance with, and governed by the laws of the State of California
without giving effect to the principles of conflict of laws thereof.
10.8 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which shall
constitute the same instrument.
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IN WITNESS WHEREOF, the parties hereto have executed this Employment
Agreement
AMERICAN DIVERSIFIED HOLDINGS, INC.,
/s/ Peter Hartmann
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Peter Hartmann
President
EXECUTIVE:
/s/ Roland Kuettner
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Roland Kuettner
