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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 28, 1998
REGISTRATION NO. 33
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AMERICAN DIVERSIFIED HOLDINGS, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
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NEVADA 6211 86-0854150
(STATE OR JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
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12100 WILSHIRE BOULEVARD, SUITE 680
LOS ANGELES, CALIFORNIA 90025
(310) 442-2660
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)
JAMES BUCHANAN REA, JR.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
AMERICAN DIVERSIFIED HOLDINGS, INC.
12100 WILSHIRE BOULEVARD, SUITE 680
LOS ANGELES, CALIFORNIA 90025
(310) 442-2660
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE OF PROCESS)
THE COMMISSION IS REQUESTED TO SEND COPIES OF ALL COMMUNICATION TO:
MICHAEL B. JEFFERS, ESQ.
JEFFERS, WILSON, SHAFF & FALK, LLP
18881 VON KARMAN AVENUE, SUITE 1400
IRVINE, CALIFORNIA 92612
(949) 660-7700
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
As soon as reasonably practicable after the effective date of this Registration
Statement
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED SHARE PRICE(1) FEE
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Common Stock, no par value(2)(3)... 3,646,667 $14.00 $51,053,338 $15,061.00
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Total.............................. 3,646,667 $51,053,338 $15,061.00
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(1) Estimated solely for purposes of calculating the registration fee, pursuant
to rule 457(a) under the Securities Act.
(2) Assumes exercise of an option granted to the Underwriters to purchase up to
246,667 shares of Common Stock to cover over-allotments, if any.
(3) Includes shares (the "Converted Shares") of Common Stock issuable to
approximately 320 shareholders of the Company (the "Selling Shareholders")
upon conversion of 5,000,000 shares of Series A Preferred Stock, par value
$1.00, of the Company acquired by the Selling Shareholders in a private
placement completed as of March 31, 1998, which shares are being registered
for resale by the Selling Shareholders on a delayed or continuous basis
pursuant to Rule 415 under the Securities Act.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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CROSS REFERENCE SHEET
BETWEEN ITEMS OF FORM SB-2 AND PROSPECTUS
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ITEM IN FORM SB-2 LOCATION IN PROSPECTUS
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Front of Registration Statement and outside
front cover of Prospectus.................... Facing Page; Cross Reference Sheet; Outside
Front Cover Page
Inside Front and Outside Back Cover Page of
Prospectus................................... Inside Front Cover Page; Outside Back Cover
Page
Summary Information and Risk Factors........... PROSPECTUS SUMMARY; RISK FACTORS
Use of Proceeds................................ PROSPECTUS SUMMARY; RISK FACTORS
Determination of Offering Price................ UNDERWRITING
Dilution....................................... DILUTION
Selling Security Holders....................... Not Applicable
Plan of Distribution........................... Inside Front Cover Page; SECURITY OWNERSHIP OF
MANAGEMENT AND CERTAIN SECURITYHOLDERS;
UNDERWRITING
Legal Proceeding............................... DESCRIPTION OF BUSINESS -- Legal Proceedings
Directors, Executive Officers, Promoter and
Control Persons.............................. DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT
EMPLOYEES
Security Ownership of Certain Beneficial Owners
and Management............................... SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN
SECURITY HOLDERS
Description of Securities...................... Outside Front Cover Page; Capitalization;
DESCRIPTION OF SECURITIES; UNDERWRITING
Interest of Named Experts and Counsel.......... LEGAL MATTERS; EXPERTS
Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.................................. DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT
EMPLOYEES
Organization Within Last Five Years............ DESCRIPTION OF BUSINESS; DIRECTORS, EXECUTIVE
OFFICERS AND CERTAIN EMPLOYEES; INTEREST OF
MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS
Description of Business........................ PROSPECTUS SUMMARY; DESCRIPTION OF BUSINESS
Management's Discussion and Analysis or Plan of
Operations................................... MANAGEMENT'S DISCUSS AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Description of Property........................ DESCRIPTION OF PROPERTIES
Certain Relationships and Related
Transactions................................. INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN
TRANSACTIONS
Market for Common Equity and Related
Shareholder Matters.......................... RISK FACTORS; DESCRIPTION OF SECURITIES;
UNDERWRITING
Executive Compensation......................... EXECUTIVE COMPENSATION
Financial Statements........................... CONSOLIDATED FINANCIAL STATEMENTS
Changes in and Disagreement With Accountants on
Accounting and Financial Disclosure.......... Not Applicable
Indemnification of Directors and Officers...... Information not required in Prospectus;
Indemnification of Directors and Officers
Other Expenses of Issuance and Distribution.... Use of Proceeds
Recent Sales of Unregistered Securities........ Not Applicable
Exhibits....................................... Not Applicable
Undertakings................................... Information Not Required in Prospectus;
Undertakings
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED AUGUST 28, 1998
PROSPECTUS
AMERICAN DIVERSIFIED HOLDINGS, INC.
1,733,333 SHARES
COMMON STOCK (NO PAR VALUE)
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American Diversified Holdings, Inc. (the "Company") is offering hereby
1,733,333 shares of the Company's Common Stock (the "Common Stock"). The Company
has two classes of stock outstanding, the Common Stock offered hereby and Series
A Preferred Stock, par value $1.00 per share (the Series A "Preferred Stock").
Concurrently with this offering, the Company is also registering 1,666,667
shares of Common Stock (the "Converted Shares") issuable to approximately 320
shareholders (the "Selling Shareholders") upon conversion of 5,000,000 shares of
Series A Preferred Stock acquired by the Selling Shareholders in a private
placement completed as of March 31, 1998, which shares of Common Stock are being
registered for resale from time to time by the Selling Shareholders after the
date of the Prospectus. The resale of the Converted Shares by the Selling
Shareholders will be subject to prospectus delivery and other requirements of
the Securities Act of 1933, as amended (the "Securities Act"). Sales of such
shares or even the potential for such sales at any time may have an adverse
effect on the market prices of the shares of Common Stock offered to investors
in this Offering. The Company will not receive any proceeds from the sale of any
of the Converted Shares and has agreed to pay all expenses relating to the offer
and sale of such shares by the Selling Shareholders. See "Concurrent Sales by
Selling Shareholders."
Prior to this offering, there has been no public market for the Company's
Common Stock and there can be no assurance that any such market will develop. It
is currently anticipated that the initial public offering price will be $14.00
per share (the "Price to Public"). Application is being made to have the Common
Stock approved for quotation on the National Association of Securities Dealers'
Automated Quotation System ("NASDAQ") under the proposed symbol "AMDIV". The
public offering price for the Shares has been determined arbitrarily by
negotiations between the Company and the Underwriters and does not necessarily
bear any relationship to the Company's results of operations, net worth,
prospects, or other commonly recognized criteria of value. See "Risk Factors"
and "Underwriting."
The textual portion of this Prospectus and a demonstration of certain of
the Company's products and services, which demonstration is part of this
Prospectus, are available on the CD-ROM portion of this Prospectus attached to
the inside back cover page hereof. To view the demonstration portion of this
Prospectus, click on the hyper link located on the cover page of the textual
portion of the CD-ROM portion of this Prospectus or exit the textual portion of
the CD-ROM portion of this Prospectus.
THESE SECURITIES ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK AS WELL AS
IMMEDIATE AND SUBSTANTIAL DILUTION. SEE "RISK FACTORS" AND "DILUTION."
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
CALCULATION OF REGISTRATION FEE
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UNDERWRITING DISCOUNTS PROCEEDS TO
PRICE TO PUBLIC AND COMMISSIONS(1) COMPANY(2)
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Per Share.................... $ $ $
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Total(3)..................... $ $ $
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(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933. See
"Underwriting."
(2) Before deducting expenses of this offering payable by the Company estimated
at $242,000.
(3) The Company has granted the Underwriters an option exercisable within days
after the date of this Prospectus to purchase up to 246,667 additional
shares of Common Stock on the same terms and conditions set forth above to
cover over-allotments, if any. If all such additional shares of Common Sock
are purchased, the total Price to Public, underwriting discount and net
proceeds to the Company will be approximately $ ,
$ and $ , respectively. See "Underwriting."
The shares of Common Stock offered hereby are offered by the several
Underwriters when, as and if delivered to and accepted by the Underwriters and
subject to their right to reject orders, in whole or in part, and subject to
certain other conditions. It is expected that the shares of the Common Stock
will be ready for delivery on or about , 1998, against payment in
immediately available funds.
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THE DATE OF THIS PROSPECTUS IS AUGUST , 1998
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TABLE OF CONTENTS
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PAGE
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PROSPECTUS SUMMARY.......................................... 1
The Company............................................ 1
Business Strategies.................................... 2
The Offering........................................... 4
RISK FACTORS................................................ 5
Limited Operating History and Losses From Operations
Creates Uncertainty About Future Results.............. 5
Need for Additional Capital............................ 5
Delay in Commencing Operations......................... 5
Dependence on Computer Systems......................... 6
Dependence on Intellectual Property Rights............. 6
Management of Growth................................... 6
Volatile Nature of Securities Business................. 6
Rapidly Evolving Markets............................... 7
Risks Associated with New Products and New Markets..... 7
Dependence on Key Management and Principal
Consultants........................................... 8
Risks Associated with Strategic Acquisitions and
Relationships......................................... 8
Regulation............................................. 8
Lack of Trademark Protection........................... 9
Immediate and Substantial Dilution..................... 9
Potential for Security Compromises..................... 9
Effect of Net Capital Requirements..................... 9
Broad Discretion in the Use of Proceeds................ 9
No Assurance of Public Trading Market or Qualification
for NASDAQ Inclusion;
Possible Volatility of Stock Price................... 10
Shares Eligible for Future Sale........................ 10
Litigation and Potential Securities Laws Liability..... 11
Dependence on Cash Inflows to Mutual Funds............. 11
Dependence on Systems and Third Parties................ 11
Competition............................................ 11
THE COMPANY................................................. 13
USE OF PROCEEDS............................................. 13
DILUTION.................................................... 14
DIVIDEND POLICY............................................. 15
CAPITALIZATION.............................................. 15
DESCRIPTION OF BUSINESS..................................... 16
General................................................ 16
The Business Opportunity............................... 18
Industry Developments in Germany....................... 18
Business Strategy...................................... 19
Development of Products and Services................... 20
Marketing.............................................. 23
Customer Service....................................... 24
Competition............................................ 25
Government Regulation.................................. 26
Net Capital Requirements; Liquidity.................... 27
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Employees.............................................. 28
Systems................................................ 28
Servicemark Application................................ 29
Legal Proceedings...................................... 29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION.................................. 30
Plan of Operation...................................... 30
ADAM' s Historical Operations.......................... 30
DESCRIPTION OF PROPERTY..................................... 32
DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES..... 32
Management............................................. 32
Principal Advisors..................................... 33
ADAG's Executive Team.................................. 34
Management Committees.................................. 35
REMUNERATION OF DIRECTORS AND OFFICERS...................... 35
Executive Compensation................................. 35
Summary Compensation Table............................. 35
Employment Agreements.................................. 36
1998 Stock Option and Incentive Plan................... 36
Stock Option Grants.................................... 38
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN
SECURITYHOLDERS........................................... 39
Preferred Stock........................................ 39
INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS... 40
DESCRIPTION OF SECURITIES................................... 40
General................................................ 40
Common Stock........................................... 41
Preferred Stock........................................ 41
CONCURRENT SALES BY THE SELLING SHAREHOLDERS................ 42
SHARES ELIGIBLE FOR FUTURE SALE............................. 42
UNDERWRITING................................................ 43
LEGAL MATTERS............................................... 44
EXPERTS..................................................... 44
ADDITIONAL INFORMATION...................................... 44
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.................. F-1
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PROSPECTUS SUMMARY
The summary information below should be read in conjunction with, and is
qualified in its entirety by, the detailed information appearing elsewhere in
this Prospectus. Capitalized terms used herein shall have the definitive
meanings assigned to them in the text below.
This Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act. Forward-looking statements may be found
throughout this Prospectus, particularly under "Prospectus Summary," "Use of
Proceeds," "Plan of Operation" and "Description of Business." Such
forward-looking statements are indicated by the use of such words as "intends,"
"expects," "may," "anticipates," "estimates," "desires," "believes" and similar
expressions. Actual results may differ from those described by forward-looking
statements as a result of many risks and uncertainties, including, but not
limited to, those described under "Risk Factors." Prospective investors are
advised not to rely upon forward-looking statements, but rather base their
investment decision on the Company's actual results to date.
THE COMPANY
American Diversified Holdings, Inc., a Nevada corporation (the "Company"),
is a development stage enterprise which was formed to offer a full range of
financial services in the United States and Europe. The Company is a holding
company primarily engaged in the management of its two wholly-owned
subsidiaries, American Diversified Asset Management, Inc., a Nevada corporation
("ADAM") which is located in Los Angeles, California, and American Diversified
AG Wertpapierhandelsbank, a German corporation ("ADAG") which is located in
Berlin, Germany. The principal business activities of the Company and its
subsidiaries will be to provide financial services and distribute financial
service products to individuals and institutional investors in the United
States, Germany and the European Union ("EU") countries. The Company and its
subsidiaries will offer financial services consisting mainly of full service
securities brokerage, Internet discount brokerage, asset management, sponsoring
and distributing mutual funds, underwriting and related financial services.
ADAM
Through its U.S. subsidiary, ADAM, the Company is engaged in the management
and distribution in the U.S. of American Diversified Funds, Inc., an open-end
investment company registered under the Investment Company Act of 1940, which
currently offers a series portfolio, the American Diversified Global Value Fund.
ADAM plans to expand its mutual fund business by increasing the assets of the
Global Value Fund and by developing new mutual fund series in the U.S. and
Europe. ADAM is in the process of registering a newly developed fund, the
American Diversified International Value Fund for U.S. distribution
(collectively with the Global Value Fund, the "Funds"). Ladas & Hulings, Inc.
("Ladas & Hulings"), a leader in global value investing with over 25 years of
experience, became sub-advisor to the Global Value Fund in April 1998 and will
provide the day-to-day investment management (sub-advisory services) for the
Funds.
ADAM is in the process of registering an umbrella fund, American
Diversified Funds, plc, in Ireland under the "UCIT's" directive for European
(EU) distribution, which will offer three sub-funds: the Global Value,
International Value, and SmallCap Value portfolios. Marketing and distribution
services in Germany and other EU countries will be provided by American
Diversified AG Wertpapierhandelsbank ("ADAG"), the Company's German subsidiary,
and through alliances with medium-sized banks, broker-dealers, insurance agents,
and by-captive sales forces.
Additionally, ADAM is preparing to act as broker for on-line brokerage
execution in U.S. markets for ADAG. The Company plans to expand the present
investment management business of ADAM by growing the Funds and introducing an
asset management business for high net worth individual and institutional
accounts, using Ladas & Hulings as the asset manager.
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ADAG
Through its German subsidiary, ADAG, the Company is engaged in the
distribution of mutual funds, providing asset management services and
underwriting services to clients in Germany. ADAG expects to begin providing
securities brokerage services to individual investors and institutions in Europe
through the Internet and ADAG's registered representatives on January 2, 1999,
after ADAG has received a full banking license in Germany. ADAG will offer trade
execution for stocks, mutual funds, options and bonds, as well as market data
and research tools to investors in Europe. ADAM is preparing to act as the
clearing broker for ADAG on all transactions involving U.S. securities which are
executed in the U.S. The electronic infrastructure and primary systems necessary
to operate ADAG's securities brokerage business are currently in place and fully
functional. ADAG has developed substantial name recognition in Germany through
the aggressive advertisement of its services during the last four months. To
date, ADAG has received 10,000 applications for new accounts and expects to
generate further interest in its services through continued advertising in the
coming months. In addition, ADAG intends to engage in underwriting Initial
Public Offerings of small to medium size European companies, especially in
Germany.
The Company believes that there is a new and growing market in the EU for
investment products denominated in U.S. dollars primarily due to the following
factors: (i) the planned transition in 1999 to a single European currency, the
EURO; (ii) the creation of new and expanding capital markets in Eastern Europe;
(iii) implementation of the directive on the Undertaking for Collective
Investments in Transferable Securities ("UCITS") in October 1989, which was
designed to create a single EU mutual funds market and has now expanded the
range of available funds for distribution in Europe; (iv) the continuing growth
of the mutual fund market; and (v) the Xetra(R) electronic trading system of the
Frankfurt Stock Exchange has expanded the number of tradeable instruments and
execution possibilities for electronic security trading. The integration of
other major European Stock Exchanges in to this system and NASDAQ's interest in
participating, creates the possibility of a Pan-European stock market for the
future. In addition, Regulatory reforms in Germany and other EU countries have
enabled smaller financial services companies to compete for investment dollars
traditionally flowing to savings account deposits at commercial banks.
Management believes that an international financial services group with offices
in both the United States and Europe can attract a diverse clientele, including
institutional investors, banks, and individual investors. See "Description of
Business -- The Business Opportunity."
The Company's executive officers and employees have a wide range of
experience and expertise in the development, marketing and sale of financial
services and products in the United States and Europe. While the Company has
entered into employment agreements with certain of its executive officers, no
assurance can be given that the Company will be able to enforce such agreement
or their non-compete provisions under applicable state laws.
BUSINESS STRATEGIES
The Company seeks to exploit the opportunities created primarily as a
result of regulatory reforms and changing conditions in the financial services
industry and to expand its market share by pursuing the following five key
strategies:
- Market Distinct Brands. ADAG will market distinct brands of financial
products with a range of services and commission rate structures designed
to attract specific groups of investors in Europe. The Company believes
that, by tailoring products and services for customers within specific
demographic categories, ADAG can attract a broader range of investors
seeking brokerage services at discount prices. ADAG will offer discount
on-line brokerage services under the AMDIV.NET(TM) brand name, which has
been created for investors seeking simple and efficient execution
services at the lowest possible transaction cost, and investors who are
comfortable with the Internet and prefer to trade exclusively through
electronic communications in exchange for low-priced trade executions.
AMERICAN DIVERSIFIED(R) has been created to provide ADAG's high net-worth
customers with a full range of brokerage services, private asset
management and mutual fund products, and underwriting services.
AMDIV.PRONET(TM) is a technologically advanced financial system that will
provide
2
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ADAG's correspondent European brokerage firms and financial institutions
with special terminals to access the major European and U.S. stock
markets through the Company's integrated computer network.
- Create Technologically Innovative Solutions to Investor Needs. Since
April 1997, the Company has worked on the development of its integrated
electronic systems, which combine the Company's newly developed software
with existing electronic services in the U.S. and Europe. AMDIV.NET(TM)
and AMDIV.PRONET(TM) each comprise a single-source trading system for
U.S. and European stocks, which offer immediate execution services. The
"Dial-In" feature of AMDIV.PRONET(TM) provides institutional
correspondents with a secure link to Europe's and the U.S.'s major stock
markets using special terminals, which enable direct access through the
Company's integrated computer network. The Company is actively pursuing
additional technologies to service the rapidly evolving financial
services industry. See "Description of Business -- Development of
Products and Services."
- Provide Transaction Value to Investors. The Company strives to offer
investors transaction value by providing specified services at prices
that are among the lowest in the discount brokerage industry.
AMDIV.NET(TM) will be offered at a flat commission rate on Internet-only
trades for equity orders having a market value of up to EURO 11,000.
AMERICAN DIVERSIFIED(R) will provide investors with access to trained
registered representatives and other customized services for a fee equal
to .44% of the order volume for each equity order. Through more efficient
operations, synergies of strategic alliances, increasing volume and the
use of advanced technology, the Company strives to minimize costs, which
will allow it to offer some of the best transaction values in the
industry. See "Description of Business -- Development of Products and
Services" and "Description of Business -- Competition".
- Expand Mutual Fund Products and Distribution. ADAM is expanding its
sponsorship and distribution of mutual funds by developing one new
portfolio in the U.S., the International Value Fund. In addition, ADAM is
in the process of registering an umbrella fund in Dublin, Ireland under
the "UCIT's" directive for European distribution, which will offer three
sub-funds: Global Value, International Value and SmallCap Value
portfolios. The Ireland-based fund will be distributed in Germany and
other EU countries through ADAG's distribution network and other channels
in Europe.
- Expand the Underwriting of Initial Public Offerings. ADAG will engage in
underwriting initial public offerings for small and medium size EU
companies which plan to be listed on NASDAQ and the Frankfurt Stock
Exchange in Frankfurt, Germany. ADAG has commenced due diligence review
of four companies in connection with proposed initial public offerings.
ADAG intends to expand its underwriting business to take advantage of the
increased demand for equity financing among small and medium size
companies in the EU.
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THE OFFERING
Common Stock Offered by the
Company in this Offering...... 1,733,333(1)
Common Stock to be Outstanding
After this Offering........... 8,551,350(1)(2)
Preferred Stock to be
Outstanding After this
Offering...................... None(2)(3)
Use of Proceeds............... To pay all expenses incurred in connection with
this Offering and expenses relating to the
offer and sale of the Converted Shares by the
Selling Shareholders; to fund the Company's
expanded marketing and promotional activities;
to provide the reserves necessary to satisfy
the German net capital requirements; to finance
the cost of capital expenditures in the U.S.
and Europe, including the additional cost of
software development; to fund the Company's
planned expansion and acquisitions; and for
general corporate purposes.
Risk Factors.................. The Common Stock offered hereby should be
considered a speculative investment, including
the loss of the entire investment. See "Risk
Factors."
Dilution...................... Purchaser will be subject to immediate and
substantial dilution in the per share tangible
book value of the Common Stock offered hereby,
and may be subject to further and substantial
dilution as a result of additional securities
offerings in the future. See "Dilution."
Nasdaq National Market Symbol
(Proposed)(4)................. AMDIV
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(1) Does not include up to 246,667 additional shares of Common Stock issuable
upon exercise of an option granted to the Underwriters to purchase such
additional shares to cover over-allotments, if any (the "Over-Allotment
Option").
(2) Includes 1,666,667 shares of Common Stock issuable upon conversion of the
5,000,000 shares of Series A Preferred Stock acquired by the Selling
Shareholders.
(3) Assumes conversion of 5,000,000 outstanding shares of Series A Preferred
Stock acquired by to the Selling Shareholders into 1,666,667 shares of
Common Stock. See "Description of Securities -- Preferred Stock" and
"Concurrent Sales by the Selling Shareholders."
(4) Although the Company has applied for inclusion of the Common Stock on the
NASDAQ, there can be no assurance that the Common Stock will be included for
quotation on NASDAQ, or if so included that the Company will be able to
continue to meet the requirements for continued quotation. In addition,
there can be no assurance that a public trading market will develop or that
if such market develops, it will be sustained. See "Risk Factors -- No
Assurance of Public Trading Market or Qualification for NASDAQ Inclusion;
Possible Volatility of Stock Price."
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RISK FACTORS
In addition to the other information contained in this Prospectus, the
following risk factors should be carefully considered in evaluating the Company
and its business before purchasing any of the Units offered hereby. This
Prospectus contains forward-looking statements within the meaning of Section 27A
of the Securities Act. Discussions containing such forward-looking statements
may be found in the material set forth under "Prospectus Summary," "Use of
Proceeds," "Management Discussion and Analysis of Financial Condition and
Results of Operations" and "Description of Business," as well as within the
Prospectus generally. Actual results could differ materially from those
described in the forward-looking statements as a result of the risks and
uncertainties set forth below and within the Prospectus generally.
LIMITED OPERATING HISTORY AND LOSSES FROM OPERATIONS CREATES UNCERTAINTY ABOUT
FUTURE RESULTS
The Company is a development stage enterprise which was formed on February
4, 1997 for the purpose of engaging in the financial services business through
its subsidiaries in Europe and the United States. Except for the merged
operations of ADAM, the Company has a limited operating history and is planning
to implement an aggressive business expansion strategy involving the development
and distribution of sophisticated financial products and services in Europe and
the United States. No assurance can be given that the Company will be able to
successfully develop and market its proposed products and services in any of its
targeted market sectors.
In addition, from its inception through May 31, 1998, the Company has
devoted the bulk of its resources to raising capital and implementing the first
phase of its business plan and has experienced aggregate losses of $1,846,044.
See the "Unaudited Proforma Consolidated Statement of Operations" of the Company
for an analysis of the losses of the Company and the merged operations of ADAM
on a proforma basis. The Company and its subsidiaries are expected to have
further and substantial losses during its start-up phase primarily due to the
high costs associated with the formation of a new banking institution and the
marketing and promotion of mutual funds and other financial services in its
market area. Results of operations in the future will be influenced by numerous
factors including, among others, expansion, the ability of the Company to manage
its growth and maintain the quality of its personnel, and the ability of the
Company to implement its strategic plan. There is no assurance that the Company
will ever operate profitably. Any future success that the Company might enjoy
and its results of operations in the future will also depend upon many factors
which may be beyond the control of the Company or which cannot be predicted at
this time. These factors may include changes in the securities and banking
industries, technological advances or product obsolescence, increased levels of
competition including the entry of additional competitors and increased success
by existing competitors, changes in general economic conditions, increases in
operating costs including costs of personnel and equipment, reduced margins
caused by competitive pressures and other factors. These conditions may have a
materially adverse effect upon the Company or may force the Company to reduce or
curtail operations.
NEED FOR ADDITIONAL CAPITAL
The Company believes that the net proceeds of this Offering will be
sufficient to finance the cost of operations through December 31, 2002. However,
additional capital will be required to effectively support the operations and to
otherwise implement the Company's overall business strategy. The Company has no
commitments for any such additional capital at this time and there can be no
assurance that financing will be available when needed on terms that are
acceptable to the Company. In addition, if the costs and expenses to be incurred
for commencing marketing and product development exceed the proceeds of this
Offering, the need for additional working capital may arise earlier than
expected. The inability to obtain additional capital will restrict the Company's
ability to grow and may reduce the Company's ability to continue as a going
concern.
DELAY IN COMMENCING OPERATIONS
ADAG has applied for a full banking license in Germany to engage in its
planned securities brokerage business. The Company cannot provide any assurance
or guarantee that the regulatory approvals necessary for
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<PAGE> 11
ADAG to commence its planned securities brokerage operations will be given in a
timely manner or at all. Any delay in commencing operations will increase
pre-opening expenses and postpone realization of potential revenues by ADAG and
the Company. Absent the receipt of revenues and commencement of profitable
operations, the Company's accumulated deficit will continue to increase (and
book value per share decrease) as operating expenses such as salaries and other
administrative expenses continue to be incurred.
DEPENDENCE ON COMPUTER SYSTEMS
The Company will receive and process trade orders through the Internet and
personal terminals. These methods of trading will be heavily dependent on the
integrity of the electronic systems supporting them. Extraordinary trading
volumes could cause the Company's computer systems to operate at an unacceptably
low speed or even fail. Any significant degradation or failure of the Company's
computer systems or any other systems in the trading process (e.g., online
service providers, record keeping and data processing functions performed by
third parties and third-party software such as Internet browsers) could cause
customers to suffer delays in trading. Such delays could cause substantial
losses for customers and could subject the Company to claims from customers for
losses, including litigation claiming fraud or negligence. There can be no
assurance that the Company's network structure will operate appropriately in the
event of a computer systems failure or that, in the event of a tornado, fire or
any other natural disaster, power or telecommunications failure, act of God or
war, the Company will be able to prevent an extended computer systems failure.
Any computer systems failure that causes interruptions in the Company's
operations could have a material adverse effect on the Company's business,
financial condition and operating results. See "Description of
Business -- Systems."
DEPENDENCE ON INTELLECTUAL PROPERTY RIGHTS
The Company's success and ability to compete are dependent to a significant
degree on its proprietary technology. The Company relies primarily on copyright,
trade secret and trademark law to protect its proprietary technology. The
Company has registered and unregistered trademarks, various registered and
unregistered copyrights and certain licenses of technology with third parties.
The Company has no patents. The source code for the Company's proprietary
software is protected as a trade secret. In addition, it is the Company's policy
to enter into confidentiality and noncompetition agreements with its associates
and generally to control access to and distribution of its proprietary
technology. Notwithstanding the precautions taken by the Company to protect its
intellectual property rights, it is possible that third parties may copy or
otherwise obtain and use the Company's proprietary technology without
authorization or otherwise infringe on the Company's proprietary rights. It is
also possible that third parties may independently develop technologies similar
to those of the Company. Policing unauthorized use of the Company's intellectual
property rights may be difficult, particularly because it is difficult to
control the ultimate destination or security of information transmitted over the
Internet. In addition, the laws of foreign countries may afford inadequate
protection of intellectual property rights.
MANAGEMENT OF GROWTH
The Company plans to expand its business with the formation of subsidiaries
in Austria, Spain, Ireland and Switzerland. To a significant extent, the
Company's future success will be dependent upon its ability to engage in a
successful expansion program and will be dependent, in part, upon its ability to
secure regulatory approvals in its chosen markets, attract customers for its
financial products, maintain adequate financial controls and reporting systems,
manage its growth, and obtain additional capital upon favorable terms. There can
be no assurance that the Company will be able to successfully implement its
planned expansion, finance its growth or manage the resulting larger operation.
VOLATILE NATURE OF SECURITIES BUSINESS
A substantial portion of the Company's revenues will be derived from
securities brokerage services. The securities business is volatile and is
directly affected by national and international economic conditions, broad
trends in business and finance and fluctuations in volume and price levels of
securities transactions, all of
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<PAGE> 12
which are beyond the control of the Company. Reduced trading volume generally
results in reduced transaction revenues and decreased profitability. Severe
market fluctuations in the future could have a material adverse effect on the
Company's business, financial condition and operating results. The securities
business is also subject to various other risks, including customer default,
employees' misconduct, and errors and omissions and litigation. Losses
associated with these risks could have a material adverse effect on the
Company's business, financial condition and operating results. The securities
industry has undergone many fundamental changes during the last two decades,
including regulation and deregulation at federal and state levels, the emergence
of discount brokers, the dominance of institutional investors and consolidation.
Several current trends are also affecting the securities industry, including
increased use of technology and greater self-reliance of individual investors.
See "Description of Business." There can be no assurance that these trends or
future changes in the securities business will not have a material adverse
effect on the Company's business, financial condition and operating results. In
addition, commissions charged to customers of discount brokerage services have
steadily decreased over the past several years, and the Company expects such
decreases to continue. There can be no assurance that such decreases will not
have a material adverse effect on the Company's business, financial condition
and operating results. See "-- Competition."
RAPIDLY EVOLVING MARKETS
The market for electronic discount brokerage services is at an early stage
of development and is rapidly evolving. As is typical for new and rapidly
evolving markets, demand and market acceptance for recently introduced services
and products are subject to a high level of uncertainty. The Company's planned
services over the Internet involve alternative approaches to securities
transactions and, as a result, intensive marketing and sales efforts may be
necessary to educate prospective customers regarding the uses and benefits of
the Company's electronic discount brokerage services and products. Consumers who
already obtain brokerage services from more traditional full-commission
brokerage firms, or even discount brokers, may be reluctant or slow to change to
obtaining brokerage services over the Internet, automated touch tone telephone
and personal computer. Moreover, the security and privacy concerns of existing
and potential users of the Company's services may inhibit the growth of
electronic discount brokerage trading. There can be no assurance that the market
for electronic brokerage services will continue to grow.
Sales of some of the Company's services and products will depend upon the
broader adoption of the Internet by consumers as a medium for commerce and
communication. Use of the Internet depends on the development of the necessary
infrastructure and complementary services and products, such as high speed
modems and high speed communication lines. As the number of users and amount of
traffic on the Internet continues to increase, there can be no assurance that
the Internet infrastructure will continue to be able to support the demands
placed on it. In addition, delays in the development or adoption of new
standards and protocols to handle increased levels of Internet activity or
increased governmental restrictions could impede further use of the Internet.
Moreover, consumer concerns about the Internet (including security, reliability,
cost, ease of use, accessibility and quality of service) remain unresolved and
may negatively affect the growth of Internet use. As a result, there can be no
assurance that the number of the Company's transactions generated over the
Internet will continue to increase.
RISKS ASSOCIATED WITH NEW PRODUCTS AND NEW MARKETS
The market for financial services, particularly the market for electronic
discount brokerage services, is characterized by rapid technological change,
changing customer requirements, frequent service and product enhancements and
introductions and emerging industry standards. The introduction of services or
products embodying new technologies and the emergence of new industry standards
can render existing services or products obsolete and unmarketable. The
Company's future success will depend, in part, on its ability to develop and use
new technologies, respond to technological advances, enhance its existing
services and products and develop new services and products on a timely and
cost-effective basis. There can be no assurance that the Company will be
successful in effectively developing or using new technologies, responding to
technological advances or developing, introducing or marketing service and
product enhancements or new services and products. In addition, the Company may
enter into new markets in connection with enhancing its
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<PAGE> 13
existing services and products and developing new services and products. There
can be no assurance that the Company will be successful in pursuing new
opportunities or will compete successfully in any new markets. See "-- Risks
Associated with Strategic Acquisitions and Relationships."
DEPENDENCE ON KEY MANAGEMENT AND PRINCIPAL CONSULTANTS
The Company will rely on the business and technical expertise of its
executive officers and certain other key employees, particularly its Chairman of
the Board and Vice President-International Development, Peter Hartmann and its
President and Chief Executive Officer, James Buchanan Rea, Jr. The Company is
also dependent upon the advisory services of its principal consultants, Ladas &
Hulings, Inc., and its founder, Mr. William R. Hulings. The Company does not
maintain key man life insurance on these individuals. The loss of the services
of any of these executives or consultants could have a material adverse affect
on the Company and no assurance can be given that their services will be
available in the future. The Company's success will also be dependent on its
ability to attract and retain additional qualified management personnel. See
"Directors, Executive Officers and Significant Employees."
RISKS ASSOCIATED WITH STRATEGIC ACQUISITIONS AND RELATIONSHIPS
The Company is planning to pursue strategic acquisitions of complementary
businesses and technologies. Acquisitions entail numerous risks, including
difficulties in the assimilation of acquired operations and products, diversion
of management's attention to other business concerns, amortization of acquired
intangible assets and potential loss of key employees of acquired companies.
There can be no assurance that the Company will be able to integrate
successfully any operations, personnel, services or products that might be
acquired in the future or that any acquisition will enhance the Company's
business, financial condition or operating results.
REGULATION
The international investment management and broker-dealer operations of the
Company and its subsidiaries are subject to extensive regulation, supervision
and licensing under various U.S. federal and state laws and regulations and
under the securities and corporate laws and regulations of the European
countries under which it will market its financial services. As a registered
broker-dealer and a registered investment advisor in the United States, ADAM
will be subject to the regulatory authority of the National Association of
Securities Dealers, Inc. ("NASD") and the Securities and Exchange Commission
(the "Commission"). ADAM must comply with applicable provisions of the
Securities Exchange Act of 1934 and the Investment Company Act of 1940. See
"Risk Factors -- Government Regulation." One of the most important regulations
with which ADAM must comply with as a registered broker-dealer is the
Commission's rule 15c3-1 (the "Net Capital Rule") which requires the
broker-dealer subsidiaries of the Company to maintain a minimum amount of net
capital, as defined under such regulations. See "-- Effect of Net Capital
Requirements."
The Company and its German subsidiary, ADAG, will also be subject to
securities regulation in Germany and the various EU jurisdictions where they
establish business operations or distributes financial services products.
Compliance with many of the regulations applicable to the Company involves a
number of risks, particularly in areas where applicable regulations may be
subject to interpretation. In the event of non-compliance with an applicable
regulation, governmental regulators and the NASD may institute administrative or
judicial proceedings that may result in censure, fine, civil penalties
(including treble damages in the case of insider trading violations), issuance
of cease-and-desist orders, deregistration or suspension of the non-compliant
broker-dealer or investment adviser, suspension or disqualification of the
broker-dealer's officers or employees or other adverse consequences. The
imposition of any such penalties or orders on the Company could have a material
adverse effect on the Company's operating results and financial condition. See
"Description of Business -- Government Regulation."
The regulatory environment in which the Company operates is subject to
change. The Company may be adversely affected as a result of new or revised
legislation or regulations imposed by the Commission, other United States or
foreign governmental regulatory authorities or the NASD. The Company also may be
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<PAGE> 14
adversely affected by changes in the interpretation or enforcement of existing
laws and rules by these governmental authorities and the NASD.
LACK OF TRADEMARK PROTECTION
The Company has applied for, but has not been issued any registered
servicemark for its "AMERICAN DIVERSIFIED" or "AmDiv" service-names in the
United States. No assurance can be given that the Company will be successful in
obtaining these marks, or that the servicemarks, if obtained, will afford the
Company any competitive advantages. See "Description of Business -- Servicemark
Application."
IMMEDIATE AND SUBSTANTIAL DILUTION
The Price to Public is significantly higher than the net tangible book
value per share of the Company's Common Stock. Purchasers in the Offering will
experience immediate and substantial dilution in the net tangible book value of
their investment in the Common Stock of approximately $9.72 per share. See
"Dilution."
POTENTIAL FOR SECURITY COMPROMISES
The secure transmission of confidential information over public networks
will be a critical element of the Company's operations. The Company will be
required to rely on encryption and authentication technology, including public
key cryptography technology, to provide the security and authentication
necessary to effect secure transmission of confidential information over the
Internet. There can be no assurance that advances in computer capabilities, new
discoveries in the field of cryptography or other events or developments will
not result in a compromise of the technologies or other algorithms which may be
used by the Company to protect customer transaction and other data. Any such
compromise of the Company's security could have a material adverse effect on the
Company's business, financial condition and operating results.
EFFECT OF NET CAPITAL REQUIREMENTS
The Commission, the NASD and various other regulatory agencies have
stringent rules with respect to the maintenance of specific levels of net
capital by securities brokers, including the Commission's Uniform Net Capital
Rule (the "Net Capital Rule"), which governs ADAM, the Company's U.S.
subsidiary. The Company's German subsidiary, ADAG, will be subject to similar
net capital requirements under the German Banking Supervisory Act. Failure to
maintain the required net capital may subject a firm to suspension or revocation
of registration by the Commission and suspension or expulsion by the NASD and
other regulatory bodies and ultimately could require the firm's liquidation. In
addition, a change in the applicable net capital rules, the imposition of new
rules or any unusually large charge against net capital could limit those
operations of the Company that require the intensive use of capital, such as the
financing of customer account balances, and also could restrict the Company's
ability to withdraw capital from its brokerage subsidiaries, which in turn could
limit the Company's ability to pay dividends, repay debt and repurchase shares
of its outstanding stock. A significant operating loss or any unusually large
charge against net capital could adversely affect the ability of the Company to
expand or even maintain its present levels of business, which could have a
material adverse effect on the Company's business, financial condition and
operating results. See "Description of Business -- Government Regulation" and
"Net Capital Requirements; Liquidity."
BROAD DISCRETION IN THE USE OF PROCEEDS
The Company expects to use the net proceeds primarily to fund its
operations, planned expansion and for other general corporate purposes.
Consequently, the Board and management of the Company will have broad discretion
in allocating the net proceeds of the Offering, which creates uncertainty for
shareholders and could adversely affect the Company's financial condition and
future results of operations. See "Use of Proceeds."
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NO ASSURANCE OF PUBLIC TRADING MARKET OR QUALIFICATION FOR NASDAQ INCLUSION;
POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Common
Stock. The Company has applied for quotation of the Common Stock on the Nasdaq
National Market under the trading symbol "AMDIV." There can be no assurance that
an active public market will develop or be sustained for the Common Stock. The
initial public offering price will be determined through negotiations between
the Company and the representatives of the Underwriters and may not be
indicative of the market price for the Common Stock after the completion of the
Offering. The market price of the Common Stock after completion of the Offering
could be subject to significant fluctuations in response to quarterly variations
in operating results, announcements of technological innovations or new services
or products by the Company or its competitors, changes in financial estimates by
securities analysts or other events or factors, many of which are beyond the
Company's control. In addition, the stock market has experienced significant
price and volume fluctuations that have particularly affected the market prices
of equity securities of many technology companies and that often have been
unrelated to the operating performance of such companies. These broad market
fluctuations may adversely affect the market price of the Common Stock. There
can be no assurance that purchasers of Common Stock will be able to resell their
Common Stock at prices equal to or greater than the initial public offering
price. See "Underwriting."
Moreover, if for any reason, the Company's Common Stock is not eligible for
continued listing on NASDAQ or another public trading market, purchasers of the
Common Stock may have difficulty selling their securities should they desire to
do so. Under newly adopted rules of the National Association of Securities
Dealers, Inc. ("NASD"), in order to qualify for initial quotation of securities
on NASDAQ, a company, among other things, must have at least $18.0 million in
net tangible assets, $1.1 million in public float shares, $18.0 million in
market value of public float and a minimum bid price of $5 per share. For
continued listing, a company, among other things, must have $4.0 million in net
tangible assets, $750,000 in public float shares, $5.0 million in market value
of public float and a minimum bid price of $1 per share. If the Company is
unable to satisfy the requirements for quotation on NASDAQ, trading, if any, in
the Common Stock could be conducted in the over-the-counter market in what are
commonly referred to as the "pink sheets" or on the NASD OTC Electronic Bulletin
Board. As a result, an investor may find it more difficult to dispose of, or to
obtain accurate quotations as to the price of, the Common Stock offered hereby.
The above-described rules may materially adversely affect the liquidity of the
market of the Company's securities.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have approximately
8,551,350 shares of Common Stock outstanding out of a total of 20,000,000 shares
of Common Stock authorized, after giving effect to the issuance of 1,666,667
shares of Common Stock upon conversion of the 5,000,000 shares of Series A
Preferred Stock but excluding up to 246,667 shares of Common Stock issuable upon
exercise of the Underwriter's Over-Allotment Option. The shares of Common Stock
offered hereby will be freely tradeable without restriction or further
registration under the Securities Act of 1933, as amended (the "Securities
Act"), by persons other than "affiliates" of the Company within the meaning of
Rule 144 promulgated under the Securities Act. The remaining shares of Common
Stock outstanding will be "restricted" shares which may be sold in the public
securities market without registration under the Securities Act to the extent
permitted by Rule 144 (or Rule 145, as applicable) promulgated under the
Securities Act or any exemption under the Securities Act. Of the 5,151,350
restricted shares, 500,00 shares of Common Stock are currently eligible for sale
under Rule 144, and 4,618,750 shares of Common Stock will be eligible for sale
under Rule 144 beginning in March 1999. See "Shares Eligible for Future Sale."
Shares of Common Stock not issued or reserved for issuance may be issued
without any action or approval of the Company's shareholders. Any such issuance
could be used as a means of discouraging, delaying or preventing a change in
control of the Company or could dilute the public ownership of the Company.
Future sales of a substantial amount of Common Stock in the public market, or
the perception that such sales may occur, could adversely affect the market
price of the Common Stock prevailing from time to time in the public market. See
"Shares Eligible for Future Sale."
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LITIGATION AND POTENTIAL SECURITIES LAWS LIABILITY
Many aspects of the Company's business involve substantial risks of
liability. An underwriter is exposed to substantial liability under federal and
state securities laws, other federal and state laws and court decisions,
including decisions with respect to underwriters' liability and limitations on
indemnification of underwriters by issuers. For example, a firm that acts as an
underwriter may be held liable for material misstatements or omissions of fact
in a prospectus used in connection with the securities being offered or for
statements made by its securities analysts or other personnel. In recent years
there has been an increasing incidence of litigation involving the securities
industry, including class actions that seek substantial damages. The Company
also will be subject to the risk of litigation from its other business
activities, including litigation that may be without merit. As the Company
intends actively to defend any such litigation, significant legal expenses could
be incurred. An adverse resolution of any future lawsuits against the Company
could materially adversely affect the Company's future operating results and
financial condition.
DEPENDENCE ON CASH INFLOWS TO MUTUAL FUNDS
A slowdown or reversal of cash inflows to mutual funds and other pooled
investment vehicles could lead to lower underwriting and brokerage revenues for
the Company since mutual funds purchase a significant portion of the securities
offered in public offerings and traded in the secondary markets. The recent
demand for new equity offerings has been driven in part by institutional
investors, particularly large mutual funds, seeking to invest cash received from
the public. The public may withdraw additional cash from mutual funds as a
result of a decline in the market generally or as a result of a decline in
mutual fund net asset values. To the extent that a decline in cash inflows into
mutual funds or a decline in net asset values of these funds reduces demand by
fund managers for initial public or secondary offerings, the Company's business
and future results of operations could be materially adversely affected.
Moreover, a slowdown in investment activity by mutual funds may have an adverse
effect on the securities markets generally.
DEPENDENCE ON SYSTEMS AND THIRD PARTIES
The Company's international investment management and broker-dealer
operations will be highly dependent on third-party communications and
information systems, including certain systems provided by clearing brokers. Any
failure or interruption of the Company's future clearing broker or third party
trading systems, could cause delays or other future problems in the Company's
securities trading activities, which could have a material adverse effect on the
Company's operating results. Such failures and interruptions may result from the
inability of certain computing systems (including those of the Company's
clearing broker, and other third party vendors) to recognize the year 2000.
There can be no assurance that the year 2000 issue can be resolved prior to the
upcoming change in the century. Although the Company may incur substantial
costs, particularly costs resulting from charges by its third party service
providers, in correcting year 2000 issues, such costs are not sufficiently
certain to estimate at this time. In addition, there can be no assurance that
such third party trading systems will not suffer any systems failure or
interruption, including one caused by an earthquake, fire, other natural
disaster, power or telecommunications failure, act of God, act of war or
otherwise, or that the Company's back-up procedures and capabilities in the
event of any such failure or interruption will be adequate.
COMPETITION
The investment management business is highly competitive. The Company
encounters significant competition in connection with the operation of its
business in the U.S., and expects to encounter substantial competition for
brokerage services and the distribution of U.S. mutual funds to its targeted
potential clientele in its primary marketing area in Germany. These services are
typically provided in Germany today through banks and savings institutions,
which are not primarily engaged in providing these services to individual
investors. 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
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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. See
"Description of Business -- Competition."
The Company will compete with a large number of investment management
firms, commercial banks, insurance companies, broker-dealers and other financial
services providers, which have greater resources, assets under management,
administration capability and a better developed operating infrastructure. A
large number of the Company's competitors also offer a broader range of
investment products than the Company, and have better name recognition and more
extensive customer bases as compared to the Company. These competitors may in
the future be able to respond more quickly to new or changing opportunities,
technologies and customer requirements than the Company and may be able to
undertake more extensive promotional activities, offer more attractive terms to
customers and adopt more aggressive pricing policies than the Company. Moreover,
current and potential competitors have established or may establish cooperative
relationships among themselves or with third parties or may consolidate to
enhance their services and products. The Company expects that new competitors or
alliances among competitors will emerge and may acquire significant market
share.
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THE COMPANY
The Company is a development stage enterprise which was formed to engage in
the financial services business in Europe and the United States. The Company was
incorporated in the State of Nevada on February 4, 1998. The Company's primary
function is the management of its two subsidiaries, ADAM and ADAG.
ADAM was founded in October 1997 to operate as a registered investment
advisor and broker-dealer. Effective March 31, 1998, ADAM merged with James
Buchanan Rea, Inc. ("JBRI") a California corporation, and succeeded to the
business of JBRI as a Registered Investment Adviser and licensed NASD
Broker/Dealer, Underwriter and Distributor. ADAM serves as Advisor, Underwriter
and Distributor to American Diversified Funds, Inc., a diversified, open-end
investment company registered under the Investment Company Act of 1940, with a
single series portfolio, the American Diversified Global Value Fund (formerly
the Rea-Graham Balanced Fund), a series mutual fund. See "Description of
Business -- General."
ADAG is a licensed distributor of financial products and underwriter in
Germany, which is expected to offer a full range of investments and banking
services through its EU subsidiaries. In order to provide securities brokerage
services, ADAG has applied for a full banking license in Germany, which is
expected to be approved by the end of the 1998 calendar year. ADAG has applied
for membership on the Frankfurt Stock Exchange located in Frankfurt, Germany.
The registration process has been completed and ADAG's membership will become
effective upon approval of ADAG's full banking license. ADAG has completed all
technical preparations necessary to commence operations, including installation
of network links to the stock exchanges. See "Description of
Business -- General."
Although the Company has a limited operating history, its management team
has extensive expertise and experience in the banking and financial services
industries in Europe and the United States. The principal executive offices of
the Company are located at American Diversified Holdings, Inc., 12100 Wilshire
Blvd., #680, Los Angeles, CA 90025.
USE OF PROCEEDS
If all 1,733,333 shares of Common Stock offered by this Prospectus are
sold, the Company will receive net proceeds of approximately $22,325,000
(assuming the public offering price is $14.00, and assuming the over-allotment
option is not exercised). If the Underwriters exercise the Over-Allotment
Option, the Company would receive an additional $3,177,000. Net proceeds are
determined after deduction of all commissions, discounts and expenses paid to
the underwriters (estimated to be $1,941,662) and after all expenses of the
Offering (estimated to be $242,000).
The Company intends, in the following order of priority, to use the net
proceeds of this Offering to:
<TABLE>
<CAPTION>
PERCENTAGE OF
AMOUNT NET PROCEEDS
---------- -------------
<S> <C> <C>
Marketing Activities........................................ $8,000,000 35.83%
- -- Advertising expenses, production of TV-Commercials in
conjunction to expand the Company's customer base
Net Capital Lock-up......................................... $6,000,000 26.88%
- -- Funds to be deposited in a special escrow account to
satisfy the German net capital requirement
Capital Investments......................................... $3,500,000 15.68%
- -- Expenditures for computer equipment and other technology,
furniture and fixtures for the new office premises in
Europe and the U.S
Software Development........................................ $1,500,000 6.72%
The remainder of the net proceeds will be used for the
development and acquisition of new forms of technology to be
used in the Company's business and for other general
corporate purposes, which may include the acquisition of the
complementary businesses and the increase of the Company's
net capital position. The Company does not currently have
any agreements with respect to any such acquisitions. Prior
to the application of the net proceeds to the Company as
described above, such funds will be invested in short-term
investment grade securities................................. $3,325,000 14.89%
</TABLE>
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The amount and timing of working capital expenditures may vary
significantly depending upon numerous factors, including the progress of the
Company's development and marketing efforts, the timing and costs involved in
obtaining regulatory approvals, competing technological and market developments,
the costs associated with commercialization of the Company's services and
products.
The Company believes that its available cash and existing sources of
funding, together with the proceeds of this Offering and interest earned
thereon, will be adequate to maintain its current and planned operations through
December 31, 2002. Thereafter, the Company may be required to obtain additional
capital to continue operations, as to which there can be no assurance. See "Risk
Factors -- Need for Additional Capital."
Until used, the Company intends to invest the net proceeds of this Offering
in interest-bearing, investment-grade securities. While the net proceeds are so
invested, the interest earned by the Company on such proceeds will be limited by
available market rates. See "Management's Discussion and Analysis of Financial
Condition and Results of Operation -- Plan of Operation."
DILUTION
As of May 31, 1998, there were 6,818,017 shares of Company Common Stock
outstanding, a net tangible book value per share of approximately $2.09 adjusted
on a Pro Forma basis to reflect the reverse 1:2 split of the outstanding shares
of the Company's Common Stock which was declared effective August 20, 1998, and
the conversion of the 5,000,000 shares of the Series A preferred Stock into
1,666,667 shares of Common Stock. Net tangible book value per share represents
the amount of the Company's total tangible assets less the Company's total
liabilities, divided by the number of shares the Company's Common Stock
outstanding.
After giving effect to the sale of the 1,733,333 shares of Common Stock
under this Offering at a price of $14.00 per share and the application of the
net proceeds therefrom, and after giving effect to the reverse 1:2 stock split
effective August 20, 1998 and the conversion of the 5,000,000 shares of Series A
Preferred Stock into 1,666,667 shares of Common Stock (but assuming no exercise
of the Underwriters' Over-allotment Option and no exercise of the options
granted pursuant to the 1998 Stock Option and Incentive Plan) there would be a
total of 8,551,350 shares of Company Common Stock outstanding with a net
tangible book value of approximately $4.30 per share. This would represent an
immediate increase in pro forma net tangible book value of $2.18 per share to
existing shareholders and an immediate dilution of $9.70 per share to new
investors. Dilution is determined by subtracting net tangible book value per
share after the Offering from the amount paid by new investors per share of
Common Stock. The following table illustrates the per share dilution:
<TABLE>
<S> <C>
Initial public offering price per share..................... $14.00
Pro forma net tangible book value per share as of May 31,
1998................................................... $ 2.12
Increase attributable to new investors.................... $ 2.18
Adjusted pro forma net tangible book value per share after
this Offering............................................. $ 4.30
------
Dilution per share to new investors......................... $ 9.70
======
</TABLE>
The following table summarizes, on a pro forma basis, as of May 31, 1998,
the difference between the existing shareholders and the new investors with
respect to the number of shares of Common Stock purchased from the Company, the
total consideration paid and the average price per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------- ---------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders................. 6,818,017(1) 79.7% $16,861,710(2) 41.0% $ 2.47
New investors......................... 1,733,333 20.3% $24,266,662 59.0% $14.00
--------- ----- ----------- -----
Total....................... 8,551,350 100.0% $41,128,372 100.0%
========= ===== =========== =====
</TABLE>
- ---------------
(1) After giving effect to the conversion of the 5,000,000 outstanding shares of
Series A Preferred Stock into the 1,666,667 Converted Shares, but assuming
no exercise of the Underwriters' Over-allotment Option and no exercise of
any of the options granted pursuant to the 1998 Stock Option Plan.
(2) Reflects the capital contribution of the existing holders of the Company's
shares of Common Stock and the holders of the 5,000,000 outstanding shares
of Series A Preferred Stock.
14
<PAGE> 20
DIVIDEND POLICY
Holders of shares of Common Stock are entitled to dividends when, as and if
declared by the Board of Directors, out of funds legally available therefor.
Holders of the Series A Preferred Stock are entitled to a cumulative
preferential dividend of $.09 per share, when and as declared by the Board of
Directors. On July 2, 1998, the Company declared dividends of $.045 per share on
the Series A Preferred Stock. Upon conversion of the Series A Preferred Stock,
the Company does not expect to pay any additional dividends in the foreseeable
future. The Company intends to use all retained earnings for working capital and
to finance the anticipated growth and expansion of its business enterprise.
CAPITALIZATION
The following table sets forth the Company's capitalization (i) as of May
31, 1998; and (ii) on a Pro Forma basis as adjusted to give effect to the
reverse 1:2 split of the outstanding shares of Common Stock which was declared
effective August 20, 1998, the conversion of the 5,000,000 shares of Series A
Preferred Stock acquired by the Selling Shareholders into 1,666,667 shares of
the Company's Common Stock and the receipt of net proceeds from the sale of
1,733,333 shares of Common Stock offered hereby, after deducting underwriting
discounts and commissions and estimated Offering expenses:
<TABLE>
<CAPTION>
MAY 31, 1998
---------------------
PRO FORMA
ACTUAL AS ADJUSTED
------ -----------
(IN THOUSANDS)
<S> <C> <C>
Shareholders' equity:
Preferred Stock, no par value, 10,000,000 shares
authorized, of which 5,000,000 have been designated
shares of Series A Preferred Stock, par value $1.00,
and which have been issued and are outstanding; Pro
Forma As Adjusted: 10,000,000 shares authorized; no
shares issued and outstanding.......................... 5,000 -0-
Common Stock, no par value, 20,000,000 shares authorized;
5,151,350 shares issued and outstanding(1); Pro Forma
As Adjusted: 20,000,000 shares authorized; 8,551,350
shares issued and outstanding.......................... 11,862 39,187
------ ------
Accumulated deficit....................................... (2,071) (2,071)
Total shareholders' equity........................ 14,791 37,116
------
</TABLE>
- ---------------
(1) After giving effect to the reverse 1:2 stock split, effective August 20,
1998. Excludes the 1,666,667 Converted Shares issuable upon conversion of
the Series A Preferred Stock.
15
<PAGE> 21
DESCRIPTION OF BUSINESS
GENERAL
The Company, through its two subsidiaries, ADAM in the U.S. and ADAG in
Germany, is a service and technology driven international provider of financial
services consisting mainly of full service discount securities brokerage, asset
management, sponsoring and distributing mutual funds, underwriting and related
services. The Company and its subsidiaries have assembled a staff of management,
brokerage, asset management and marketing personnel, including several former
key employees of major German banks and their subsidiaries.
The Company's management believes that an international financial services
group with management and offices in both the U.S. and Europe can attract a
clientele of institutional investors, banks, businesses and individuals. The
Company's business strategy is to provide individuals and small- to medium-sized
European banks with direct access to American financial markets and an
opportunity to invest in tailored U.S. mutual funds, such as the Fund. The
Company believes there is a new and growing market in Germany and the EU for the
distribution of U.S. investment products, particularly mutual fund shares to
individual investors and smaller financial institutions, as European investors
discover that other financial products are available as an alternative to
traditional savings account deposits in commercial banks. In addition, the
planned transition to the EURO in January 1999, is expected to increase the
demand for investments denominated in U.S. dollars.
The Company and its subsidiaries intend to market their services and
products in Europe through a systematic program of direct marketing to
prospective customers and through referral sources such as banks, insurance
providers, attorneys, accountants and to a lesser extent, personal business
contacts. Over the next two years, the Company's expansion plans include the
formation of subsidiaries and commencement of financial services businesses in
Vienna, Austria, Madrid, Spain, Dublin, Ireland and Zurich, Switzerland. Initial
steps have been taken to establish the Austrian and Irish subsidiaries. See
"Risk Factors -- Management of Growth."
The Company intends to finance its business expansion through sales of
equity capital in Europe and the U.S. On March 31, 1998, the Company completed a
$5,000,000 private placement of its Series A Preferred Stock at a price of $1
per share in Germany, in an offering that is exempt from U.S. securities laws
under Regulation S. Since its inception in February 1997, the Company has sold
9,000,000 shares of Common Stock for an aggregate consideration of approximately
$11,600,000 in a private transaction pursuant to applicable exemptions from
registration under U.S. state and federal securities laws. The 9,000,000 shares
of Common Stock were converted into 4,500,000 shares following the reverse 1:2
stock split, effective August 20, 1998.
ADAM
Through its U.S. subsidiary, ADAM, the Company is engaged in the management
and distribution in the U.S. of American Diversified Funds, Inc., an open-end
investment company registered under the Investment Company Act of 1940, which
currently offers a series portfolio, the American Diversified Global Value Fund.
ADAM plans to expand its mutual fund business by increasing the assets of the
Global Value Fund and by developing new mutual fund series in the U.S. and
Europe. ADAM currently has in registration a newly developed fund, the American
Diversified International Value Fund, for U.S. distribution (collectively with
the Global Value Fund, the "Funds"). Ladas & Hulings, Inc. ("Ladas & Hulings"),
a leader in global value investing with over 25 years of experience, became
sub-advisor to the Global Value Fund in April 1998 and will provide the
day-to-day investment management (sub-advisory services) for the Funds.
ADAM is in the process of registering an umbrella fund, American
Diversified Funds, plc, in Ireland under the "UCIT's" directive for European
(EU) distribution, which will offer three sub-funds: the Global Value,
International Value, and SmallCap Value portfolios. Marketing and distribution
services will be provided in Germany and other EU countries by ADAG, and through
alliances with medium-sized banks, broker-dealers, insurance agents, and
by-captive sales forces.
16
<PAGE> 22
Additionally, ADAM is preparing to act as broker for on-line brokerage
execution in U.S. markets for ADAG. The Company plans to expand the present
investment management business of ADAM by growing the Funds and introducing an
asset management business for high net worth individual and institutional
accounts using Ladas & Hulings as the asset manager.
ADAM has expanded its operations to New York to facilitate the distribution
of the Fund and new portfolios of American Diversified Funds, Inc. to U.S.
investors, and to increase the Company's domestic marketing and promotional
efforts. In August 1998, the Company retained Mr. Joseph E. Breslin to serve as
the Company's representative in New York City. Mr. Breslin will oversee the
management and development of the New York office, and will be primarily
responsible for expanding distribution of the Company's mutual fund series
through broker-dealers in New York. Mr. Breslin will also be responsible for the
recruitment of additional personnel and will serve as the Company's liaison in
the City of New York. Mr. Breslin is an attorney and has served as the President
and Director of an established group of mutual funds. See "Directors, Executive
Officers and Significant Employees."
ADAM has hired additional executives and support staff in the area of asset
management and brokerage services and retained experts in the areas of
technology, marketing, public relations, and management. New computer systems,
office equipment, phone systems, and technology are being added to insure that
efficient, cost effective, and customer oriented, investment products and
services are available in both the U.S. and EU markets.
ADAG
ADAG is presently engaged in mutual fund distribution and asset management
for clients in Germany. ADAG has developed substantial name recognition through
the aggressive advertisement of ADAG's services during the last four months.
Commencing on or about January 2, 1999, after approval of its full German
banking license, ADAG will provide securities brokerage services to individual
investors and institutions in Europe through the Internet and registered
representatives. The Company cannot provide any assurance or guarantee that the
regulatory approvals necessary for ADAG to commence its planned securities
brokerage operations will be given in a timely manner or at all. See "Risk
Factors -- Delay in Commencing Operations" ADAG will offer trade execution for
stocks, mutual funds, options and bonds, as well as market data and research
tools to investors in Europe. The electronic infrastructure and primary systems
necessary to operate ADAG's securities brokerage business are currently in place
and fully functional. ADAG has received over 10,000 applications for new
accounts during the last four months through the aggressive advertisement of its
services in Germany. In addition, ADAG intends to engage in underwriting initial
public offerings of small to medium size European companies, especially in
Germany.
The Company has developed a creative approach to the planned delivery of
brokerage and advisory services in Europe. ADAG will provide retail and
institutional financial services under two distinct brand names, each of which
will offer a range of services and commission rates designed to attract
investors within specific demographic categories. This branding strategy will
allow ADAG to align the cost structures of its brokerage business with the level
of services desired by its customers. By providing clearing and execution
services, ADAG will be able to expand its customer base, provide synergies to
its retail brokerage business, enhance mutual fund distribution and diversify
its revenues. AMERICAN DIVERSIFIED(R) will provide ADAG's high-net-worth
customers with a full range of brokerage services, private asset management and
mutual fund products, and is expected to engage in underwriting initial public
offerings of fast growing smaller companies. AMDIV.NET(TM) will provide discount
on-line securities brokerage services, research and investment analysis tools
exclusively through the Internet using advanced electronic systems.
AMDIV.NET(TM) also will provide European investors interested in the U.S.
securities market with multi-lingual service and with toll-free telephone access
from seven European countries. AMDIV.PRONET(TM) is a technologically advanced
financial system that will provide ADAG's correspondent European brokerage firms
and financial institutions with special terminals to access the major European
and U.S. stock markets through the Company's integrated computer network.
AMDIV.PRONET(TM) is expected to provide securities clearing and execution
services to approximately 700 independent broker-dealers, depository
institutions, registered investment advisers and financial planners in Germany.
See "-- Development of Products and Services."
17
<PAGE> 23
THE BUSINESS OPPORTUNITY
The Company believes that there is a new and growing market in the EU for
investment products denominated in U.S. dollars primarily due to the following
factors: (i) the planned transition in 1999 to a single European currency, the
EURO; (ii) the creation of new and expanding capital markets in Eastern Europe;
(iii) implementation of the directive on the Undertaking for Collective
Investments in Transferable Securities ("UCITS") in October 1989, which was
designed to create a single EU mutual funds market and has now expanded the
range of available funds for distribution in Europe; (iv) the continuing growth
of the mutual fund market; and (v) the Xetra(R) electronic trading system of the
Frankfurt Stock Exchange has expanded the number of tradeable instruments and
execution possibilities for electronic security trading. The integration of
other major European Stock Exchanges into this system and NASDAQ's interest in
participating, creates the possibility of a Pan-European stock market for the
future. Additionally, regulatory reforms in Germany and other EU countries have
enabled smaller financial services companies to compete for investment dollars
traditionally flowing to savings account deposits at commercial banks.
The services offered by the Company are typically provided in Germany today
through banks and savings institutions, cater primarily to large institutional
individual investors, rather than to individuals. Management of the Company
believes it has identified a niche market in Germany and the EU for providing
discount securities brokerage services to individual and small institutional
investors, including the marketing of U.S. mutual fund products. Brokerage
services offered by German banks are targeted for large institutional customers,
are expensive and do not address the needs of individual investors. German banks
typically encourage private clients to maintain savings accounts, and bank
personnel typically lack the incentives and expertise to provide individual
customers with U.S. style investment services. The large U.S. investment firms
operating in Germany typically prefer to market only to large institutional
clients and require minimum account balances in the $1,000,000 range. On the
investment banking side, there were approximately 31 public equity securities
offerings in Germany during 1997, and 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.
Management believes that an international financial services group with
offices in both the United States and Europe can attract a diverse clientele,
including institutional investors, banks, investors and individuals. The Company
is particularly focusing on Germany. The interest of German investors in foreign
securities and equity investments is growing rapidly, as are the German capital
markets. Germany's sole clearing organization, Deutsche Boerse Clearing has
reported a rise in deposits of foreign securities from 53.4 billion German Marks
to 100.8 billion German Marks, an increase of 47.4 billion German Marks (+88.8%)
during the years 1996 to 1997. During the first six months of 1998, the deposits
of foreign securities totaled 136.5 billion German Marks. Management believes
that these favorable conditions have created a strong demand for the
implementation of advanced electronic trading systems with direct access to the
worldwide equity markets.
INDUSTRY DEVELOPMENTS IN GERMANY
Before January 1998, the German market for financial products was
traditionally dominated by a group of large banks and insurance companies
marketing savings oriented investment vehicles to their depositors. Companies
interested in expanding their asset base through capital investment or
acquisitions have been generally required to fund the undertaking through cash
flow generated from operations or bank loans.
In an effort to harmonize financial services regulations within the EU,
German policies were changed with the revision of existing banking laws (6.
Novelle des KwGs) which became effective on January 1, 1998. These changes
allowed for the unbundling of investment services in Germany and have brought
approximately 7,000 small and medium sized distributors of financial products
under the regulation and supervision of the "Bundesaufsichtsamt fur das
Kreditwesen (BaKred)" the authority regulating the German banking industry.
At the same time the demand for equity financing has steadily grown after
the initial public offering of Deutsche Telekom in 1996. The "Neuer Markt" was
created in March 1997 on the Frankfurt Stock Exchange to provide a market for
technologically innovative companies. The market growth potential in Germany is
significant. Prior to opening the "Neuer Markt", only 10 to 20 companies
annually registered on the
18
<PAGE> 24
established exchanges in Germany. Since March 1997 the number of initial public
offerings has increased by approximately 300%. The Company believes that the
market will continue to expand as more entrepreneurs realize the competitive
advantage associated with a higher capital base.
These developments brought about the advent of regulated brokerage and
financial services firms, which provide financial advisory services and trade
execution services at a lower price than the banking institutions. Although
investors have been able to use discount brokerage services provided by
subsidiaries of major banks, the Company believes that many investors will
prefer to use the Internet discount brokerage services to be provided by the
Company, which will offer faster execution and are expected to be more efficient
and competitively priced as compared to traditional bank brokerage services.
The unbundling of brokerage services from the banking industry has
permitted investors to pick and choose among various financial service providers
for specified services. As a result, firms have emerged which provide the
services usually provided by banking institutions. Firms now specialize in
providing investment advice, financial information, and financial planning
services. Other firms specialize in providing underwriting services and discount
securities brokerage.
Consumers have expanded access to powerful, yet inexpensive technology and
are becoming more comfortable with and proficient in the use of this technology.
The use of this new technology to sort and deliver vast amounts of information,
to facilitate inexpensive communication of data and for the completion of
financial transactions has been growing at an accelerating rate. Specifically,
the Internet has produced thousands of new cyber-investors every day, primarily
through the World Wide Web. In Germany, more than three million households
conduct their banking on-line.
Investors are becoming more self-reliant and value conscious in the pursuit
of their financial goals. Investors are increasingly willing to acquire the
information and understanding of investment alternatives and have become
increasingly sophisticated and knowledgeable about investing. Access to a broad
range of financial information and advice has decreased the necessity for
full-service brokers. These investors make their own decisions about their
financial future and tend to seek greater value, often in the form of lower
transaction costs. As a result, the use of discount brokers and directly
marketed no-load mutual funds have increased in market share at the expense of
traditional providers charging a higher commission or sales load.
Finally, the growth in financial assets held by individual's is
accelerating. Large numbers of "baby boomers" are beginning to invest for their
children's education and for their own retirement. Additionally, it is estimated
that these individuals, many of whom have greater education, technical
capabilities and investment choices than their parents, as well as greater
access to information, will inherit up to $10 trillion from the previous
generation during the next decade. This represents the largest absolute
transference of wealth in German history.
The convergence of these trends is creating a new marketplace for financial
services. It is also creating a new investor, who is self-reliant, comfortable
with the use of technology and value oriented. The Company seeks to be the
leading provider of financial services in Germany, and eventually the EU, to
this new investor.
BUSINESS STRATEGY
The Company seeks to exploit the opportunities created primarily as a
result of regulatory reforms and changing conditions in the financial services
industry and to expand its market share by pursuing the following key
strategies:
- Market Distinct Brands. ADAG will market distinct brands with a range of
services and commission rates designed to appeal to specific groups of
investors within the financial service market. The Company believes that,
by tailoring products and services for customers within specific
demographic categories, ADAG can attract a broader range of investors
seeking brokerage services at discount prices. AMDIV.NET(TM) will offer
discount on-line brokerage services for investors seeking simple and
efficient execution services at the lowest possible transaction cost, who
are comfortable with the Internet and prefer to trade exclusively through
electronic communications in exchange for low-priced trade executions.
AMERICAN DIVERSIFIED(R) will provide ADAG's high-net-worth customers
19
<PAGE> 25
with a full range of brokerage services, private asset management and
mutual fund products, and underwriting services. AMDIV.PRONET(TM) is a
technologically advanced financial system that will provide ADAG's
correspondent European brokerage firms and financial institutions with
special terminals to access the major European and U.S. stock markets
through the Company's integrated computer network. Through this market
seggmentation approach, management believes that the Company and its
subsidiaries will be able to deliver products and services tailored to
meet the specific needs of its customers in the most cost efficient
manner. See "Development of Products and Services."
- Create Technologically Innovative Solutions to Investor Needs. The
Company plans to be the technology leader in the retail brokerage and
clearing and execution businesses. Since April 1997, the Company has
worked on the development of its integrated electronic systems, which
combine the Company's newly developed software with existing electronic
services in the U.S. and Europe. AMDIV.NET(TM) and AMDIV.PRONET(TM) each
comprise a single-source trading system for U.S. and European stocks,
which offer immediate execution services. The "Dial-In" feature of
AMDIV.PRONET(TM) provides institutional correspondents with a secure link
to Europe's and the U.S.'s major stock markets using special terminals,
which enable direct access through the Company's integrated computer
network. The Company is actively pursuing additional technologies to
service the rapidly evolving financial services industry. See
"Development of Products and Services."
- Provide Transaction Value to Investors. The Company strives to offer
investors transaction value by providing specified services at prices
that are among the lowest in the discount brokerage industry.
AMDIV.NET(TM) will be offered generally at a flat commission rate on
Internet-only trades for equity orders having a market value of up to
EURO 11,000. AMERICAN DIVERSIFIED(R) will provide investors with access
to trained registered representatives and other customized services for a
fee equal to .44% of the order volume, for each equity order. Through
more efficient operations, synergies of strategic alliances, an
increasing number of transactions and the use of advanced technology, the
Company strives to minimize costs, which allows it to offer some of the
best transaction values in the industry. See "-- Products and Services"
and "-- Competition".
- Expand Mutual Fund Products and Distribution. ADAM is expanding its
sponsorship and distribution of mutual funds by developing one new
portfolio in the U.S., the International Value Fund. In addition, ADAM is
in the process of registering an umbrella fund in Dublin, Ireland, under
the "UCIT's" directive for European distribution, which will offer three
sub-funds patterned: the Global Value, International Value and SmallCap
Value portfolios. The Ireland-based funds will be distributed in Germany
and other EU countries through ADAG's distribution network and other
channels in Europe.
- Expand the Underwriting of Initial Public Offerings. ADAG will engage in
underwriting initial public offerings for small and medium size EU
companies which plan to be listed on NASDAQ and the Frankfurt Stock
Exchange in Frankfurt, Germany. ADAG has commenced due diligence review
of four companies in connection with proposed initial public offerings.
ADAG intends to expand its underwriting business to take advantage of the
increased demand for equity financing among small and medium size
companies in the EU.
DEVELOPMENT OF PRODUCTS AND SERVICES
The Company's subsidiaries have developed a broad range of products and
services designed to address specific consumer needs. A demonstration of certain
of the Company's products and services, which demonstration is part of this
Prospectus, is available on the CD-ROM portion of this Prospectus attached to
the inside back cover page of this Prospectus. The Company is actively pursuing
opportunities to improve and increase the products and services offered to
customers.
Pursuing these opportunities demonstrates the Company's commitment to offer
its customers innovative products and services. The development of products and
services by the Company and its subsidiaries will continue to require
substantial capital expenditures. See "Use of Proceeds". The Company expenses
all research and development costs as they are incurred. The Company regularly
monitors the costs and projected
20
<PAGE> 26
benefits of its product and service developments to determine their continued
viability. The Company does not believe that the failure of any of its products
and services would have a material adverse effect on the Company's future
business, financial condition or operating results. See "Risk Factors -- Rapidly
Evolving Markets" and "Risk Factors -- Risks Associated with New Products and
New Markets."
MUTUAL FUND PRODUCTS
ADAM's mutual fund families in the U.S. will consist of value-oriented
mutual funds, including:
- American Diversified Global Value Fund
- American Diversified International Value Fund
ADAM's mutual fund families established in Ireland for distribution in the
EU will consist of value-oriented mutual funds, including:
- American Diversified Global Value Fund
- American Diversified International Value Fund
- American Diversified SmallCap Value Fund
The Funds are managed by ADAM, based on Benjamin Graham's "value
investment" principles. Ladas & Hulings, a leader in value investing with over
25 years of experience, will serve as investment sub-advisor to the Funds and
will provide their day-to-day management. Portfolios managed by Ladas & Hulings
have been rated by Nelson's Information as among the "Top 20" Money
Managers -- 10 year returns.
A principal component of ADAM's planned expansion involves marketing the
Funds to institutional investors. ADAM plans to develop a special class of
institutional series or shares for distribution to institutional investors. As
the Funds grows in size, the revenues and profitability of ADAM are expected to
increase because ADAM's revenues and income will be based on the net assets of
the Funds and with other mutual funds that it may manage in the future.
DISCOUNT SECURITIES BROKERAGE SERVICES
ADAG will provide Internet-discount brokerage services under the brand name
AMDIV.NET(TM) and brokerage services for its high-net-worth clients under the
brand name AMERICAN DIVERSIFIED(R). ADAG has also developed AMDIV.PRONET(TM), a
brand of services for European brokerage firms, banking institutions and other
institutional correspondents to access the major U.S. and European stock markets
on special terminals through the Company's integrated computer network. Through
this market segmentation approach, ADAG will offer a variable range of services
and competitive rate structures designed to attract specific groups of
individual and institutional investors in Europe.
The development of the Company's products and services will continue to
require substantial capital expenditures. See "Use of Proceeds."
21
<PAGE> 27
The following chart summarizes by brand these planned services and the
average commission per trade which ADAG expects to charge its customers:
<TABLE>
<CAPTION>
AMERICAN DIVERSIFIED(R) AMDIV.NET(TM) AMDIV.PRONET(TM)
----------------------- ------------- ----------------
<S> <C> <C> <C>
WAYS TO TRADE
Internet -- EURO 12.00* EURO 10.00*
Personal terminal EURO 20.00 -- --
Professional Terminal -- -- EURO 14.00*
Registered
representative EURO 22.00** -- --
PRODUCTS
U.S.-Stocks x x x
European-Stocks x x x
Foreign-Stocks x x x
Mutual funds x x x
Options x x x
Bonds x x x
Foreign securities x x x
SERVICES OFFERED
Live quotes x*** -- x
10 Minute delayed quotes -- x --
Research tools x*** x x
Credit card x -- --
Debit card -- x --
Check writing x -- --
News search x*** x x
Program investing x x x
Day trading x*** x x
</TABLE>
- ---------------
* For equity orders having a market value of up to EURO 11,000.
** 22% of the trading volume or a minimum charge of Euro 22.00.
*** With personal terminal only.
[LOGO AMDIV.NET(TM)]
AMDIV.NET(TM) will be a discount broker that offers technologically
advanced delivery systems for sophisticated on-line investors via the Internet.
AMDIV.NET(TM) customers will be able to place trades, obtain quotes and review
pertinent account information electronically using the Internet. AMDIV.NET's(TM)
web site will allow customers to enter orders for stocks, mutual funds and
options, to view their balances, positions, order status, quotes and transaction
history and to use research provided by various data service providers. The
research and market data available for AMDIV.NET(TM) customers will include
historical and intra-day charts, company reports, earnings estimates, stock
screening and general market information.
AMDIV.NET(TM) will offer an advanced program trading feature, which will
allow customers to create conditions under which orders will be placed and then
have their personal computer monitor the market to automatically place the
order. Customers will be able to design baskets of stocks to track and trade.
Investors
22
<PAGE> 28
also will be able to place spread, straddle and buy/write orders using the
AMDIV.NET(TM) features no other competing online-brokerage in Europe offers. In
addition, the system will provide investors access to multiple news and research
services. Customers will be able to access company highlights or detailed
company reports and earnings estimates from a variety of data banks. A prototype
system offering the above-described features is in the final stage of
development and is undergoing testing at this time.
In addition, AMDIV.NET(TM) will offer a wide range of third-party research
services to assist its customers in selecting the best trading strategy. Stock
research will include professional reports on over 20,000 listed companies on
the major U.S. and European exchanges, qualitative and quantitative analyses on
all major industry sectors and ranking tables, including performance ratios for
large, middle and small cap stocks. AMDIV.NET's(TM) stock alerts will notify
clients of earnings announcements, dividend reports, price changes of more than
3% and other significant events affecting investments.
AMDIV.NET(TM) will cater to investors who are comfortable with the Internet
and prefer to trade exclusively through electronic communications in exchange
for low priced trade executions. Customer inquiries will be accepted via e-mail
and representatives are required to respond within two hours, although responses
usually are sent by return e-mail instantly. Although AMDIV.NET(TM) maintain
toll-free telephone numbers for customer inquiries, these inquiries will be
limited to technical support and customer inquires during specified time
intervals. AMDIV.NET(TM) expects to charge a commission of EURO 12.00 for equity
orders having a market value of up to EURO 11,000. Based on published reports,
the Company believes that AMDIV.NET(TM) will offer one of the lowest commission
rates in the industry in Germany, especially on U.S.-securities.
[LOGO AMDIV.PRONET(TM)]
AMDIV.PRONET(TM) will be wholesale provider of discount brokerage and other
financial services to independent broker-dealers, registered investment advisors
and financial planners, including smaller banks, who serve their own retail
customers. AMDIV.PRONET(TM) will act as the discount brokerage arm of
correspondent institutional clients by providing their retail customers with
access to equity and bond markets. ADAG will maintain a staff of registered
representatives to service the retail customers of correspondent institutional
clients using AMDIV.PRONET(TM).
FINANCIAL SERVICES KIOSK
The Company is presently developing, in partnership with NCR, an Internet
based financial services kiosk, which will allow its customers to obtain all the
information and tools needed to manage their personal finances at financial
kiosks spread out through strategic locations in Germany, such as airport
waiting lounges and shopping centers. This application is based on ATM's and
gives customers the possibility to get cash, trade stock, check markets,
purchase insurance products and other services. The kiosks will be open for
shared-use by banks, brokers, investment advisors, mutual fund companies,
insurance companies and other financial institutions that wish to provide
financial services through this medium.
MARKETING
The Company and its subsidiaries seek to increase their market share
through direct-response advertising, advertising on their own and other Web
sites, a public relations program and co-marketing. ADAG has recently completed
an aggressive marketing campaign in Germany designed to bring brand name
recognition to ADAG's product lines. Based on preliminary surveys, over 62% of
ADAG's targeted investors in Germany are familiar with ADAG and have associated
it with U.S.-style financial services. The Company intends to
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significantly increase its spending on print, television, radio, direct mail,
telemarketing and online advertising during the next fiscal year. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview." From time to time, the Company may choose to increase
spending on advertising to target specific groups of investors or to decrease
advertising expenditures in response to market conditions.
ADAG's marketing focus in Germany is on advertising its discount brokerage
services as a less expensive and more efficient way of initiating transactions,
building awareness of the Company's product lines and the benefits of the
Company's services. Print advertisements are placed in a broad range of the
leading business, technology and financial publications, including HANDELSBLATT,
WIRTSCHAFTSWOCHE, CAPITAL, FOCUS and in the financial section of major daily
newspapers in Germany. ADAG also employs online advertising through Yahoo!,
America Online, CompuServe and other popular Web sites such as, FOCUS-Online.
ADAG's commercials are featured regularly on N-TV, Germany's leading channel for
stock exchange reports and during business programs of other major television
networks. ADAG also uses telemarketing and direct mail to advertise its products
and services. ADAG's aggressive advertising program in Germany has significantly
contributed to the increase in new account applications.
ADAM plans to expand the advertising of its mutual fund products in the
U.S., and to build awareness of the Funds' value investment approach. To promote
its marketing and expansion efforts, ADAM has engaged the services of R.J.
Lauren, a public relations consulting firm based in Westlake Village,
California. R.J. Lauren will be primarily responsible for developing marketing
programs to promote ADAM's mutual funds in the U.S. In addition, R.J. Lauren
will promote the Company's asset management services and assist the Company in
issuing press releases as necessary to inform the public of recent developments
affecting the Company's business and operations.
At the Company's Web sites, prospective customers both, in the U.S. and
Europe will be able to obtain detailed information on the services offered by
the Company and its subsidiaries, use an interactive demonstration system,
request additional information and complete an account application online.
Visitors to the Company's German Web site can obtain detailed information about
the U.S.-equity markets, NASDAQ and all major European stock exchanges. The
Company's programmers have developed a search engine which provides financial
information from over 800 sources. Visitors to ADAM's U.S.-based Web site will
be able to obtain performance information on the funds, request literature and
prospectuses online, download reports and get basic information about ADAM's
value investment approach. Based on the increased number of visits to the
Company's Web sites, the Company believes that on-line advertising is a
significant factor in increasing brand awareness and generating leads, as
consumers increasingly look to the Internet as a key source of information and
commercial activity.
The Company also pursues public relations opportunities to build brand
awareness. This campaign has resulted in interview appearances on television and
radio stations in the U.S. and Germany, in addition to profiles in the business
section of a variety of daily national newspapers. The Company also actively
seeks speaking opportunities at industry conferences and events in Europe.
CUSTOMER SERVICE
The Company and its subsidiaries strive to optimize the level of customer
service, provided to their clients by (i) expanding their use of technology to
handle most typical inquiries generated in the course of customers' securities
trading and related activities, (ii) ensuring adequate staffing with properly
trained and motivated personnel in their customer service departments, enabling
prompt response to customer inquiries and (iii) tailoring customer service to
the particular expectations of the clients of each of their respective services.
In order to optimize the level of service provided to European customers,
ADAG has installed advanced call handling capabilities and provides 24 hours,
365-day live customer service through an 800-number. The new phone-systems
provide automated answering, departmental call forwarding, information on
expected wait times, summary market data while on hold and integrated voice-mail
and response capabilities. The new telephone systems also allow linkage between
the caller identification units and the customer database to provide customer
service representatives with immediate access to customer's account data. It is
expected that
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these telephone systems will increase call-handling efficiency and enhance the
customers' experience when calling for service, particularly during periods of
heavy market activity.
The Company and its subsidiaries have also developed software and Web sites
which provide basic information on how to use the Company's services. For those
inquiries that cannot be answered through one of the Company's automated
systems, customers are encouraged to use e-mail for matters that are not time
sensitive. The Company's operating standards require a response within two hours
of receipt of the e-mail for such matters; however, the Company strives to
respond within 30 minutes of the original message. The Company also maintains
electronic bulletin boards where customers and potential customers can ask
questions and exchange information about the Company's services.
The Company plans to monitor the level of overall customer satisfaction
through use of customer response cards sent with trade confirmations or through
periodic surveys. Written comments, e-mails and electronic postings by customers
will be regularly reviewed by the Company's senior officers. The Company has
established a policy to respond to all customer questions, or complaints,
regardless of their mode of transmission.
COMPETITION
All aspects of the Company's investment management business are intensely
competitive. The Company competes with U.S. brokerage firms which have
affiliates in Germany and other EU countries and with German banking
institutions which are authorized, under German law, to offer both traditional
brokerage functions and investment advisory services. The Company encounters
significant competition in connection with the operation of its business in the
U.S. for its mutual fund products. The Company's competitors in the U.S. include
numerous enterprises with extensive experience in the financial services sector.
Therefore, the Company intends to use the bulk of its marketing resources to
promote its investment products in Europe, where it expects initially to
encounter only limited competition for its discount brokerage services and the
distribution of mutual funds to its targeted potential clientele in Germany, its
primary marketing area. The services offered by the Company are typically
provided in Germany today through banks and savings institutions, cater
primarily to large institutional individual investors, rather than to
individuals. Management of the Company believes it has identified a niche market
in Germany and the EU for providing discount securities brokerage services to
individual and small institutional investors, including the marketing of U.S.
mutual fund products. Brokerage services offered by German banks are targeted
for large institutional customers, are expensive and do not address the needs of
individual investors. German banks typically encourage private clients to
maintain savings accounts, and bank personnel typically lack the incentives and
expertise to provide individual customers with U.S. style investment services.
The large U.S. investment firms operating in Germany typically prefer to market
only to large institutional clients and require minimum account balances in the
$1,000,000 range. On the investment banking side, there were approximately 31
public equity securities offerings in Germany during 1997, and 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.
The Company expects competition to continue and intensify in the future.
There are currently approximately 10 discount brokerage firms in Germany, all of
them wholly owned subsidiaries of German commercial banks. These discount
brokerage firms include Comdirect Bank, ConSors Dicount Broker, Advance Bank,
Brokerage24 and Direkt Anlage Bank . The Company also encounters competition
from the established banks, which provide full-commission brokerage services as
well as mutual fund sponsors and other organizations, some of which provide
electronic services. Although these competitors are well established, they
generally lack the ability to provide prospective customers with the desired
capabilities in international securities trading. None of these competitors
offer direct execution of U.S. securities after 5:30 P.M., when the German
exchanges stop trading and, during the trading session, fast order execution for
U.S. securities is limited to the stock of the U.S. companies listed on one of
the German exchanges.
The Company believes, that providing investors with the ability to buy,
sell and execute trades in U.S. securities until the close of the trading
session in the U.S., 10 P.M. German time, will give the
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Company's Internet brokerage a significant advantage over all its competitors.
This will give ADAG's on-line customers the ability for day trading in U.S.
securities during the entire period from 8:30 A.M. to 10 P.M. German time.
The Company believes that the principal competitive factors affecting the
market for its discount brokerage services are price, customer service, quality
and speed of trade execution, delivery platform capabilities, ease of use,
graphical user interface, breadth of services and innovation. Firms compete on
the elements of price, technology, financial strength and customer service.
Based on management's experience, preliminary market research and the success
the Company's marketing campaign has enjoyed to date, the Company believes that
it can competes effectively with respect to each of these factors.
In addition, factors affecting the Company's business expansion success
include: 1) the abilities, performance records and reputations of its investment
managers; and, 2) its ability to develop new investment products and implement
marketing strategies in the U.S. and Europe. The marketability of the Company's
investment products, primarily mutual funds, is also dependent, in part, on the
relative attractiveness of their investment strategies and practices under
prevailing market conditions. There are relatively few barriers to entry by new
investment management firms or distributors of U.S. mutual funds in the EU
markets.
The general financial success of companies within the securities industry
over the past several years has strengthened existing and emerging competitors.
The Company believes that such success will continue to attract new competitors
to the industry such as large U.S. discount brokers such as e*trade, Charles
Schwab, AmeriTrade and similarly structured groups. Charles Schwab has already
commenced operations in Great Britain and is monitoring the German and European
markets closely. "e*trade" has signed a licensing agreement with E trade Central
Europe, Inc, which is owned by two emerging German financial services firms.
Commercial banking institutions and other financial institutions have become a
competitive factor in the securities industry by offering their customers
discounted financial services. While it is not possible to predict the type and
extent of competitive services that the banking institutions and other newly
emerging financial institutions ultimately may offer the Company may be
adversely affected by such competition.
There can be no assurance that the Company will be able to compete
effectively with current or future competitors or that the competitive pressures
faced by the Company will not have a material adverse effect on the Company's
business, financial condition and operating results. See "Risk
Factors -- Competition."
GOVERNMENT REGULATION
The international investment management and broker-dealer operations are
subject to extensive regulation, supervision and licensing under various U.S.
federal and state laws and regulations and under the securities and corporate
laws and regulations of the European countries under which it will market its
financial services.
ADAM's operations in the U.S. are subject to extensive regulation under
U.S. federal and state securities laws. The SEC is the federal agency
responsible for administering the federal securities laws in the U.S. In
general, broker-dealers are required to register with the SEC under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). Under the
Exchange Act, every registered broker-dealer that does business with the public
is required to be a member of and is subject to the rules of the NASD. The NASD
has established Rules of Fair Practice, which are subject to SEC approval, for
all securities transactions among broker-dealers and private investors, trading
rules for the over-the-counter markets, and operational rules for its member
firms. The NASD examinations of member firms, investigate possible violations of
the federal securities laws and its own rules, and conduct disciplinary
proceedings involving member firms and associated individuals. The NASD
administers qualification testing for all securities principals and registered
representatives for its own account and on behalf of the state securities
authorities.
In addition, broker-dealers are subject to extension regulations under
state laws. A recent amendment to the federal securities laws prohibits the
states from imposing substantive requirements on broker-dealers, which exceed
those imposed under federal law. The recent amendment, however, does not
preclude the states
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from imposing registration requirements on broker-dealers that operate within
their jurisdiction or from sanctioning such broker-dealers for engaging in
misconduct.
ADAM will continue the former operations of James Buchanan Rea, Inc.
("JBRI"), as a registered broker-dealer under the Securities Exchange Act of
1934 (the "1934 Act"), as amended, and as a registered investment advisor under
the Investment Company Act of 1940, as amended. ADAM is also registered as a
broker-dealer in the State of California.
ADAG, the Company's German subsidiary, is subject to regulation under
German law and in the various EU jurisdictions it may operate under in the
future. Germany recently revised its banking laws and for the first time,
financial service providers and broker-dealers are subject to rules and
regulation and supervision of the various regulatory agencies, mainly the
Bundesaufsichtsamt fuer das Kreditwesen ("BaKred"), the body regulating the
banking industries, as well as the Bundesaufsichtsamt fuer Wertpapierhandel
("BAWH"), the body regulating the securities transactions and stock exchanges
and the Bundesbank, Germany's Central Bank. The revision of the banking law was
adopted in October 1997 and became effective on January 1, 1998. ADAG currently
has a license which permits it to engage in product distributions, underwriting
and asset management activities. Due to the uncertainties regarding
interpretation of the new laws, ADAG has filed an application with the "BaKred"
to extend its current license to a full banking license. Upon approval of its
full banking license, ADAG will commence operations as a fully licensed bank and
brokerage firm. The Company cannot provide any assurance or guarantee that the
regulatory approvals necessary for ADAG to commence its planned securities
brokerage operations will be given in a timely manner or at all. See "Risk
Factors -- Delay in Commencing Operations."
All marketing activities by ADAG regulated by the BaKred, and all such
marketing materials are required to be reviewed by the Company's compliance
officer prior to release. If ADAG were to engage in soliciting orders or making
investment recommendations, it would become subject to additional rules and
regulations governing, among other things, the suitability of recommendations to
customers and sales practices.
ADAG will be engaged in clearing and settling transactions and maintaining
customer accounts. In its capacity as a depository bank, ADAG has to be a member
of the "Einlagensicherungsfond", the depository trust fund of the German Banking
Association. There can be no assurance that ADAG will be accepted as a member in
the future. As a depository bank, ADAG will be further required to comply with
the rules of banking institutions, including rules relating to possession and
control of customer funds and securities, margin lending and execution and
settlement of transactions.
NET CAPITAL REQUIREMENTS; LIQUIDITY
As a registered broker-dealer and member of the NASD, ADAM, the Company's
U.S. subsidiary, is subject to the Net Capital Rule. The Net Capital Rule, which
specifies minimum net capital requirements for registered brokers-dealers, is
designed to measure the general financial integrity and liquidity of a broker-
dealer and requires that at least a minimum part of its assets be kept in
relatively liquid form. See "Historical Operations of ADAM."
As a depository bank, ADAG will be subject to the net capital requirements
of the "Kreditwesengesetz". The law presently requires a minimum net capital of
10 million German Marks (approximately $5.6 million, for the operations planned
by ADAG. The BaKred can increase the net capital requirement at any time.
In general, net capital is defined as net worth (assets minus liabilities),
plus qualifying subordinated borrowings and certain discretionary liabilities,
and less certain mandatory deductions that result from excluding assets that are
not readily convertible into cash and from valuing conservatively certain other
assets. Among these deductions are adjustments (called "haircuts"), which
reflect the possibility of a decline in the market value of an asset prior to
disposition.
Failure to maintain the required net capital by ether subsidiary may
subject a firm to suspension or revocation of registration by the SEC, or
BaKred, and suspension or expulsion by the NASD and other regulatory bodies and
ultimately could require the firm's liquidation. The Net Capital Rule prohibits
payments
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of dividends, redemption of stock, the prepayment of subordinated indebtedness
and the making of any unsecured advance or loan to a stockholder, employee or
affiliate, if such payment would reduce the firm's net capital below a certain
level. The Net Capital Rule also provides that the SEC and the BaKred may
restrict for up to 20 business days any withdrawal of equity capital, or
unsecured loans or advances to stockholders, employees or affiliates ("capital
withdrawal") if such capital withdrawal, together with all other net capital
withdrawals during a 30-day period, exceeds 30% of excess net capital and it is
determined that the capital withdrawal may be detrimental to the financial
integrity of the broker-dealer. In addition, the Net Capital Rule provides that
the total outstanding principal amount of a broker-dealer's indebtedness under
certain subordination agreements, the proceeds of which are included in its net
capital, may not exceed 70% of the sum of the outstanding principal amount of
all subordinated indebtedness included in net capital, par or stated value of
capital stock, paid in capital in excess of par, retained earnings and other
capital accounts for a period in excess of 90 days.
A change in the Net Capital Rule, the imposition of new rules or any
unusually large charge against net capital could limit those operations of the
Company that require the intensive use of capital, such as the financing of
customer account balances, and also could restrict the Company's ability to
withdraw capital from its brokerage subsidiaries, which in turn could limit the
Company's ability to pay dividends, repay debt and repurchase shares of its
outstanding stock. A significant operating loss or any unusually large charge
against net capital could adversely affect the ability of the Company to expand
or even maintain its present levels of business, which could have a material
adverse effect on the Company's business, financial condition and operating
results.
ADAM is a member of Securities Investor Protection Corporation ("SIPC"),
which provides, in the event of the liquidation of a broker-dealer, protection
for customers' accounts held by each of them of up to $500,000 for each customer
account, subject to a limitation of $100,000 for claims for cash balances.
EMPLOYEES
As of July 31, 1998, the Company employed a total of 24 full-time
associates, including management and 12 part-time associates. The Company
believes that its future success will depend on its continued ability to attract
and retain highly skilled and qualified employees. The Company believes that its
relations with its employees are good.
The Company's employment assessment process is a critical factor in
identifying candidates whose abilities and potential create the opportunity to
be a successful associate with the Company. The assessment process includes an
in-person interview, a work-related behavioral trait profile, a cognitive
reasoning assessment test, a telephone structured interview to identify life
themes predictive of success, and a data entry "keyboarding" or computer skills
test when appropriate. The Company believes based on its experience to date that
its employment assessment process has a positive impact on the Company's
success.
The Company has approved a policy of paying cash bonuses to its management
and non-management employees out of a pool based on a percentage of annual
income. Bonuses are based upon the success of the Company and the individual job
performance of the employee.
The Company believes that the continuous training of its management,
employees and part-time associates is a key factor for the Company's ability for
rapid growth. The Company has established a training facility in Berlin and
implemented a training schedule.
SYSTEMS
The Company will use a variety of systems to support investors and the
Company's correspondents. The Company currently is developing a sophisticated
proprietary computer network that will link the various trading applications to
the proprietary core system, the AMDIV Operating System ("AMDOS"). All of the
customer trading applications will interface and feed data through standardized
messaging and formatting into AMDOS. AMDOS will deliver quotes and information
to the investor and route trades to the market.
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AMDOS will then update account balances and positions via multiple lines of
communication. AMDOS also will support other operations such as clearing
functions, account administration and record keeping.
The Company's technology relies on a scalable computer system connected to
the Internet backbone. To enhance the reliability of the system and integrity of
data, the Company maintains multiple backup systems. A backup power supply
supports the operations facility. Tape backups are made nightly to prevent a
loss of data. See "Risk Factors -- Dependence on Computer Systems."
The Company's technology is supported by an internal staff of programmers,
developers and operators 24 hours a day, seven days a week. The programming
staff is supplemented by a team of quality control analysts, Web page
developers, technical writers and design specialists who ensure the final
product is user-friendly and dependable. In addition to supporting the systems,
the staff continually enhances software and hardware and develops new services.
Software is designed to be versatile and easily adaptable to new and emerging
technologies.
The secure transmission of confidential information over public networks is
a critical element of the Company's operations. The Company relies on encryption
and authentication technology, including public key cryptography technology
licensed from Netscape Communications, Inc., to provide the security and
authentication necessary to effect secure transmission of confidential
information over the Internet. The Company has hired some of the best encryption
specialists available in Europe. See "Risk Factors -- Potential for Security
Compromises."
A major advantage is the Company's direct fiberoptic connections to the
Internet through a main backbone of UUNet. ADAG is connected to the fiberoptic
network COLT Telecom, one of Europe's most progressive providers of commercial
fiberoptic networks. COLT Telecom is servicing the majority of the German
banking industry and stock exchanges. ADAG has signed agreements to receive
unlimited network capacity for its data and telecommunication needs on scalable
basis to very competitive prices. The Company plans to connect the premises in
Berlin and Los Angeles by a direct line by the end of 1998.
SERVICEMARK APPLICATION
The Company has applied for, but not been issued any registered servicemark
for its "AMERICAN DIVERSIFIED(TM)" or "AmDiv(TM)" service-names in the U.S. ADAG
is also planning to register its trademarks in Germany and other European
countries. No assurance can be given that the Company will be successful in
obtaining these marks, or that the servicemarks, if obtained, will afford the
Company any competitive advantages. ADAG owns the "AMERICAN DIVERSIFIED"
trademark for Germany, which was registered on February 26, 1998 with the German
Patent and Trademark Office in Munich, registration No. 39745648.
LEGAL PROCEEDINGS
The Company is not a party to, nor is the Company's property the subject of
any pending legal proceeding.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
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.
PLAN OF OPERATION
The following discussion is based upon and should be read in conjunction
with the Company's financial statements, including the notes thereto, and the
cautionary statements regarding forward-looking statements.
The Company and its subsidiaries will offer financial services consisting
mainly of full service securities brokerage, Internet discount brokerage, asset
management, sponsoring and distributing mutual funds, underwriting and related
financial services. The Company is a development stage enterprise and, had not
generated any significant revenue from operations to date since its inception on
February 4, 1997.
The Company has financed its development activities through the sale of
equity securities to its existing stockholders in private transactions. As of
July 31, 1998, the Company had approximately $1.1 million in cash to conduct
operations. At the current expense rate, the Company anticipates that such
funds, together with $11,584,000 receivable by the Company in connection with
the sale of the "Bearer Note" issued by Immofin
Grundstuecksverwaltungsgessellschaft Conradi & Hilber GbRmbH, will be sufficient
to continue operations until December 31, 1999. Thereafter, the Company will be
dependent upon the receipt of additional capital to sustain operations. WITHOUT
ADDITIONAL CAPITAL, THERE IS SUBSTANTIAL UNCERTAINTY ABOUT THE ABILITY OF THE
COMPANY TO CONTINUE AS A GOING CONCERN. See "Interest of Management and Others
in Certain Transactions."
The Company intends to continue on-going development of its products and
services during the fiscal year ending August 31, 1999, to the extent permitted
by available financing. The Company and its subsidiaries do not anticipate any
significant sale of equipment during the fiscal year ending August 31, 1999, but
do expect to purchase various equipment for development purposes at an
anticipated cost of $1.5 million.
The Company has recently expended staffing at both executive and employee
levels and does not currently anticipate any additional significant changes in
the number of employees or compensation payable to employees. See "Description
of Business -- Employees" and "Directors, Executives and Significant Employees."
ADAM'S HISTORICAL OPERATIONS
ADAM merged with and into James Buchanan Rea, Inc., a California
corporation ("JBRI"), effective March 31, 1998, to acquire an existing mutual
fund operation and establish a presence for the Company in the U.S. JBRI served
as the investment advisor and distributor to the Rea-Graham Balanced Fund
(renamed the American Diversified Global Value Fund; interchangeably, the
"Fund"), a series mutual fund of American Diversified Funds, Inc. (formerly
named the "Rea-Graham Funds, Inc.") a diversified open-end investment company
registered under the Investment Company Act of 1940. ADAM has succeeded JBRI as
a registered broker-dealer and registered investment advisor and the
shareholders of the Fund have approved ADAM as investment advisor to the Fund.
The Fund was originally organized as a private limited partnership in 1976
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 continued to operate as a
separate series mutual fund of Rea-Graham Funds, Inc., which was succeeded by
American Diversified Funds, Inc., following the merger.
Pursuant to the revised investment advisory agreement, the Fund pays ADAM a
monthly advisory fee equal on an annual basis to 1% of the first $20,000,000 of
the Fund's net assets as of the close of business on
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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 ADAM a distribution fee payable monthly equal on an
annual basis to .35% of the Fund's average daily net assets.
The following discussion is based upon and should be read in conjunction
with JBRI's financial statements for the period ended December 31, 1996 and
December 31, 1997, and the Company's financial statements for the period ended
May 31, 1998 together with the notes related thereto.
JBRI'S OPERATIONS FOR THE PERIOD ENDED DECEMBER 31, 1996 COMPARED TO THE
PERIOD ENDED
DECEMBER 31, 1997
Results of Operations. Revenues for fiscal year-ended December 31, 1997
were $145,119 as compared to revenues of $166,059 for the fiscal year-ended
December 31, 1996, representing a cumulative decrease of approximately 12.6%.
The decrease in revenues was primarily due to a reduction of advisory and
distribution fees from the Fund, as the Fund's net assets declined from
$11,377,574 to $10,154,957 during this period.
Operating expenses consist of salary expenses, communications costs,
occupancy and equipment rental expenses and other operating expenses. Operating
expenses were $214,973 for the fiscal year-ended December 31, 1997 as compared
to operating expenses of $214,386 for the fiscal year-ended December 31, 1996.
However, operating expenses as a percentage of revenues increased approximately
19% to 148% for fiscal 1997 as compared to 129% for fiscal 1996, as a result of
the decline in revenues due to the decline in the Fund's net assets.
Net losses from operations for the fiscal year-ended 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.
JBRI was subject to the net capital rule (Rule 15c3-l) promulgated under
the 1934 Act, which prohibits a broker-dealer from engaging in securities
transactions when its aggregate indebtedness exceeds 15 times its net capital,
as those terms are defined in Rule 15c3-1. The net capital, required net capital
and net capital ratio for JBRI as of December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ---------
<S> <C> <C>
Net Capital........................... $ 10,199 $ 58,920
Required Net Capital.................. $ 5,000 $ 5,000
Net Capital Ratio..................... 1.17 to 1 17 to 1
========== =========
</TABLE>
THE COMPANY'S OPERATIONS FOR THE PERIOD ENDED MAY 31, 1998
Results of Operations. For the three months ended May 31, 1998, the Company
reported operating revenue of $13,758 all of which is attributable to ADAM. ADAM
reported revenues and operating expenses of $13,758 and $59,897, respectively
during the quarter ended May 31, 1998. ADAG is still in the organizational stage
and did not commence any significant business operations during the quarter.
Liquidity and Capital Resources. Initial promotional costs associated with
marketing efforts in Germany and costs associated with operating ADAG in Germany
increased the Company's monthly liquidity requirements to approximately $350,000
during the period ended May 31, 1998 as opposed to $100,000 and $20,000 during
the periods ended February 28, 1998 and the fiscal year ended August 31, 1997.
As such, costs incurred for employee compensation and advertising increased from
$116,993 and $52,831 in the second
31
<PAGE> 37
quarter to $159,414 and $538,538 in the third quarter. Cash inflows from the
sale of 2,791,000 shares of Series A Preferred Stock sold during the period
provided the working capital.
ADAM was subject to the net capital rule (Rule 15c3-1) promulgated under
the 1934 Act, which prohibits a broker-dealer from engaging in securities
transactions when its aggregate indebtedness exceeds 15 times its net capital,
as those rules are defined in Rule 15c3-1. The net capital, required net capital
and net capital ratio for ADAM as of May 31, 1998 were $84,796.00, $5,000.00,
and .11 to 1, respectively.
YEAR 2000 COMPLIANCE
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. The Year 2000 problem, however, is pervasive and complex as virtually
every computer operation will be affected in some way by the rollover of the two
digit year value to 00. Consequently, no assurance can be given that the
potential failure of third party systems will not increase the Company's
operating costs or create uncertainties that may have an adverse effect on the
Company's operating results of financial condition. See "Risk
Factors -- Dependence on Systems and Third Parties."
DESCRIPTION OF PROPERTY
The Company and its subsidiaries currently has two business offices under
lease. ADAM has a one-year lease for office space in Los Angeles from CB
Commercial, Inc. at $2,370 per month, which is the office space formerly
occupied by JBRI. ADAG has entered into a five-year lease expiring January 2003
for office space in Berlin from 58 Grundstucksverwalt Ungsgesellschaft -- Bull
and Liedtke, Hamburg, at $3,700 per month. Both premises are in good condition
and are adequately insured. It is anticipated that the Company will enter into
new office leases as additional subsidiaries are formed and the business
activities of the Company and its subsidiaries are expanded into additional EU
countries.
DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES
MANAGEMENT
The Company is assembling an international team of managers and
entrepreneurs with experience in the initial market area and a shared commitment
to its future growth and success.
PETER HARTMANN, age 42, Chairman of the Board and Executive Vice-President
of International Development, has over 20 years of experience with international
business development and project management. Between 1992 and January 1997, Mr.
Hartmann served as President and Chief Executive Officer of EMDC, an
international consulting company specializing in project development with
clients in Europe, Russia, Singapore and Vietnam. Although Mr. Hartmann has only
limited experience in the financial services industry, he has extensive in the
development of international companies and in mergers and acquisitions. He was
engaged by the Company to structure and develop its business. Mr. Hartmann
speaks five languages. Mr. Hartmann received his MBA degree from Glasgow College
of Technology, in Scotland.
JAMES BUCHANAN REA JR., age 42, Director, President and Chief Executive
Officer, has over 20 years experience in the mutual fund industry, especially in
financial, accounting and operating positions. Mr. Rea is President and Chief
Executive Officer of ADAM, the Company's U.S. investment advisory and brokerage
subsidiary. He served as President of JBRI, the predecessor of ADAM, since 1986.
He is also Chairman of the Board of ADAM, and has managed Rea-Graham Funds, Inc.
(renamed American Diversified Funds, Inc.) since 1986 as president, chief
executive officer and chairman of the board. From 1980 to November 1995 he was
vice president of James Buchanan Rea, Inc., the company founded by his father,
Dr. James Buchanan Rea. He is a registered investment advisor and broker-dealer
with the Commission, NASD, and State of California. Mr. Rea received his
Bachelor of Science degree from the University of Southern California.
32
<PAGE> 38
JOEL EPSTEIN, age 38, Executive Vice President of Operations, has over 11
years of professional experience as a CPA. Since April 1995, Mr. Epstein has
been providing financial consulting services for companies, including start-ups,
in various industries. From 1987 to 1995, Mr. Epstein served as Senior Vice
President and chief Financial Officer of the Pilgrim Group, Inc., a mutual fund
group. Prior to that time, Mr. Epstein was employed as an auditor with Peat
Marwick Main & Co. in Los Angeles for over three years. Mr. Epstein received his
Bachelor of Science degrees in Marketing and Accounting from California State
University, Northridge in 1982 and 1984, respectively.
T. MICHAEL GRAF, age 61, Executive Vice President of Asset Management, has
over 28 years of experience in portfolio management, new business development
and client servicing. Mr. Graf has six years of experience managing an
investment management organization. From 1986 to the present, Mr. Graf has
served as First Vice President of Schroeder Capital Management, Inc.
("Schroeder"). Schroeder merged Wertheim Schroeder Investment Services into
Schroeder Capital Management in July, 1995. Mr. Graf's primary responsibilities
at Schroeder have included business development for endowments, foundations and
high net worth individuals in the western half of the U.S. Mr. Graf has also
been responsible for servicing Schroeder's institutional and individual clients
on the west coast. Mr. Graf received his MBA degree from Harvard Business School
in 1962 and his Bachelor of Science degree in Petroleum Engineering from
Stanford University in 1960. Mr. Graf is a chartered investment counselor
("CIC") and a chartered financial analyst ("CFA").
ROLAND KUETTNER, age 43, Director, Chief Financial Officer and Treasurer,
qualified as a CPA in 1983 and gained ten years professional experience in North
America (the Pacific Northwest and eastern Canada) before moving to Germany. As
a Manager in the Accounting and Audit Division of Arthur Andersen & Co., Mr.
Kuettner gained extensive experience in dealing with matters affecting financial
reporting and control.
THOMAS C. CORCOVELOS, age 47, Director of the Company, is a partner in the
law firm of Corcovelos & Forry LLP in Manhattan Beach, California. Since 1985,
Mr. Corcovelos has served as Corporate Counsel and Federal Securities Compliance
Officer to JBRI, which was merged with and into ADAM, effective March 31, 1998.
Mr . Corcovelos received his Bachelor of Science degree from Loyola University
of Los Angeles in 1973, and his law degree from Boalt Hall School of Law,
University of California at Berkeley in 1976.
THOMAS H. FITZGERALD, JR., age 65, Director of the Company, is President of
T.H. Fitzgerald & Co., a Wall Street asset management firm, and a member of the
American Finance Association. Mr. Fitzgerald is also an advisor to the
management of the American Institution of Management and the Market Technician
Association. For more than 18 years Mr. Fitzgerald published the "Money Market
Directory," a world renowned reference book regarding investors and their
portfolio managers.
Messrs. Rea, Hartmann, Corcovelos, Epstein, Graf and Fitzgerald reside in
the U.S. Messrs. Kuettner reside in Berlin, Germany.
PRINCIPAL ADVISORS
Ladas & Hulings, Inc. ("Ladas & Hulings"), a registered investment advisor
founded in 1970 and headquartered in Scottsdale, Arizona, with regional offices
in Austin, Texas, and Palm Beach, Florida, is investment sub-advisor to the
Fund. Ladas & Hulings is also expected to secure an investment sub-advisor to
the new small-cap and international funds to be offered by ADAM in the future.
Ladas & Hulings currently has approximately $270.0 million in assets under
management, including $180.0 million in domestic managed accounts and $90.0
million in non-domestic managed accounts. Ladas & Hulings' investment style is
substantially similar to that of the Company's, involving the use of fundamental
investment analysis applied and adapted to the global equity markets.
Mr. William R. Hulings, age 45, President and Chief Investment Officer of
Ladas & Hulings, had over 25 years of experience in investment management. Mr.
Hulings has Masters of Science and MBA degrees from the University of Southern
California.
The Company has retained Mr. Joseph Breslin, age 44, to head the Company's
expanded offices in New York. Mr. Breslin has over 16 years of experience in
investment management services and the mutual
33
<PAGE> 39
funds industry. Since September 1994, Mr. Breslin has served as the President of
a wholly owned consulting firm specializing in all aspects of the investment
management business, including institutional and retail marketing, design and
formation of mutual funds and other investment services, advise on the sale or
acquisition of investment management firms or funds and expense/profitability
analyses of all aspects of mutual fund operations. From 1985 to July 1994, Mr.
Breslin variously served as the Vice President and General Counsel, President
and Director of the Mutual Fund Group at Spears, Benzak, Salomon & Farrell. From
1981 to 1985, Mr. Breslin was Senior Vice President -- Finance and General
Counsel of National Securities and Research Corporation. Mr. Breslin received
his law degree from Fordham University in 1980 and his Bachelor of Science
degree in Accounting from Georgetown University in 1975.
ADAG'S EXECUTIVE TEAM
ADAG's executive team includes a young group of experienced managers with
an average age of 29 and 9 years practical experience in the banking sector. The
German educational system provides graduates an opportunity to literally "learn
on the job" with a potential employer after completing high school. The
apprenticeship program, which leads to a Diploma in Commercial Banking, consists
of theoretical and practical instruction over a 2 to 3 year period. The employer
who is satisfied with a student's performance will generally offer that
individual a full-time position after completion of his studies. ADAG's Board of
Management consists of the following executives:
BERNWARD J. ROHMANN, age 47, Chief Executive Officer (Vorstand), has over
22 years international experience in the banking industry, in leading positions
with major financial institutions during the last 7 years. Mr. Rohmann studied
at the Ruhr-University, Bochum, Germany where he graduated 1975 with a degree as
economist (Diplom Okonom). From 1997 through 1991 Mr. Rohmann was the Head of
DM-Treasury Department at JP Morgan, Frankfurt where he also served as a member
of the JP Morgan Investment Committee for pension funds. Between 1991 and 1992
he was the responsible General Manager for reorganizing the London Branch of
Hessische Landesbank. From July 1992 through December 1993 Mr. Rohmann was a
member of the Executive Management Board in charge of Capital Markets,
Securities and the UBS Invest Division of Schweizerische Bankgesellschaft in
Frankfurt. From February 1994 through December 1996 Mr. Rohmann was a member of
the Executive Management Board in charge of Securities, treasury, Controlling
and DATA Processing of National Westminster Bank plc in Frankfurt. Mr. Rohmann
received a diploma for participating in the Advanced Management Program for
Overseas Bankers of the Wharton School in Philadelphia. He will commence his
duties on September 1, 1998.
VOLKMAR BREMBACH, age 29, Senior Executive, has over 9 years experience in
the banking sector. Mr. Brembach began as an apprentice with the Berliner
Sparkasse, a major banking institution, where he received his Commercial Banking
Diploma. Between 1993 and 1996 he was responsible for the development of two
investment and finance centers for Landesbank Berlin. From December 1996 through
June 1998, when he joined the Company, he was the department head of the best
performing investment and finance center of Landesbank Berlin. Mr. Brembach
holds a degree in Banking Business Management. Mr. Brembach is responsible for
asset management, brokerage, product development and underwriting funds.
KLAUS CONRADI, age 28, Senior Executive, has over 9 years experience in
banking and real estate. Mr. Conradi began as an apprentice with Dresdner Bank
in Berlin, where he received his Commercial Banking Diploma. From 1992 to 1994,
he worked at Dresdner as a department head in the real estate loan department.
From 1994 through June 1997, when he joined the Company, he was an executive
officer with IMOFIN GmbH Berlin, a real estate and finance company. Mr. Conradi
is a registered real estate appraiser and a professional banker. Mr. Conradi
holds Diplomas in Business Management and Banking Law from a business school in
Berlin. Mr. Conradi is responsible for compliance, administration, organization,
technology, marketing and sales and research. Mr. Conradi also served as a
Director of the Company from its inception in February 1997 to May 26, 1998,
where he resigned to focus his full attention on the development of ADAG's
operations in Europe.
The Departmental Management (Abteilungsleiter) of ADAG consists of Sven
Romeyka, Kay Molketin, Ksenija Advic, Jorg Trudering, Dr. Jan Block, Gabriela
Wegener and Marion Grigoleit.
34
<PAGE> 40
SVEN ROMEYKE, age 28, has 10 years experience in the banking sector. Mr.
Romeyke began as an apprentice with the Berliner Sparkasse, a major banking
institution, where he received his Commercial Banking Diploma. Since 1993 he has
been responsible for the high end private asset management clients of Landesbank
Berlin. He will begin with the Company on September 1, 1998. Mr. Romeyke holds a
degree in banking business management and Diplomas in Economy and Financial
Management (Bankfachwirt und Sparkassenfachwirt). He is responsible for the
asset management of the Company's private clients.
KAY MOLKETIN, age 29, was an apprentice with the Berliner Bank, a leading
banking institution, where he received his Commercial Banking Diploma. He then
studied at the University of Berlin, where he graduated with a degree in economy
(Diplom Betriebawirt) with an emphasis in planning, controlling and analysis. He
is knowledgeable in computer science and is responsible for the organizational
structure of the Company.
DR. JAN BLOCK, age 33, is expected to commence his responsibilities with
the Company on September 1, 1998. Dr. Block was employed in various positions
with Dresdner Bank and Berliner Bank, where his experience included securities
trading, clearing, research and investment banking. From 1992 through 1995, Dr.
Block was employed with the German-South-American Bank AG in Miami, Florida. He
holds Diplomas in Banking (Bankkaufmannsbrief) and Business Management. He
graduated as a Dr. Rer. Pol. in Economics (Volkswirtschaft) from Berlin
University. Dr. Block heads the Company's research department.
Additional key personnel will be hired to fill the rest of the positions in
the coming weeks and months.
MANAGEMENT COMMITTEES
The Company expects to formally establish management committees in Germany
and in the U.S. that institutes policies and procedures regarding the Company's
daily operations regarding risk, expense operations. The committee in Germany
will include B. Rohmann, Roland Kuettener, Klaus Conradi and Volkmar Brembach,
and assigned executives from each of the Company's subsidiaries. The committee
in the U.S. will include James Buchanan Rea Jr., Joel Epstein, Michael Graf and
Peter Hartmann. The committees provide oversight and assist the subsidiaries in
achieving their goals. The committees may suggest the establishment of, or
changes to, policies and procedures of the subsidiaries to strengthen controls
in areas of risk, expense and operations. The committees, however, do not take
the place of the decision-making authority vested in each of the subsidiaries.
35
<PAGE> 41
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 $91,765 during 1997, as
President and Chief Executive Officer of JBRI.
The following table sets forth information concerning the compensation to
be received for the fiscal year ending August 31, 1998 for services rendered to
the Company in all capacities by the Company's executives. The Company had no
executive officers under employment during 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITION SALARY($)
--------------------------- ---------
<S> <C>
Peter Hartmann, Chairman of the Board and Executive Vice
President -- International Development.................... $180,000
James Buchanan Rea, Jr., Director, President and Chief
Executive Officer......................................... $125,000(1)
Joel Epstein, Executive Vice President of Operations........ $125,000(1)
T. Michael Graf, Executive Vice President of Asset
Management and Operations................................. $125,000
Ronald Kuettner, Director, Chief Financial Officer and
Treasurer................................................. $100,000(1)
</TABLE>
- ---------------
(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 annual
salary of $125,000 per year, and an annual discretionary benefits fund of
$40,000, and the Company provides personal and family medical insurance
coverage. Mr. Rea will also be the designated general securities principal and
financial principal of ADAM. If Mr. Rea is terminated without cause or the
employment agreement is not renewed, he would receive a severance payment equal
to one-quarter of the average annual base salary during the term of his
employment plus an amount equal to one-quarter of the highest annual bonus or
profit-sharing received during his employment. The discretionary benefits
includes life and disability insurance, business automobile expenses, and
business-associated memberships and expenses. Any portion of the benefits fund
not expended during a month is paid as additional compensation. Mr. Rea is also
entitled to participate in all employee plans and benefits that may be
established for executive employees. Bonuses are expected to be determined in
the future by the Board based upon an evaluation of performance against the
Company's strategic business plan and operating budget.
The Company has also entered into employment agreements with Messrs.
Hartmann and Kuettner. Mr. Hartmann's employment agreement provides for a
thirty-month term commencing July 1, 1998, pursuant to which Mr. Hartmann has
agreed to perform the duties of Chairman of the Board and Executive Vice
President -- International Development at an initial annual base salary of
$180,000 and an annual discretionary benefits funds of $40,000, generally on the
same terms as Mr. Rea's employment agreement described above, including
severance and bonus provisions. Mr. Kuettner has a three-year employment
agreement with
36
<PAGE> 42
the Company to perform the duties of Chief Financial Officer and Treasurer at an
initial annual salary of $100,000 and an annual discretionary benefits fund of
$40,000, generally on the same terms as the employment contract for Mr. Rea
described above, including severance and bonus provisions.
1998 STOCK OPTION AND INCENTIVE PLAN
General. The Company's 1998 Stock Option and Incentive Plan (the "1998
Stock Option and Incentive Plan") provides for the Incentive Stock Options of
("ISO's") and Non-qualified Stock Options ("NQSO's").
Purpose. The 1998 Stock Option and Incentive Plan is intended to provide
incentive to key employees, officers, directors and others expected to provide
significant services to the Company, to encourage proprietary interest in the
Company, to encourage such key employees to remain in the employ of the Company,
to attract new employees with outstanding qualifications, and to afford
additional incentive to others to increase their efforts in providing
significant services to the Company.
Administration. The 1998 Stock Option and Incentive Plan will be
administered by a committee, established by the Board of Directors (the
"Committee"), which shall at all times be composed of "non-employee directors;"
provided, however, that the Board of Directors may abolish the Committee at any
time and revest administration of the 1998 Stock Option and Incentive Plan in
the Board of Directors or a reconstituted Committee. No member of the Committee
will vote on any matter affecting his or her own compensation.
The value of one (1) Share of Common Stock, is determined as follows: (i)
If the Shares are traded on an exchange, the price at which Share traded at the
close of business on the date of valuation; (ii) If the Shares are traded
over-the-counter on the NASDAQ System, the closing price if one is available, or
the mean between the bid and asked prices on said System at the close of
business on the date of valuation; and (iii) If neither (i) or (ii) applies, the
fair market value as determined by the Board or the Committee in good faith.
Such determination shall be conclusive and binding on all persons.
Vesting of Options and Awards. The stock options and award granted under
the 1998 Stock Option and Incentive Plan shall vest as determined by the
Committee or the Board of Directors.
Eligible Persons. Officers and directors and employees of the Company and
other persons expected to provide significant services to the Company are
eligible to participate in the 1998 Stock Option and Incentive Plan. ISO's may
be granted to the officers and key employees of the Company. NQSO's and other
awards may be granted to the directors, officers, key employees, agents and
consultants of the Company or any of its subsidiaries, provided that the
Committee finds that the value of services rendered or to be rendered to the
Company is at least equal to the value of the awards being granted.
Under current law, ISO's may not be granted to any director of the Company
who is not an employee, or to directors, officers and other employees of
entities unrelated to the Company.
Shares Subject to the Plan. Subject to anti-dilution provisions for stock
splits, stock dividends and similar events, the 1998 Stock Option and Incentive
Plan authorizes the grant of stock options to purchase up to 1,000,000 shares of
the Company's Common Stock, provided that at no time shall options be granted to
purchase an aggregate of more than five percent of the outstanding shares of the
Company's Common Stock.
Term of the Plan. Unless previously terminated by the Board of Directors,
the 1998 Stock Option and Incentive Plan will terminate on May 26, 2008, and no
options may be granted under the 1998 Stock Option and Incentive Plan
thereafter, but existing options will remain in effect until the options are
exercised or terminated by their terms.
Term of Options. Each stock option must terminate no more than ten years
from the date it is granted (or five years in the case of ISO's granted to an
employee who is deemed to win an excess of ten percent of the combined voting
power of the Company's outstanding equity stock). Stock options may be granted
on terms providing for exercise either in whole or in part at any time or times
during their restrictive terms, or only in specified percentages at the stated
time periods or intervals during the term of the stock option.
37
<PAGE> 43
Option Exercise. The exercise price of any stock option granted under the
1998 Stock Option and Incentive Plan is payable in full in cash, or its
equivalent as determined by the Committee. The Company may make loans available
to option holders to exercise stock options evidenced by a promissory note
executed by the option holder and secured by a pledge of Common Stock with fair
value at least equal to the principal of the promissory note, unless otherwise
determined by the Committee.
Amendment and Termination of Stock Option Plan. The Board of Directors may,
without affecting any outstanding stock options, from time to time revise or
amend the 1998 Stock Option and Incentive Plan, and may suspend or discontinue
it at any time. However, no such revision or amendment may, without stockholder
approval, increase the number of shares subject to the 1998 Stock Option and
Incentive Plan, modify the class of participants eligible to receive options
granted under the 1998 Stock Option and Incentive Plan or extend the maximum
option term under the 1998 Stock Option and Incentive Plan.
Outstanding Options. The Company has granted options to acquire 100,000
shares of Common Stock pursuant to the 1998 Stock Option and Incentive Plan. Of
these stock options, 40,000 have been granted to the two independent directors
and will vest six months from the date on which the options were granted. All
stock options granted pursuant to the 1998 Stock Option and Incentive Plan are
exercisable at a price of $3.00 per share. The 1998 Stock Option and Incentive
Plan provides that, in connection with any reorganization, merger,
consolidation, recapitalization, stock split or similar transaction, the
Committee shall appropriately adjust the number of shares of Common Stock
subject to outstanding stock options and the total number of shares for which
stock options may be granted under the Plan.
STOCK OPTION GRANTS
The following table sets forth information concerning stock options granted
to date in 1998 to each member of the Board of Directors and Executive Officers.
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES
PERCENT OF TOTAL OF STOCK APPRECIATION FOR
OPTIONS GRANTED TO EXERCISE PRICE 10-YEAR OPTION TERM
EMPLOYEES DURING OR BASE PRICE --------------------------
NAME GRANT THE YEAR(1) (S/SHARE) DATE 5%($) 10%($)
---- ------ ------------------ -------------- ------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
James B. Rea, Jr. ...... 35,000 100% $3.00 6/17/08 $693,158 $1,165,933
Thomas H. Fitzgerald,
Jr. .................. 20,000 100% $3.00 6/17/08 $396,090 $ 666,247
Thomas C. Corcovelos.... 20,000 100% $3.00 6/17/08 $396,090 $ 666,247
Michael B. Jeffers...... 20,000 100% $3.00 6/17/08 $396,090 $ 666,247
Isabell Bautista........ 5,000 100% $3.00 6/17/08 $ 99,023 $ 166,561
</TABLE>
38
<PAGE> 44
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN SECURITYHOLDERS
The Company declared a reverse 1:10 stock split of its Common Stock,
effective May 26, 1998. The Company recently declared another reverse 1:2 stock
split of its Common Stock, effective August 20, 1998. All amounts of Common
Stock outstanding reflected herein give effect to both reverse stock splits.
Except as otherwise indicated, the following table sets forth certain
information regarding the beneficial ownership of the Company's capital stock as
of July 1, 1998, after giving effect to the conversion of the Series A Preferred
Stock, by: (i) each of the Company's directors and officers, (ii) each person
who beneficially owned more than five percent of the Company's capital stock,
and (iii) all directors and executive officers of the Company as a group. Unless
otherwise indicated, the address of each named beneficial owner is the same as
that of the Company's principal office located at 12100 Wilshire Boulevard, #680
Los Angeles, California 90025.
<TABLE>
<CAPTION>
PERCENTAGE
SHARES BENEFICIALLY
BENEFICIALLY OWNED(1)
OWNED --------------------
------------ BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER(2) NUMBER OFFERING OFFERING
--------------------------------------- ------------ -------- --------
<S> <C> <C> <C>
COMMON STOCK
Dr. Michael Klug........................................ 489,500 7.2% 5.7%
Pfalzburger Strasse 20, 10717 Berlin, Germany
Eureka Consulting, Inc.................................. 422,000 6.2% 4.9%
1350 E. Flamingo Road #742, Las Vegas, NV 89119
Prodevco, Inc........................................... 633,000 9.3% 7.4%
7135 Pintale Drive, Carlsbad, CA 92009
Klaus Conradi........................................... 321,750 6.2% 4.7%
Kurfurstendamm 15, Berlin, D-10719, Germany
Peter Hartmann.......................................... 448,750 6.6% 5.2%
James Buchanan Rea, Jr.................................. 118,750 1.7% 1.4%
Thomas Corcovelos....................................... 25,000 * *
Ronald Kuettner......................................... 25,000 * *
Kurfurstendamm 15, Berlin, D-10719, Germany
Bernward J. Rohmann..................................... 15,000 * *
Kurfurstendamm 15, Berlin, D-10719, Germany
Officers and Directors as a group (6 individuals)....... 954,250 14.0% 11.2%
</TABLE>
- ---------------
* Less than one percent
(1) Beneficial ownership is determined in accordance with the applicable rules
under the 1934 Act. In computing the number of shares beneficially owned by
a person and the percentage ownership of that person, shares of Common Stock
subject to options held by that person that are currently exercisable, or
become exercisable within 60 days from the date hereof, are deemed
outstanding. However, such shares are not deemed outstanding for purposes of
computing the percentage ownership of any other person. Percentage ownership
is based on 6,818,017 shares of Common Stock outstanding prior to this
Offering and 8,551,350 shares of Common Stock outstanding after this
Offering (assuming the sale of all of the shares of Common Stock offered
hereby), and conversion of the 5,000,000 shares of Series A Preferred Stock.
(2) Unless otherwise indicated, the address of each of the beneficial owners
named above is 12100 Wilshire Blvd., Suite 680, Los Angeles, California
90025.
PREFERRED STOCK
As of July 1, 1998, the Company had issued and 5,000,000 shares of Series A
Preferred Stock held by a total of individual preferred shareholders. None of
the holders of the shares of Series A Preferred Stock owns more than five
percent of the shares. All of these individuals are residents of Germany and
none are affiliated with the Company.
39
<PAGE> 45
INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS
The merger of JBRI into ADAM was completed and became effective on March
31, 1998. On January 12, 1998, the shareholders of the Fund approved a new
investment advisory agreement with ADAM. Under the terms of the merger, Mr. Rea
received 2,375,000 shares (pre-reverse splits) of the Company's common stock at
the closing in exchange for his 50,500 shares of JBRI stock, and the other JBRI
shareholders received aggregate cash payments of $160,875 in consideration for
their 49,500 shares of JBRI stock, at a value of $3.25 per share. The 2,375,000
shares of the Company's Common Stock issued in connection with the JBRI-ADAM
Merger were converted into 118,750 shares, after giving effect to the Company's
reverse 1:10 stock split, effective May 26, 1998, and the reverse 1:2 stock
split, effective August 20, 1998. Mr. Rea acquired the Company shares without
registration in reliance on the exemption provided by Section 4(2) under the
Securities Act of 1933, as amended (the "Securities Act"). Mr. Rea is a
sophisticated investor knowledgeable in the securities business. He will
continue to serve as President of ADAM, the successor to JBRI. The Company
shares issued to Mr. Rea are "restricted securities" and may not be publicly
resold except pursuant to a registration under the Securities Act, Rule 144 or
other exemption under the Securities Act that may be applicable.
On August 28, 1997, the Company issued 90,000,000 shares of Common Stock to
American Diversified Corporation ("ADC"), a Delaware corporation, the principal
shareholders of which are by Messrs. Conradi, Hilger and Hartmann, in exchange
for its contribution of a "Bearer Note" issued by Immofin
Grundstuecksverwaltungsgessellschaft Conradi & Hilger GbRmbH, a partnership
consisting of Messrs. Klaus Conradi and Josef Hilger, two of the Company's
founding shareholders. The shares issued to ADC were converted into 4,500,000
shares, after giving effect to the Company's reverse 1:10 stock split of the
Common Stock, effective May 26, 1998, and reverse 1:2 stock split of the Common
Stock, effective August 20, 1998. The shares previously held by ADC have since
been transferred, pursuant to applicable exemptions from registration under U.S.
state and federal securities laws. On May 28, 1998, the Company sold the Bearer
Note to an unrelated third party for $ 11,584,186 (including accrued interest).
(See Note 3 to "Consolidated Financial Statements," page F-16) .
DESCRIPTION OF SECURITIES
Upon the closing of this Offering, the authorized capital stock of the
Company will consist of 20,000,000 shares of Common Stock, no par value, of
which 8,551,350 will be outstanding after the closing of this Offering (assuming
all of the shares offered hereby are sold and after giving effect to the
conversion of the 5,000,000 shares of Series A preferred Stock held by the
Selling Shareholders) and 10,000,000 shares of the Company's Preferred Stock, no
par value, none of which will have been issued. There is no public trading
market for the Company's common or preferred stock and there is no assurance
that a trading market will develop.
The following is a brief description of the material terms of the Company's
capital stock. This description does not purport to be complete and is subject
in all respects to applicable Nevada law and to the provisions of the Company's
Articles of Incorporation and Bylaws, copies of which are on file with the
Commission are incorporated by reference herein.
GENERAL
The shares of Preferred Stock may be issued from time to time in one or
more series. The Board of Directors is authorized to fix the number of shares of
any series of preferred stock and to determine the designation of any such
series. The Board of Directors is also authorized to determine or alter the
rights, preferences, privileges and restrictions granted to or imposed upon any
wholly unissued series of Preferred Stock and, within the limits and
restrictions stated in any resolution or resolutions of the Board of Directors
originally fixing the number of shares constituting any series, to increase or
decrease (but not below the number of shares of such series then outstanding)
the number of shares of any such series subsequent to the issue of shares of
that series.
40
<PAGE> 46
COMMON STOCK
Holders of common stock are entitled to receive dividends when, as and if
declared by the Board of Directors, out of funds legally available therefor.
Dividends on any outstanding shares of preferred stock may be required to be
paid in full before payment of any dividends on the common stock. Upon
liquidation, dissolution or winding up of the Company, holders of common stock
are entitled to share ratably in assets available for distribution after payment
of all debts and other liabilities and subject to the prior rights of any
holders of any preferred stock then outstanding.
Holders of common stock are entitled to one vote per share with respect to
all matters submitted to a vote of shareholders and do not have cumulative
voting rights. Accordingly, holders of a majority of the common stock entitled
to vote in any election of directors may elect all of the directors standing for
election, subject to the voting rights (if any) of any series of preferred stock
that may be outstanding from time to time. The Company's Articles of
Incorporation and Bylaws contain no restrictions on the repurchase by the
Company of shares of the common stock or preferred stock. All the outstanding
shares of common stock are, and additional shares of common stock will be, when
issued, validly issued, fully paid and nonassessable.
Effective May 26, 1998, the Company declared a reverse 1:10 stock split of
its Common Stock. The Company subsequently declared a reverse 1:2 stock split of
its Common Stock, effective August 20, 1998. Based upon the number of shares
outstanding as of the date of this Prospectus, and after giving effect to the
sale of the Common Stock offered hereby and the issuance of Converted Shares to
the Selling Shareholders, there will be 8,551,350 shares of Common Stock
outstanding (assuming no exercise of outstanding options, warrants or the
Underwriter's over-allotment option).
PREFERRED STOCK
As of March 31, 1998, the Company had sold 5,000,000 shares of Series A
Preferred Stock, par value $1 per share, pursuant to a private placement
conducted in Germany in reliance upon the exemption from
U. S. securities laws under Regulation S. No other shares of Preferred Stock are
outstanding. The Series A Preferred Stock is entitled to a cumulative
preferential dividend of $.09 per share, when and as declared by the Board of
Directors. The Series A Preferred Stock ranks prior to the common stock as to
dividends and as to distributions in the event of liquidation, dissolution or
winding up of the Company. The Company may redeem the Series A Preferred Stock
at any time at the price of $1 per share, as adjusted to give effect to
anti-dilution, plus any cumulated but unpaid dividends. The shares are
convertible into common stock, at any time in the ratio of three shares of
Series A Preferred Stock into one share of common stock and shall be
automatically converted into common stock if the Company effects a firm
commitment public offering registered under the Securities Act, that results in
net proceeds to the Company of at least $10 million.
The Board of Directors is authorized to designate with respect to each
series of preferred stock the number of shares in each such series, the dividend
rates and dates of payment, voluntary and involuntary liquidation preferences,
redemption prices, if any, whether or not dividends shall be cumulative and, if
cumulative, the date or dates from which the same shall be cumulative, the
sinking fund provisions, if any, and the terms and conditions on which shares
can be converted into or exchanged for shares of another class or series, and
the voting rights, if any. As of the date hereof, there were no shares of
Preferred Stock issued and outstanding. The Series A Preferred Stock is
non-voting. Any series preferred stock issued will rank prior to the common
stock as to dividends and as to distributions in the event or liquidation,
dissolution or winding up of the Company. The ability of the Board of Directors
to issue preferred stock, while providing flexibility in connection with
possible acquisitions and other corporate purposes, could, among other things,
adversely affect the voting powers of holders of common stock. The preferred
stock will, when issued, be fully paid and nonassessable.
41
<PAGE> 47
CONCURRENT SALES BY THE SELLING SHAREHOLDERS
This registration statement also relates to the registration for resale by
the Selling Shareholders of 1,666,667 shares of Common Stock (the "Converted
Shares"), issuable upon conversion of the 5,000,000 outstanding shares of Series
A Preferred Stock. The Converted Shares may be sold from time to time by the
Selling Shareholders as of the date of this Prospectus. The resale of the
securities by the Selling Shareholders is subject to prospectus delivery and
other requirements of the Securities Act.
Sales of Selling Shareholders' securities or even the potential of such
sales would likely have an adverse effect on the market prices of the securities
offered hereby. As of the date of this Prospectus, the freely tradeable
securities of the Company (the "public float") will be (i) 1,733,333 shares of
Common Stock offered to investors by this Prospectus, and (ii) the 1,666,667
Converted Shares issuable to the Selling Shareholders upon conversion of the
shares of Series A Preferred Stock. Up to an additional 246,667 shares of Common
Stock will be offered to investors and freely transferable upon exercise of the
Underwriter's Over-Allotment Option.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have approximately
8,551,350 shares of Common Stock outstanding (assuming no exercise of the
Underwriters Over-Allotment-Option). Of these shares the 1,733,333 shares sold
to the public in this offering and the 1,666,667 Converted Shares to be offered
and sold by the Selling Shareholders will be freely tradable without
restrictions or further registration under the Securities Act of 1933, as
amended (the "Securities Act"), expect for any shares purchased by affiliates of
the Company within the meaning of the Securities Act, which will be subject to
the resale limitations of Rule 144. The remaining 5,151,350 shares held by
existing shareholders were issued by the Company in private transactions in
reliance upon one or more exemptions under the Securities Act and are
"Restricted Securities" as that term is defined in Rule 144 promulgated under
the Securities Act. The holders of restricted shares generally will be entitled
to sell these shares in the public securities market without registration under
the Securities Act to the extent permitted by Rule 144 (or Rule 145, as
applicable) promulgated under the Securities Act or any exemption under the
Securities Act. Generally, under Rule 144, each person holding restricted
securities for a period of one year may, every three months after such one year
holding period, sell in ordinary brokerage transactions or to market makers an
amount of shares equal to the greater of one percent of our then outstanding
Common Stock or the average weekly trading volume during the four weeks prior to
the proposed sale. In addition, sales under Rule 144 may be made only through
unsolicited "broker's transactions" or to a "market maker" and are subject to
various other conditions. The limitation on the number of shares which may be
sold under Rule 144 and the "broker's transaction" requirement do not apply to
restricted securities sold for the account of a person who is not and has not
been the Company's "affiliate" (as that term is defined in the Act) during the
three months prior to the proposed sale and who has beneficially owned the
securities for at least two years. Of the 5,151,350 restricted shares, 500,000
shares of Common Stock are currently eligible for resale under Rule 144, and
4,618,750 shares of Common Stock will be eligible for resale under Rule 144
beginning in March 1999.
In addition, the Company intends to file a registration statement of Form
S-8 with respect to the shares of Common Stock issuable upon exercise of options
under the 1998 Stock Option and Incentive Plan (the "Plan"). The Plan authorizes
the issuance of options relating to up to 1,000,000 shares of Common Stock.
Currently, there are 100,000 options that have been issued under the Plan which
generally vest over three years. See "1998 Stock Option and Incentive Plan."
Upon filing of such registration statement, the holders of such options may,
subject to vesting requirements, exercise and sell their shares immediately
without restriction, except affiliates who are subject to certain volume
limitations and manner of sale requirements of Rule 144. Upon registration, such
shares may be sold in the market without limitation. Sales of such shares may
decrease the market price for the Company's Common Stock.
Future sales of a substantial amount of Common Stock in the public market,
or the perception that such sales may occur, could adversely affect the market
price of the Common Stock prevailing from time to time in the public market. See
"Risk Factors -- Shares Eligible for Future Sale."
42
<PAGE> 48
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting agreement
(the "Underwriting Agreement"), the Company has agreed to sell to each of the
underwriters named below (the "Underwriters"), and each of the Underwriters, for
whom is acting as representative (the "Representative"), has
severally agreed to purchase, the number of shares of Common Stock set forth
opposite its name below. Under certain circumstances, the commitments of
non-defaulting Underwriters may be increased as set forth in the Agreement Among
Underwriters.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
---------
Total............................................. 1,733,333
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriter
thereunder are subject to approval of certain legal matters by counsel and to
various other conditions. The nature of the Underwriter's obligations is such
that it is committed to purchase and pay for all of the above shares of Common
Stock if any are purchased. The Underwriter proposes to offer the shares of
Common Stock directly to the public at the public offering price set forth on
the cover page of this Prospectus.
The Company granted to the Underwriter a -day over-allotment
option to purchase up to additional shares of Common Stock
at the public offering price less the underwriting discount. The Underwriter may
exercise such option only to cover over-allotments made in connection with the
sale of the shares of Common Stock offered hereby.
The Company has agreed to allow the Underwriter a commission of percent
( %) of the public offering price of the shares of Common Stock.
Additionally, the Company will pay the Underwriter, following the closing of
this Offering, a non-accountable expense allowance equal to
percent ( %) of the aggregate public offering price of
the shares of Common Stock, less any applicable deposits.
The Company has further agreed to indemnify the Underwriter against certain
liabilities, losses and expenses, including liabilities under the Securities
Act, or to contribute to payments that the Underwriter may be required to make
in respect thereof. The Company also has agreed to reimburse the Underwriter for
certain out-of-pocket expenses incurred in connection with the Offering.
The Underwriter has advised us that it does not intend to make sales to
discretionary accounts.
The Company's officers and directors who in the aggregate beneficially own
942,250 shares of Common Stock have agreed not to, directly or indirectly, sell,
offer, contract to sell, make any short sale, pledge or otherwise dispose of
such shares for a period of months after the date of the
closing of this Offering.
Prior to this offering, there has not been a public market for the Common
Stock. The public offering price of the Common Stock has been determined by
arms-length negotiation between the Company and the Representative. There is no
direct relation between the offering price of the Common Stock and the assets,
book value or net worth of the Company. Among the factors considered by the
Company and the Representative in pricing the Common Stock were the results of
operations, the current financial condition and future prospects of the Company,
the experience of management, the amount of ownership to be retained by present
shareholder, the general condition of the economy and the securities markets,
and the demand for similar securities of companies considered comparable to the
Company.
43
<PAGE> 49
LEGAL MATTERS
The validity of the Securities offered hereby and certain tax matters will
be passed on by Jeffers, Wilson, Shaff & Falk, LLP, Irvine, California. Certain
legal matters will be passed upon for the Underwriters by .
EXPERTS
The financial statements of the Company included in this Prospectus have
been audited by McGladrey and Pullen, LLP, independent auditors, as stated in
their report appearing in this Prospectus. Such financial statements have been
included in reliance upon the report of McGladrey & Pullen, LLP, and upon the
authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission, Washington, D.C. 20549, a
Registration Statement (the "Registration Statement") under the Securities Act
of 1933, as amended (the "Securities Act"), with respect to the Common Stock
offered hereby. This Prospectus, filed as part of the Registration Statement,
omits certain information contained in the Registration Statement in accordance
with the rules and regulations of the Commission. Copies of the Registration
Statement and the exhibits thereto are on file at the offices of the Commission
in Washington, D.C. and may be obtained at rates prescribed by the Commission
upon request to the Commission and inspected, without charge, at the offices of
the Commission. For further information, reference is hereby made to the
Registration Statement. Statements contained herein concerning the provisions of
any document are not necessarily complete and in each instance, reference is
made to the copy of such document filed as an exhibit to the Registration
Statement or otherwise filed with the Commission. Each such statement is
qualified in its entirety by such reference.
The Company has previously filed with the Commission, a registration
statement on Form 10-SB under the Securities Exchange Act of 1934, which was
declared effective on March 2, 1998. As of the effective date of the Company's
registration statement on Form 10-SB, the Company became a "reporting company"
under the Securities Exchange Act of 1934. The Company is a "small business
issuer" and has filed reports pursuant to the 1934 Act or forms applicable to
small business issues.
Such reports and other information can be inspected and copied at the
public reference facilities maintained by the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the Commission's regional offices at
Northwestern Atrium Center, 500 West Madison Street (Suite 1400), Chicago,
Illinois 60661 and 7 World Trade Center, New York, New York 10048. Copies of
such material can also be obtained from the Commission at prescribed rates
through its Public Reference Section at 450 Fifth Street, N.W., Washington, D.C.
20549. The Commission maintains a Web site that contains reports, proxy,
information statements and other information regarding registrants that file
electronically with the Commission. The Web site is located at
http://www.sec.gov. Statements contained in this Prospectus as to the contents
of any contract or any contract or other document referred to are not
necessarily complete, and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respect by such reference.
44
<PAGE> 50
AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
<TABLE>
<S> <C>
Independent Auditor's Report................................ F-2
Consolidated Balance Sheets as of May 31, 1998 (unaudited)
and August 31, 1997....................................... F-3
Consolidated Statements of Operations for the Periods from
February 4, 1997 (Inception) to August 31, 1997 and May
31, 1998 (unaudited)
and the Nine Months Ended May 31, 1998 (unaudited)........ F-4
Consolidated Statements of Stockholders' Equity for the
Period from
February 4, 1997 (Inception) to August 31, 1997 and the
Nine Months Ended May 31, 1998 (unaudited)................ F-5
Consolidated Statements of Cash Flows for the Periods from
February 4, 1997 (Inception) to August 31, 1997 and May
31, 1998 (unaudited)
and the Nine Months Ended May 31, 1998 (unaudited)........ F-6
Notes to Consolidated Financial Statements........... F-7 to F-10
Unaudited Proforma Consolidated Financial Statements........ F-11
Unaudited Proforma Consolidated Statement of Operations
for the Nine Months Ended May 31, 1998.................... F-12
Unaudited Proforma Consolidated Statement of Operations
for the Period from February 4, 1997 (Inception) to August
31,1997................................................... F-13
Notes to Unaudited Proforma Consolidated Financial
Statements................................................ F-14
JAMES BUCHANAN REA, INC.
Unaudited Statement of Operations For the Three Months Ended
March 31, 1998 and 1997................................... F-15
Unaudited Statement of Cash Flows For the Three Months Ended
March 31, 1998 and 1997................................... F-16
Independent Auditor's Report................................ F-17
Balance Sheets as of December 31, 1997 and 1996............. F-18
Statements of Operations For the Years Ended December 31,
1997 and 1996............................................. F-19
Statements of Changes in Stockholders' Equity for the
Years ended December 31, 1997 and 1996.................... F-20
Statements of Cash Flows For the Years Ended December 31,
1997 and 1996............................................. F-21
Notes to Financial Statements....................... F-22 to F-24
</TABLE>
F-1
<PAGE> 51
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 third
paragraph of Note 7 as to which the date
is August 20, 1998
F-2
<PAGE> 52
AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
MAY 31, 1998 AND AUGUST 31, 1997
ASSETS
<TABLE>
<CAPTION>
MAY 31, 1998 AUGUST 31, 1997
------------ ---------------
(UNAUDITED)
<S> <C> <C>
Cash and cash equivalents................................... $ 901,773 $ 2,264
Receivables (Note 8)........................................ 11,584,186
Debt Securities (Note 2).................................... 1,193,049
Stock subscriptions receivable.............................. 789,112 117,000
Prepaid expenses............................................ 209,348 4,220
Property and equipment, net of accumulated depreciation 1998
19,915; 1997 -0-.......................................... 273,670 14,320
Goodwill, net of amortization of $7,791..................... 318,860
Other....................................................... 195,794
----------- ---------
TOTAL ASSETS...................................... $15,465,792 $ 137,804
=========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses............................................ $ 234,030 $ 7,600
Accounts payable............................................ 216,096 55,977
Dividends payable........................................... 225,000
----------- ---------
TOTAL LIABILITIES................................. $ 675,126 $ 63,577
=========== =========
STOCKHOLDERS' EQUITY (Notes 1, 3, 5, 7, 8)
Preferred stock, 10,000,000 shares authorized:
Series A, par value $1.00 9% cumulative, redeemable,
convertible 5,000,000 shares designated:
Issued and outstanding 5,000,000 shares................... 5,000,000
Subscribed for but not yet paid for and not issued,
162,495 shares......................................... 150,545
Unpaid subscriptions as of December 22, 1997................ (33,545)
Common Stock, no par value, 20,000,000 shares authorized:
5,151,350 and 10,000,000 shares issued and outstanding as
of 1998 and 1997, respectively (1997 prior to reverse
stock splits)............................................. 11,861,710 96,754
Deficit accumulated during the development stage............ (2,071,044) (139,527)
----------- ---------
Total Stockholders' Equity............................. 14,790,666 74,227
----------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $15,465,792 $ 137,804
=========== =========
</TABLE>
See Notes to the Consolidated Financial Statements.
F-3
<PAGE> 53
AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
NINE MONTHS FEBRUARY 4, 1997 FEBRUARY 4, 1997
ENDED (INCEPTION) TO (INCEPTION) TO
MAY 31, 1998 MAY 31, 1998 AUGUST 31, 1997
------------ ---------------- ----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
REVENUE.......................................... $ 13,758 $ 13,758 $
EXPENSES
Salaries and wages............................. 354,316 375,157 20,841
Travel and entertainment....................... 109,048 131,534 22,486
Administration................................. 189,354 211,860 22,506
Advertising.................................... 633,836 641,056 7,220
Professional services.......................... 288,539 355,013 66,474
Other operating expenses....................... 98,684 98,684
Depreciation................................... 19,915 19,915
Amortization................................... 7,791 7,791
Interest....................................... 18,792 18,792
----------- ----------- ---------
Expenses....................................... 1,720,275 1,859,802 139,527
(Loss) before income taxes..................... (1,706,517) (1,846,044) (139,527)
Income Taxes................................... -- -- --
----------- ----------- ---------
NET (LOSS)....................................... $(1,706,517) $(1,846,044) $(139,527)
Average common shares outstanding................ 5,064,000 3,569,200 500,000
Basic and diluted (loss) per common share........ (0.38) (0.58) (0.28)
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE> 54
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 NINE MONTHS
ENDED MAY 31, 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
--------- ---------- ---------- ----------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance February 4, 1997,
date of inception.............. $ -- $ -- $ -- $ -- $ --
Stock Issued:
Common Stock:
For cash at $.001/share........ 4,750,000 47,795
For legal and other services
at $.001/share............... 5,250,000 48,959
Preferred Stock:
For cash at $1.00 share paid by
December 22, 1997............ 126,287 117,000
Unpaid for at December 22,
1997......................... 36,208 33,545 (33,545)
Net (loss)..................... (139,527)
--------- ---------- ---------- ----------- ----------- -------- ------------
Balance, August 31, 1997......... 162,495 150,545 10,000,000 96,754 (139,527) (33,545)
(UNAUDITED)
Common stock:
1 for 10 reverse stock split... (9,000,000)
1 for 2 reverse stock split.... (500,000)
Stock issued:
For cash at $2.19/share........ 7,100 15,550
In exchange for note receivable
from affiliate at
$2.17/share.................. 4,500,000 9,773,260 (9,773,260)
For legal and other services
at $2.20/share............... 25,500 56,100
In exchange for shares of JBRI
(Note 7) at $2.00............ 118,750 237,500
Interest on notes receivable... 165,446 (165,446)
Sale of note receivable........ 1,517,100 10,176,206
Preferred stock:
Issued for cash and securities
at $1.00/share, as of
February 28, 1998............ 4,837,505 4,849,455 33,545
Dividend declared $.045 per
share........................ (225,000)
Net (loss)..................... (1,706,517)
--------- ---------- ---------- ----------- ----------- -------- ------------
Balance, May 31, 1998............ 5,000,000 $5,000,000 5,151,350 $11,861,710 $(2,071,044) $ -- $ --
========= ========== ========== =========== =========== ======== ============
<CAPTION>
TOTAL
-----------
<S> <C>
Balance February 4, 1997,
date of inception.............. $
Stock Issued:
Common Stock:
For cash at $.001/share........ 47,795
For legal and other services
at $.001/share............... 48,959
Preferred Stock:
For cash at $1.00 share paid by
December 22, 1997............ 117,000
Unpaid for at December 22,
1997.........................
Net (loss)..................... (139,527)
-----------
Balance, August 31, 1997......... 74,227
(UNAUDITED)
Common stock:
1 for 10 reverse stock split...
1 for 2 reverse stock split....
Stock issued:
For cash at $2.19/share........ 15,550
In exchange for note receivable
from affiliate at
$2.17/share..................
For legal and other services
at $2.20/share............... 56,100
In exchange for shares of JBRI
(Note 7) at $2.00............ 237,500
Interest on notes receivable... --
Sale of note receivable........ 11,693,306
Preferred stock:
Issued for cash and securities
at $1.00/share, as of
February 28, 1998............ 4,883,000
Dividend declared $.045 per
share........................ (225,000)
Net (loss)..................... (1,706,517)
-----------
Balance, May 31, 1998............ $14,790,666
===========
</TABLE>
See Notes to Consolidated Financial Statements
F-5
<PAGE> 55
AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIODS FROM INCEPTION (FEBRUARY 4, 1997) THROUGH AUGUST 31,1997
FROM SEPTEMBER 1, 1997 TO MAY 31, 1998 AND FROM INCEPTION TO MAY 31, 1998
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
NINE MONTHS FEBRUARY 4, 1997 FEBRUARY 4, 1997
ENDED (INCEPTION) TO (INCEPTION) TO
MAY 31, 1998 MAY 31, 1998 AUGUST 31, 1997
------------ ---------------- ----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Income (loss).................................... $(1,706,517) $(1,846,044) $(139,527)
Adjustments to reconcile net income (loss) to net
cash used in operating activities
Noncash expenses:
Professional fees.................................. 56,100 105,057 48,959
Depreciation and amortization...................... 27,706 27,708
Changes in assets and liabilities:
Increase (decrease) in accounts payable and
accruals........................................ 386,549 450,126 63,577
Increase in receivables............................ (128,380) (128,380)
Decrease in bank overdrafts Decrease (increase) in
prepaid expenses and other...................... (329,196) (333,416) (4,220)
----------- ----------- ---------
Net cash (used in) provided from operating
activities.................................... (1,693,738) (1,724,949) (31,211)
Cash Flows from Investing Activities:
Acquisition of J.B. Rea, Inc....................... (160,875) (160,875)
Purchase of equipment.............................. (279,265) (293,585) (14,320)
----------- ----------- ---------
Net cash (used in) Investing Activities......... (440,140) (454,460) (14,320)
Cash Flows from Financing Activities:
Proceeds from issuance of preferred stock.......... 3,017,837 3,017,837
Proceeds from issuance of common stock............. 15,550 63,345 47,795
----------- ----------- ---------
Net cash provided by Financing Activities....... 3,033,387 3,081,182 47,795
----------- ----------- ---------
Increase in cash and cash equivalents................ 899,509 901,773 2,264
Cash and Cash equivalents Beginning of the period.... 2,264 -- --
----------- ----------- ---------
End of the period............................... $ 901,773 $ 901,773 $ 2,264
=========== =========== =========
</TABLE>
<TABLE>
<S> <C> <C> <C>
Supplemental schedule of noncash financing activities
Issuance of 51,000, 813,500 and 762,500 common shares
in exchange for services rendered.................... $ 56,100 $ 105,059 $ 48,959
----------- ----------- ---------
Issuance of 1,193,051 shares of preferred stock in
exchange for debt securities......................... $ 1,193,051 $ 1,193,051
----------- -----------
Issuance of 9,000,000 common shares in exchange for
note receivable...................................... $ 9,939,025 $ 9,939,025
----------- -----------
Capital contribution associated with sale of note
receivable to unrelated investors.................... $ 1,516,781 $ 1,516,781
----------- -----------
Issuance of 237,500 common shares in connection with
the acquisition of J.B. Rea, Inc..................... $ 237,500 $ 237,500
----------- -----------
Dividends declared on preferred stock................ $ 225,000 $ 225,000
----------- -----------
</TABLE>
See Notes to the Consolidated Financial Statements.
F-6
<PAGE> 56
AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF MAY 31, 1998 AND FOR THE NINE MONTHS ENDED MAY 31, 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, Investment adviser to planned mutual
Inc. ("ADAM") 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 all highly liquid debt
instruments purchased with a maturity of three months or less 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 nine months ended May 31, 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.
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.
F-7
<PAGE> 57
AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MAY 31, 1998 AND FOR THE NINE MONTHS ENDED MAY 31, 1998 IS
UNAUDITED)
Fair Value of Financial Instruments: The fair value of cash and cash
equivalents, debt securities, notes receivable and capital stock subscriptions
receivable approximates carrying amounts because of the short term nature of
those instruments.
Basic and Diluted 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. Dividends declared on preferred
stock, which totaled $225,000 for the nine months ended May 31, 1998, replaced
the earnings available to common stockholders in the computation. 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).
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.
Interim Financial Statements: The accompanying financial statements as of
May 31, 1998 and for the nine months ended May 31, 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 nine months ended May 31, 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 May 31, 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 $117,422 (unaudited)
during the nine months ended May 31, 1998 and $48,959 in the period ended August
31, 1997.
F-8
<PAGE> 58
AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MAY 31, 1998 AND FOR THE NINE MONTHS ENDED MAY 31, 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 nine months ended May 1998 the Company received
subscriptions for an additional 4,837,505 shares of Series A 9% cumulative
convertible redeemable preferred stock, all of which has been collected by July
31, 1998. All subscriptions for the preferred stock were from unaffiliated
investors.
NOTE 6. INCOME TAXES
The Company has approximately $30,000 of federal and state operating loss
carryforwards, which may be utilized to offset future taxable income. The
federal operating loss carryforwards expire in 2012 and the state operating loss
carryforwards expire in 2002. The tax benefit recognized for the net operating
loss has been offset by an equal increase in the valuation allowance for
deferred taxes resulting in no income tax expense or benefit reflected in the
accompanying statement of operations.
F-9
<PAGE> 59
AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MAY 31, 1998 AND FOR THE NINE MONTHS ENDED MAY 31, 1998 IS
UNAUDITED)
NOTE 7. EVENTS SUBSEQUENT TO AUGUST 31, 1997
In September 1997, the Company issued 4,500,000 shares (giving effect to
all stock split and reverse stock splits, see below) 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.
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 became
effective on March 31, 1998 and was accounted for as a purchase. The Company
exchanged 118,750 shares (giving effect to all stock split and reverse stock
splits) of common stock and cash of $160,875 for the common stock of JBRI. The
acquisition of JBRI resulted in goodwill of $327,000 which is being amortized
over seven years. On May 26, 1998, the Board of Directors approved a one-for-ten
reverse stock split which decreased the number of the outstanding shares. On
this date the Company also amended their articles of incorporation to change the
number of authorized common stock to 20,000,000 and preferred shares to
10,000,000. On August 20, 1998, the Board approved a second reverse stock split
of one-for-two. All 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 and reverse stock splits as if it had
occurred at inception. On May 26, 1998, the Board of Directors approved the 1998
Stock Option and Incentive Plan which authorized 1,000,000 shares of common
stock to be issued under the Plan.
NOTE 8. RECEIVABLES (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 value of 17.5 million
Deutschmarks, is due on December 31, 1999. The note was sold, on a non-recourse
basis to a group of unrelated investors on May 29, 1998 for 20.2 million
Deutschmarks resulting in an economic gain of $1,517,000. For U.S. accounting
purposes the gain is reported as an adjustment to the issuance price of share
capital. The transaction was handled through escrow agents in Berlin. Management
expects that payment will occur during the first quarter of fiscal 1999.
F-10
<PAGE> 60
UNAUDITED PROFORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited proforma consolidated financial statements have
been prepared by the Company's management from its historical financial
statements, which are contained elsewhere in this prospectus. The Unaudited
Proforma Statement of Operations presented on the following pages reflects the
Company's results of operations adjusted for the acquisition of James Buchanan
Rea, Inc. ("JBRI") as of March 31, 1998 and the related issuance of notes
payable and common stock, as described in the accompanying notes. The proforma
adjustments have been applied to the historical unaudited consolidated statement
of operations for the fiscal periods ended August 31, 1997 and May 31, 1998, and
the unaudited statements of operations of JBRI for the nine months ended
September 30, 1997 and the audited results of operations for the seven months
ended March 31, 1998, as if the acquisition occurred on February 4, 1997 (the
inception date of the Company). The balance sheet of JBRI and the results of
operations of JBRI for the two months ended May 31, 1998, are included in the
historical consolidated balance sheet and statement of operations. The
acquisition has been accounted for using the purchase method of accounting. For
purposes of the 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-11
<PAGE> 61
AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED PROFORMA CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED MAY 31, 1998
<TABLE>
<CAPTION>
HISTORICAL PURCHASE
AMERICAN JBRI ACCOUNTING
DIVERSIFIED NOTE (B) ADJUSTMENTS PROFORMA
----------- -------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue.................................. $ 13,758 $95,678 $ -- $ 109,436
----------- ------- -------- -----------
Expenses (Note 2):
Travel and entertainment............... 109,048 -- -- 109,048
Employee compensation and benefits..... 354,316 66,786 -- 421,102
Professional fees...................... 288,539 3,133 -- 291,672
Advertising and promotion................ 633,836 3,070 -- 636,907
Administrative......................... 189,354 20,762 -- 210,116
Other Operating Expenses................. 98,684 -- -- 98,684
Depreciation and amortization.......... 27,706 2,071 27,988(4) 57,765
Interest............................... 18,792 -- 7,977(3) 26,769
----------- ------- -------- -----------
1,720,276 95,822 35,965 1,852,063
----------- ------- -------- -----------
(Loss) before income taxes............... (1,706,517) (144) (35,965) (1,742,627)
Income taxes............................. -- -- --(5) --
----------- ------- -------- -----------
Net (loss)............................... $(1,706,517) $ (144) $(35,965) $(1,742,627)
=========== ======= ======== ===========
Average common shares outstanding........ 5,064,000 92,361 5,156,361
=========== ======= ======== ===========
Basic and diluted (loss) per common
share.................................. $ (.38) $ -- $ -- $ (.34)
=========== ======= ======== ===========
</TABLE>
Note B -- JBRI unaudited results of operations are estimated for the seven
months ended March 31, 1998. JBRI results for the two months ended May 31, 1998
are included with the historical results.
See Notes to Unaudited Proforma Consolidated Financial Statements.
F-12
<PAGE> 62
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 (B) 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 27,988(2) 30,651
Interest............................... -- -- 7,900(1) 7,900
--------- -------- ---------- -----------
139,527 146,992 35,888 322,407
--------- -------- ---------- -----------
(Loss) before income taxes............... (139,527) (50,024) (35,888) (225,439)
Income taxes............................. -- -- --(5) --
--------- -------- ---------- -----------
Net (loss)............................... $(139,527) $(50,024) $ (35,888) $ (225,439)
========= ======== ========== ===========
Average common shares outstanding........ 5,000,000 118,750 618,750
--------- -------- ---------- -----------
Basic and fully diluted (loss) per common
share.................................. $ (0.28) $ -- $ -- $ (0.36)
========= ======== ========== ===========
</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-13
<PAGE> 63
AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED PROFORMA CONSOLIDATED FINANCIAL STATEMENTS
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 nine months ended May 31,
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
results of operations that might have occurred had the acquisition and financing
taken place at the beginning of the period or as of May 31, 1998, or to project
the Company's financial position or results of operations at any future date or
for any future period.
Adjustments were made as follows:
<TABLE>
<S> <C>
(1) 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
------
(2) Record amortization of goodwill over a period of 7 years
for the period February 4, 1997 through August 31,1997
Amortization expense................................... 27,988
------
(3) Record interest on notes payable at an annual rate of
8.5%, for the nine months ended May 31, 1998.
Interest expense....................................... 7,977
------
(4) Record amortization of goodwill over a period of 7 years
for the seven months ended March 31, 1998
Amortization expense................................... 27,988
------
(5) The tax benefit for the proforma adjustments has been
offset by an equal increase in the valuation allowance
for deferred taxes resulting in no income tax expense or
benefit reflected in the purchase accounting
adjustments.
</TABLE>
F-14
<PAGE> 64
JAMES BUCHANAN REA, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED
MARCH 31, MARCH 31,
1998 1997
------------- -------------
<S> <C> <C>
Revenue:
Commissions (Note 4)...................................... $ 112 $ 223
Advisory fees (Note 4).................................... 24,937 27,275
Distribution fees (Note 4)................................ 4,580 4,046
Interest.................................................. 116 449
-------- --------
29,745 31,993
Expenses (Note 4):
Employee compensation and benefits........................ 19,152 24,453
Communications............................................ 1,424 572
Occupancy and equipment rental............................ 4,337 3,079
Other operating expenses.................................. 14,132 25,677
-------- --------
39,045 53,781
-------- --------
(Loss) before income taxes........................ (9,300) (21,788)
Federal and state income taxes (Note 7)
-------- --------
Net (loss)........................................ $ (9,300) $(21,788)
======== ========
Weighted average number of common shares outstanding........ 100,000 100,000
======== ========
Net (loss) per common share................................. $ (0.09) $ (0.22)
======== ========
</TABLE>
See Notes to Financial Statements.
F-15
<PAGE> 65
JAMES BUCHANAN REA, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED
MARCH 31, MARCH 31,
1998 1997
------------- -------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net (loss)................................................ $(9,300) $(21,788)
Adjustments to reconcile net (loss) to net cash (used in)
operating activities:
Depreciation and amortization........................ 888 888
Change in assets and liabilities:
(Increase) decrease in receivables................... (1,907) 1,020
(Increase) decrease in prepaids and other assets..... 1,739 (30)
Increase (decrease) in accounts payable and accrued
expenses.......................................... 712 (2,682)
Increase (decrease) in dealer service fees payable... 834 549
------- --------
Net cash (used in) operating activities................ (7,034) (22,043)
------- --------
Cash Flows from Investing Activities........................ -- --
------- --------
Cash Flows from Financing Activities........................ -- --
------- --------
Contribution of capital................................... 10,000 --
------- --------
Increase (Decrease) in cash and cash equivalents....... 2,966 (22,043)
Cash and Cash Equivalents
Beginning................................................. 11,336 60,838
------- --------
Ending.................................................... $14.302 $ 38,795
======= ========
</TABLE>
See Notes to Financial Statements.
F-16
<PAGE> 66
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-17
<PAGE> 67
JAMES BUCHANAN REA, INC.
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
ASSETS
<TABLE>
<CAPTION>
1997 1996
--------- --------
<S> <C> <C>
Cash and cash equivalents................................... $ 11,336 $ 60,838
Accounts receivable:
Investment advisory fees.................................. 8,462 12,043
Distribution fees......................................... 2,951 3,363
Other..................................................... 2,539
Prepaid expenses............................................ 2,136 2,527
Property and equipment, net (Note 2)........................ 45,344 48,495
Deposits.................................................... 1,687 1,387
--------- --------
$ 74,455 $128,653
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses..................... $ 7,744 $ 5,233
Dealer service fees payable............................... 4,202 5,057
--------- --------
11,946 10,290
--------- --------
Stockholders' Equity (Note 6):
Common stock, no par value; authorized, issued and
outstanding
100,000 shares......................................... 7,500 7,500
Additional paid-in capital................................ 198,735 184,735
Accumulated deficit....................................... (143,726) (73,872)
--------- --------
62,509 118,363
--------- --------
$ 74,455 $128,653
========= ========
</TABLE>
See Notes to Financial Statements.
F-18
<PAGE> 68
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-19
<PAGE> 69
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-20
<PAGE> 70
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-21
<PAGE> 71
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.
NOTE 2. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1997 and 1996 is summarized as
follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Automobiles............................................ $ $ 7,525
Capital improvements to executive office............... 66,925 66,925
Furniture and equipment................................ 29,371 28,972
-------- --------
96,296 103,422
Less accumulated depreciation.......................... (50,952) 54,927
-------- --------
$ 45,344 $ 48,495
======== ========
</TABLE>
F-22
<PAGE> 72
JAMES BUCHANAN REA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. PROFIT SHARING PLAN
The Company participates in an employee profit sharing plan which covers
all full-time employees. Annual contributions to the profit sharing plan are
determined by the Board of Directors. No contributions were made to the profit
sharing plan for 1997 and 1996.
NOTE 4. RELATED PARTY TRANSACTIONS
The Company is retained as the investment advisor to the 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.
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
F-23
<PAGE> 73
JAMES BUCHANAN REA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
operating losses were offset by equal increase in the valuation allowance for
deferred taxes resulting in no income tax expense or benefit reflected on the
Statements of Operations.
NOTE 8. OFF-BALANCE-SHEET RISK
As discussed in Note 1, the Company's customers' securities transactions
are introduced on a fully disclosed basis with its clearing broker-dealer. The
clearing broker-dealer carries all accounts of the Company's customers and is
responsible for execution, collection and payment of funds, and receipt and
delivery of securities, relative to customer transactions. Off-balance-sheet
risk exists due to the possibility that customers may be unable to fulfill their
contractual commitments, in which case the clearing broker-dealer may charge to
the Company any losses it incurs. The Company seeks to minimize this risk
through procedures designed to monitor the creditworthiness of its customers and
to ensure that customer transactions are executed properly by the clearing
broker-dealer.
NOTE 9. PENDING MERGER
On November 24, 1997, the Company entered into an agreement to merge with
American Diversified Asset Management, Inc. (American Diversified) with American
Diversified to be the survivor of the merger. The merger will be affected by an
exchange of 2,375,000 shares of common stock of American Diversified and cash of
$160,875 for the common stock of the Company. The cash proceeds will be utilized
to retire the stock of the minority shareholders of the Company. The merger was
approved by the shareholders of the Fund on January 12, 1998.
On March 31, 1998, the Company's merger into American Diversified Holdings,
Inc. became effective.
F-24
<PAGE> 74
- ------------------------------------------------------
- ------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 1
Risk Factors.......................... 5
The Company........................... 13
Use of Proceeds....................... 13
Dilution.............................. 14
Dividend Policy....................... 15
Capitalization........................ 15
Description of Business............... 16
Management's Discussion and Analysis
of Financial Condition and Results
of
Operation........................... 30
Description of Property............... 32
Directors, Executive Officers and
Significant Employees............... 32
Remuneration of Directors and
Officers............................ 35
Security Ownership of Management and
Certain Securityholders............. 39
Interest of Management and Others in
Certain Transactions................ 40
Description of Securities............. 40
Concurrent Sales by the Selling
Shareholders........................ 42
Shares Eligible for Future Sale....... 42
Underwriting.......................... 43
Legal Matters......................... 44
Experts............................... 44
Additional Information................ 44
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
------------------------
NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION AND REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO ITS DATE. THIS PROSPECTUS DOSE NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE
REGISTERED SECURITIES TO WHICH IT RELATES. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY
CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
UNTIL , 1998, ALL DEALERS EFFECTING TRANSACTIONS IN THE UNITS,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
1,733,333 SHARES
COMMON STOCK (NO PAR VALUE)
AMERICAN DIVERSIFIED
HOLDINGS, INC.
------------------------
PROSPECTUS
------------------------
August , 1998
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 75
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
ALTERNATE
SUBJECT TO COMPLETION, DATED AUGUST 28, 1998
PROSPECTUS
AMERICAN DIVERSIFIED HOLDINGS, INC.
1,666,667 SHARES
COMMON STOCK (NO PAR VALUE)
------------------------
This Prospectus relates to up to 1,666,667 shares of (the " Converted
Shares") of common stock, no par value (the "Common Stock"), of American
Diversified Holdings, Inc., a Nevada corporation (the "Company"), issuable to
320 shareholders of the Company (hereinafter collectively referred to as the
"Selling Shareholders") upon conversion of 5,000,000 shares of Series A
Preferred Stock, par value $1.00, acquired by the Selling Shareholders, which
Converted Shares are hereby offered for resale by the Selling Shareholders. See
"Description of Securities."
The Converted Shares offered by this Prospectus may be sold from time to
time by the Selling Shareholders, or by their transferees. No underwriting
arrangements have been entered into by the Selling Shareholders. The
distribution of the Converted Shares may be effected in one or more transactions
that may take place on the over-the-counter market including ordinary brokers'
transactions, privately negotiated transactions or through sales to one or more
dealers for resale of such shares as principals at market prices prevailing at
the time of sale, at prices released to such prevailing market prices or at
negotiated prices. Usual and customary or specifically negotiated brokerage fees
or commissions received may be paid by the Selling Shareholders in connection
with sales of such Converted Shares.
The Selling Shareholders and intermediaries through whom such securities
are sold may be deemed "underwriters" within the meaning of the Securities Act
of 1933, as amended (the "Act") with respect to the securities offered and any
profits realized or commissions received may be deemed underwriting
compensation. The Company has agreed to indemnify the Selling Shareholders
against certain liabilities, including liabilities under the proposed Act.
The Company will not receive any of the proceeds from the sale of the
Converted Shares by the Selling Shareholder. All costs incurred in the
registration of the Shares are being borne by the Company. See "Selling
Shareholders."
Prior to this offering, there has been no public market for the Company's
Common Stock and there can be no assurance that any such market will develop.
Application is being made to have the Common Stock approved for quotation on the
National Association of Securities Dealers' Automated Quotation System
("NASDAQ") under the symbol "AMDIV". See "Risk Factors" and "Underwriting."
The textual portion of this Prospectus and a demonstration of certain of
the Company's products and services, which demonstration is part of this
Prospectus, are available on the CD-ROM portion of this Prospectus attached to
the inside back cover page hereof. To view the demonstration portion of this
Prospectus, click on the hyper link located on the cover page of the textual
portion of the CD-ROM portion of this Prospectus or exit the textual portion of
the CD-ROM portion of this Prospectus.
THESE SECURITIES ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK AS WELL AS
IMMEDIATE AND SUBSTANTIAL DILUTION. SEE "RISK FACTORS" AND "DILUTION."
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
The date of this Prospectus is August , 1998
<PAGE> 76
ALTERNATE
CONCURRENT SALES
On the date of this Prospectus, a Registration Statement under the Act with
respect to an underwritten public offering (the "Offering") of 1,733,333 shares
of Common Stock (without giving effect to the Over-Allotment Option granted to
the Underwriters of the Offering) by the Company was declared effective by the
Securities and Exchange Commission (the "Commission"). Sales pursuant to the
Offering of 1,733,333 shares of Common Stock by the Company or even the
potential of such sales would likely have an adverse effect on the market price
of the Company's securities.
SELLING SHAREHOLDERS
The Selling Shareholders may offer for sale the Converted Shares from time
to time as the date of this Prospectus. Converted shares are issuable upon the
conversion of the 5,000,000 shares of Series A Preferred Stock outstanding. The
Company has agreed to register the Converted Shares and pay all expenses in
connection therewith. No Selling Shareholder has ever held any managerial
position with the Company. The Company will not receive any proceeds from the
sale of the Converted Shares by the Selling Shareholders.
PLAN OF DISTRIBUTION
The securities offered hereby may be sold from time to time directly by the
Selling Shareholders. Alternatively, the Selling Shareholders may from time to
time offer such securities through underwriters, dealers or agents. The
distribution of securities by the Selling Shareholders may be effected in one or
more transactions that may take place on the over-the-counter market, including
ordinary broker's transactions, privately-negotiated transactions or through
sales to one or more broker-dealers for resale of such shares as principals, at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices. Usual and customary or
specifically negotiated brokerage fees or commissions may be paid by the Selling
Shareholders in connection with such sales of securities. The Selling
Shareholders and intermediaries through whom such securities are sold may be
deemed "underwriters" within the meaning of the Act with respect to the
securities offered, and any profits realized or commissions received may be
deemed underwriting compensation.
<PAGE> 77
- ------------------------------------------------------
- ------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 1
Risk Factors.......................... 5
The Company........................... 13
Use of Proceeds....................... 13
Dilution.............................. 14
Dividend Policy....................... 15
Capitalization........................ 15
Description of Business............... 16
Management's Discussion and Analysis
of Financial Condition and Results
of Operation........................ 30
Description of Property............... 32
Directors, Executive Officers and
Significant Employees............... 32
Remuneration of Directors and
Officers............................ 35
Security Ownership of Management and
Certain Securityholders............. 39
Interest of Management and Others in
Certain Transactions................ 40
Description of Securities............. 40
Concurrent Sales by the Selling
Shareholders........................ 42
Selling Shareholders.................. 42
Plan of Distribution.................. 42
Shares Eligible for Future Sale....... 43
Underwriting.......................... 44
Legal Matters......................... 45
Experts............................... 45
Additional Information................ 45
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
------------------------
NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION AND REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO ITS DATE. THIS PROSPECTUS DOSE NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE
REGISTERED SECURITIES TO WHICH IT RELATES. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY
CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
UNTIL , 1998, ALL DEALERS EFFECTING TRANSACTIONS IN THE UNITS,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
1,666,667 SHARES
COMMON STOCK (NO PAR VALUE)
AMERICAN DIVERSIFIED
HOLDINGS, INC.
------------------------
PROSPECTUS
------------------------
August , 1998
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 78
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Articles of Incorporation limit the liability of directors and officers
to the fullest extent permitted under Nevada General Corporation Law. As allowed
by Nevada Revised Statutes, the Articles of Incorporation and Bylaws of the
Company provide that the liability of the directors of the Company for monetary
damages shall be eliminated to the fullest extent permissible under Nevada law.
This is intended to eliminate the personal liability of a director for monetary
damages in an action brought by or in the right of the Company for breach of a
director's duties to the Company or its shareholders except for liability for
acts or omissions that involve intentional misconduct or knowing and culpable
violation of law, for acts or omissions that a director believes to be contrary
the best interests of the Company or its shareholders or that involve the
absence of good faith on the part of the director, for any transaction from
which a director derived an improper personal benefit, for acts or omissions
that show a reckless disregard for the director's duty to the Company or its
shareholders in circumstances in which the director was aware, or should have
been aware, in the ordinary course of performing a director's duties, of a risk
of serious injury to the Company or its shareholders, for acts or omissions that
constitute an unexcused pattern of inattention that amounts to an abdication of
the director's duty to the Company or its shareholders, with respect to certain
contracts in which a director has a material financial interest and for approval
of certain improper distributions to shareholders or certain loans or
guarantees. This provision does not limit or eliminate the rights of the Company
or any shareholder to seek non-monetary relief such as an injunction or
rescission in the event of a breach of a director's duty of care.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses in connection with this
Registration Statement. All of such expenses are estimates, other than the
filing fees payable to the Commission.
<TABLE>
<S> <C>
Filing Fee -- Securities and Exchange Commission............ $
Exchange Listing Fee........................................
Fees and Expenses of Accountants............................
Fees and Expenses of Counsel................................
Printing and Engraving Expenses.............................
Blue Sky Fees and Expenses..................................
Transfer Agent Fees.........................................
Miscellaneous Expenses......................................
-------
Total............................................. $
=======
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
See "Interest of Management and Others in Certain Transactions" above, for
a description of the Company's common stock issued in the JBRI-ADAM merger.
See "Description of Security -- Preferred Stock," for a discussion of the
1,733,333 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. The 2,375,000 shares issued to Mr. Hartmann have been converted into
118,750 shares of Common Stock following a reverse 1:10 stock split of the
Common Stock, effective May 26, 1998, and a reverse 1:2 stock split of the
Common Stock, effective August 20, 1998. See "Description of
Securities -- Common Stock" and "Security Ownership of Management and Certain
Securityholders."
II-1
<PAGE> 79
ITEM 27. EXHIBITS
(a) The following exhibits to this Registration Statement are filed
herewith:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S> <C>
1.1 -- Form of Underwriting Agreement++
2.1 -- Plan and Agreement of Merger and Reorganization among JBRI,
ADAM, the Company and certain shareholders of JBRI*
3.1 -- Articles of Incorporation*
3.1.1 -- Amendment to Articles of Incorporation dated April 1, 1997**
3.1.2 -- Amendment to Articles of Incorporation dated November 20,
1997**
3.1.3 -- Amendment to Articles of Incorporation dated January 12,
1998**
3.1.4 -- Certificate of Designation re: Series A Preferred Stock,
dated February 4, 1998**
3.2 -- Bylaws of the registrant*
4.1 -- Specimen of Common Stock of Registrant*
4.2 -- Specimen of Series A Preferred Stock of Registrant**
5.1 -- Opinion of Jeffers, Wilson, Shaff & Falk. LLP++
10.1 -- Form of Investment Advisory Agreement of ADAM with
Rea-Graham Balanced Fund, Inc.**
10.2 -- Form of Investment Sub-Advisory Agreement of ADAM with Ladas
& Hulings, Inc.**
10.3 -- Employment Agreement among Registrant, ADAM and James B.
Rea, Jr.**
10.4 -- Employment Agreement between Registrant and Roland
Kuettner**
10.5 -- Employment Agreement between Registrant and Peter Hartmann+
21.1 -- Subsidiaries+
23.1 -- Consent of McGladrey & Pullen+
23.2 -- Consent of Jeffers, Wilson, Shaff & Falk, LLP (filed as part
of Exhibit 5)++
24.1 -- Power of Attorney (included in the signature page)+
27.1 -- Financial Data Schedules+
</TABLE>
- ---------------
* Previously filed with the Registration Statement on Form 10-SB filed with the
Commission on January 14, 1998.
** Previously filed with Amendment No. 1 to Registration Statement on Form 10-SB
filed with the Commission on May 11, 1998.
+ Being filed with this Registration Statement.
++ To be filed by amendment to this Registration Statement.
(b) All financial statement schedules that might otherwise be required to
be filed as a party of this Registration Statement have been omitted because the
required information is shown in the financial statements or notes thereto, the
amounts involved are not significant, or the schedules are not applicable.
ITEM 28. UNDERTAKINGS
The undersigned small business issues hereby undertakes:
(1) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers
and controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in the
opinion of the Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the
II-2
<PAGE> 80
event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Company will, unless in the opinion of the Company's counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(2) The undersigned registrant hereby undertakes that:
(i) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430(A) and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of
this registration statement as of the time it was declared effective.
(ii) For the purpose of determining any liability under the Act,
treat each post-effective amendment that contains a form of prospectus
as a new registration statement for the securities offered in
registration statement and that the Offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 81
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that is has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of Los
Angeles, State of California, on August 26, 1998.
AMERICAN DIVERSIFIED HOLDINGS, INC.
By: /s/ JAMES BUCHANAN REA, JR.
------------------------------------
James Buchanan Rea, Jr.,
President and Chief Executive
Officer
POWER OF ATTORNEY
We, the undersigned directors and officers of American Diversified
Holdings, Inc. do hereby constitute and appoint James Buchanan Rea, Jr. and
Peter Hartmann, or either of them, acting individually, our true and lawful
attorneys and agents, to do any and all acts and things in our name and behalf
in our capacities as directors and officers and to execute any and all
instruments for us and in our names in the capacities indicated below, which
said attorneys and agents, or any one of them, may deem necessary or advisable
to enable said corporation to comply with the Securities Act of 1933, as
amended, and any rules, regulations, and requirements of the Commission, in
connection with this Registration Statement, including specifically, but without
limitation, power and authority to sign for us or any of us in our names and in
the capacities indicated below, any and all amendments (including post-effective
amendments) hereof; and we do hereby ratify and confirm all that the said
attorneys and agents, or any of them, shall do or cause to be done by virtue
hereof.
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement was signed by the following persons in the capacities and
on the dates stated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/ PETER HARTMANN Chairman of the Board and Vice August 26, 1998
- --------------------------------------------------- President of International
Peter Hartmann Development
/s/ JAMES BUCHANAN REA, JR. Director, President and Chief August 26, 1998
- --------------------------------------------------- Executive Officer
James Buchanan Rea, Jr.
/s/ ROLAND KUETTNER Chief Financial Officer and August 26, 1998
- --------------------------------------------------- Treasurer
Roland Kuettner
/s/ THOMAS CORCOVELOS Director August 26, 1998
- ---------------------------------------------------
Thomas Corcovelos
/s/ THOMAS H. FITZGERALD, JR. Director August 26, 1998
- ---------------------------------------------------
Thomas H. Fitzgerald, Jr.
</TABLE>
<PAGE> 82
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S> <C>
1.1 -- Form of Underwriting Agreement++
2.1 -- Plan and Agreement of Merger and Reorganization among JBRI,
ADAM, the Company and certain shareholders of JBRI*
3.1 -- Articles of Incorporation*
3.1.1 -- Amendment to Articles of Incorporation dated April 1, 1997**
3.1.2 -- Amendment to Articles of Incorporation dated November 20,
1997**
3.1.3 -- Amendment to Articles of Incorporation dated January 12,
1998**
3.1.4 -- Certificate of Designation re: Series A Preferred Stock,
dated February 4, 1998**
3.2 -- Bylaws of the registrant*
4.1 -- Specimen of Common Stock of Registrant*
4.2 -- Specimen of Series A Preferred Stock of Registrant**
5.1 -- Opinion of Jeffers, Wilson, Shaff & Falk. LLP++
10.1 -- Form of Investment Advisory Agreement of ADAM with
Rea-Graham Balanced Fund, Inc.**
10.2 -- Form of Investment Sub-Advisory Agreement of ADAM with Ladas
& Hulings, Inc.**
10.3 -- Employment Agreement among Registrant, ADAM and James B.
Rea, Jr.**
10.4 -- Employment Agreement between Registrant and Roland
Kuettner**
10.5 -- Employment Agreement between Registrant and Peter Hartmann+
21.1 -- Subsidiaries+
23.1 -- Consent of McGladrey & Pullen+
23.2 -- Consent of Jeffers, Wilson, Shaff & Falk, LLP (filed as part
of Exhibit 5)++
24.1 -- Power of Attorney (included in the signature page)+
27.1 -- Financial Data Schedules+
</TABLE>
- ---------------
* Previously filed with the Registration Statement on Form 10-SB filed with the
Commission on January 14, 1998.
** Previously filed with Amendment No. 1 to Registration Statement on Form 10-SB
filed with the Commission on May 11, 1998.
+ Being filed with this Registration Statement.
++ To be filed by amendment to this Registration Statement.
<PAGE> 1
Exhibit 10.5
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of
July 1, 1998, by and between American Diversified Holdings. Inc., its
subsidiaries and Peter Hartmann ("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 thirty months
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 $180,000 payable in 12 equal monthly installments of $15,000.
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.
<PAGE> 2
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 Chairman of the Board and
Executive Vice President - International Development 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.
2
<PAGE> 3
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 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.
3
<PAGE> 4
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) days following receipt of
written notice by Executive to the Employers of such breach by either of the
Employers;
4
<PAGE> 5
(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 substantially the same proportion as their ownership of the Voting
Securities immediately before such merger, consolidation, share exchange or
reorganization;
5
<PAGE> 6
(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.
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.
6
<PAGE> 7
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.
12000 Wilshire Blvd., Suite 680
Los Angeles, California
Attention: Peter Hartmann
Telephone: (310) 442-2660
Telecopy: (310) 442-2661
If to Executive:
Peter Hartmann
127 Via Coronado
Rancho Santa Fe, CA 92091
Telephone: (619) 759-3552
Telecopy: (619) 759-3563 fax
7
<PAGE> 8
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.
8
<PAGE> 9
IN WITNESS WHEREOF, the parties hereto have executed this
Employment Agreement
AMERICAN DIVERSIFIED HOLDINGS, INC.,
By: /s/ James Buchanan Rea, Jr., President
--------------------------------------
EXECUTIVE:
/s/ Peter Hartmann
------------------------------------------
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
NAME OF SUBSIDIARY (DOING BUSINESS AS) STATE/JURISDICATION OF ORGANIZATION
-------------------------------------- -----------------------------------
<S> <C>
American Diversified Asset Management, Inc. Nevada
American Diversified AG Wertpapierhandelsbank Germany
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the use in this Registration Statement on Form SB-2 of
our report, dated December 22, 1997, except for the third paragraph of Note 7 as
to which the date is August 20, 1998, relating to the consolidated financial
statements of American Diversified Holdings, Inc. and subsidiaries and our
report dated March 16, 1998 except for the last paragraph of Note 9 as to which
the date is March 31, 1998, related to the financial statements of James
Buchanan Rea, Inc. We also consent to the reference to our Firm under the
caption "Experts" in the Prospectus.
McGLADREY & PULLEN, LLP
New York, New York
August 28, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 9-MOS YEAR
<FISCAL-YEAR-END> AUG-31-1998 AUG-31-1998
<PERIOD-START> MAR-01-1998 FEB-04-1997
<PERIOD-END> MAY-31-1998 AUG-31-1997
<CASH> 901,773 2,264
<SECURITIES> 1,193,049 0
<RECEIVABLES> 11,584,186 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 13,679,008 2,264
<PP&E> 273,670 14,320
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 15,465,792 137,804
<CURRENT-LIABILITIES> 675,126 63,577
<BONDS> 0 0
0 0
5,000,000 0
<COMMON> 11,861,710 96,754
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 15,465,792 137,804
<SALES> 0 0
<TOTAL-REVENUES> 13,758 0
<CGS> 0 0
<TOTAL-COSTS> 1,720,275 139,527
<OTHER-EXPENSES> 98,684 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 26,583 0
<INCOME-PRETAX> (1,706,517) (139,527)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (1,706,517) (139,527)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,706,517) (139,527)
<EPS-PRIMARY> (0.38) (0.28)
<EPS-DILUTED> (0.38) (0.28)
</TABLE>
