-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, D6W5di+L9UbVzeIgtcVHMh+OtEIRpVFj2S8yAaZDRlggKBG40A3m0k4ZRnzCIG/b CrVJjAsjHGGd0pW6DL6bEQ== 0000892569-98-001331.txt : 19980512 0000892569-98-001331.hdr.sgml : 19980512 ACCESSION NUMBER: 0000892569-98-001331 CONFORMED SUBMISSION TYPE: 10SB12G/A PUBLIC DOCUMENT COUNT: 10 FILED AS OF DATE: 19980511 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN DIVERSIFIED HOLDINGS INC CENTRAL INDEX KEY: 0001052924 STANDARD INDUSTRIAL CLASSIFICATION: FUNCTIONS RELATED TO DEPOSITORY BANKING, NEC [6099] STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10SB12G/A SEC ACT: SEC FILE NUMBER: 000-23615 FILM NUMBER: 98615389 BUSINESS ADDRESS: STREET 1: 12100 WILSHIRE BLVD STREET 2: STE 680 CITY: LOS ANGELES STATE: CA ZIP: 90025 BUSINESS PHONE: 3104429931 MAIL ADDRESS: STREET 1: 3525 DELMAR HEIGHTS RD #145 STREET 2: C/O AMERICAN DIVERSIFIED SECURITIES INC CITY: SAN DIEGO STATE: CA ZIP: 92130 10SB12G/A 1 FORM 10-SB AMENDMENT 1 1 ================================================================================ U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------ AMENDMENT NO. 1 TO FORM 10-SB GENERAL FORM FOR REGISTRATION OF SECURITIES OF SMALL BUSINESS ISSUERS Under Section 12(b) or (g) of the Securities Exchange Act of 1934 AMERICAN DIVERSIFIED HOLDINGS, INC. (Name of small business issuer in its charter) NEVADA 86-0854150 (State or jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 12100 Wilshire Boulevard, Suite 680 Los Angeles, California 90025 310-442-9931 (Address and telephone number of principal executive offices) Securities to be registered under Section 12(b) of the Act: Title of each class Name of each exchange on which to be so registered each class is to be registered NONE N/A Securities to be registered under Section 12(g) of the Act: Common Stock (Title of class) Series A Preferred Stock (Title of class) ================================================================================ 2 DESCRIPTION OF BUSINESS GENERAL American Diversified Holdings, Inc. ("the Company"), was incorporated on February 4, 1997 under Nevada law and is a holding company formed to engage in the financial services business in the United States and Europe. The Company has established two wholly-owned subsidiaries: American Diversified Asset Management, Inc., (" ADAM"), a Nevada corporation formed in October 1997 (formerly named American Diversified Securities, Inc.); and American Diversified AG Wertspapierhandelsbank a ("ADAG"), a German corporation formed on April 30, 1997 (together the Company and the subsidiaries, including the merged operations of JBRI (see "JBRI-ADAM Merger" below) into ADAM, are referred to as the "Group"). The principal business activities of the Group will be to provide financial services and distribute financial service products to individual and institutional investors in the United States, Germany and the European Union ("EU") countries. The Group's initial principal activity will be to act as investment manager and distributor in the United States and the EU for the Rea-Graham Balanced Fund (the "Fund"), a series mutual fund of Rea-Graham Funds, Inc., a diversified, open-end investment company registered under the Investment Company Act of 1940. ADAG is located in Berlin and will provide financial services and be the initial distributor of the Group's mutual fund products in Germany and the EU. The Group intends to provide a wide range of commercial and consumer financial services to customers in the United States and Europe. JBRI-ADAM MERGER The merger of James Buchanan Rea, Inc. ("JBRI"), a California corporation, with and into ADAM became effective on March 31, 1998. (See "Interest of Management and Others in Certain Transactions" for a discussion of the terms of the merger and Notes 1 and 2 of the "Notes to Unaudited Proforma Consolidated Financial Statements" of the Company as of February 28, 1998, for a description of the financial accounting for the merger.) JBRI is a licensed broker-dealer and a registered investment advisor under the Investment Advisers Act of 1940. JBRI has served as the investment advisor and distributor to the Fund since its inception in 1982. The shareholders of the Fund, at a meeting on January 12, 1998, approved a new investment advisory agreement with ADAM, effective upon completion of the merger. ADAM will succeed to the business operations of JBRI and will operate as a broker-dealer and registered investment advisor. ADAM will succeed as the investment advisor and distributor to the Fund. James Buchanan Rea, Jr., the former President and registered securities principal of JBRI has become the President and general securities principal of ADAM. Other than through the merged operations of JBRI, ADAM does not have an operating history and has not previously engaged in the investment management business or in the operation and distribution of mutual funds. At March 31, 1998, the investment management business of ADAM acquired through the JBRI merger, and the initial business activities of ADAG, represent the only active business activities of the Company and the Group. BUSINESS EXPANSION; CAPITAL GROWTH The Company's management believes that an international financial services group with management and offices in both the U.S. and Europe can attract a clientele of institutional investors, banks, businesses and individuals . The Group's business strategy is to provide customers of small-to medium-sized European banks with direct access to American financial services and an opportunity to invest in tailored U.S. mutual funds, such as the Fund. The Company believes there is a new and growing market in Germany and the EU for the distribution of U.S. investment products, particularly mutual fund shares to individual investors and smaller financial institutions, as European investors discover that other financial products are available as an alternative to traditional savings account deposits in commercial banks. 1 3 Further, the planned transition to a standard European currency (the "EURO") in January 1999, is expected to increase the demand for investments denominated in U.S. dollars. The Company intends to expand the mutual fund management and distribution business of ADAM by organizing additional series funds, initially a small cap value fund, for distribution to U.S. and European investors. The Company intends to market the Fund and new series funds to European investors through ADAG. The Company also intends to organize a German growth fund and distribute it primarily to U.S. investors . The Company intends to grow the Fund by marketing it in Europe . As the Fund grows in size, the revenues and profitability of ADAM is expected to increase because ADAM's revenues and income are variable with the net assets of the Fund and with other mutual funds that it may manage in the future. As of March 31, 1998, the Group had 20 full-time employees, 3 of whom are in the U.S., consisting of the President of the Company and 2 former JBRI employees, 1 of whom is now the Chief Operating Officer of the Company; and 17 employees in Berlin, Germany, including the Chief Financial Officer of the Company and 16 ADAG employees, consisting of its Chief Executive Officer and 15 employees who are sales, managerial, asset management, brokerage and administrative personnel. ADAG is a fully licensed investment bank ("Wertpapierhandelsbank") in Germany and is expected to begin operations on May 2, 1998, offering full investment banking and financial services including: - Full service securities brokerage - Asset management - Underwriting - Online internet brokerage ADAG has applied for membership on the Berlin Stock Exchange and the European Association of Securities Dealers Automarket Quotation ("EASDAQ"), the European equivalent to the NASDAQ Stock Market, located in Brussels, Belgium. The memberships are expected to become effective during May 1998. ADAG has completed all necessary preparations for the start of actual business operations, including installation of computer networks. ADAG has received more than 1,000 applications for brokerage accounts from private and commercial clients in Germany. ADAG has 16 full time managerial and operational employees. The Group has assembled a staff of management, brokerage, asset management and marketing personnel, including several former key employees of major German banks and their subsidiaries. The Group intends to engage aggressively in the distribution of mutual funds and other financial products in Europe through a systematic program of direct marketing to prospective customers and through referral sources such as banks, insurance providers, attorneys, accountants and to a lesser extent, personal business contacts. The Company intends to finance its business expansion through sales of equity capital in Europe and the U.S. On March 31, 1998, the Company completed a $5,000,000 private placement of its Series A Preferred Stock at a price of $1 per share in Germany, in an offering that is exempt from U.S. securities laws under Regulation S. The Company has authorized 50,000,000 shares of blank check preferred stock and it anticipates future offerings of preferred stock and an initial public offering of common stock in order to finance future business expansion. There can be no assurance that the future offerings will be successful. 2 4 MARKET AREA The Group's European subsidiaries, starting with ADAG, will offer consumer focused financial services including private money management, full service and online-brokerage, and U.S. mutual fund distribution to small and medium sized institutional investors, banks and individual customers in its immediate market area. The Group's initial targeted market area for the distribution of the Fund and other financial service products in Europe is Berlin, Germany's future capital and the location of one of Germany's five regional stock exchanges, and other financial centers in Germany. Over the next two years, the Company's expansion plans include the formation of subsidiaries and commencement of financial services businesses in Vienna, Austria, Madrid, Spain, Luxembourg and Zurich, Switzerland. Initial steps have been taken to establish the Austrian subsidiary. LACK OF PROFITABILITY, POTENTIAL LOSSES Because the Company was only recently formed, there is no history of operations, other than the historical operations of JBRI prior to its merger into ADAM. The Group's business expansion plans for Europe and the Untied States are subject to the risks inherent in the establishment of a new business enterprise. From its inception on February 4, 1997 through February 28, 1998, the Company has experienced aggregate losses of $792,278. (Please see the "Unaudited Proforma Consolidated Statement of Operations" of the Company for an analysis of the losses of the Company and JBRI on a proforma basis.) Further, a key element of the Company's strategy consists of an aggressive marketing plan for its financial products in Europe. This strategy may result in continued net losses for the Company during its start-up phase due to start-up costs associated with the anticipated high marketing costs for the promotion of mutual funds and other financial services in its market area. Results of operations in the future will be influenced by numerous factors including, among others, expansion, the ability of the Company to manage its growth and maintain the quality of its personnel, and the ability of the Company to implement its strategic plan. The Company may incur problems, delays, expenses and difficulties in its development stage, many of which may be beyond the Company's control. These include, but are not limited to, unanticipated regulatory compliance, marketing problems and intense competition that may exceed current estimates. There is no assurance that the Company will ever operate profitably. MANAGEMENT OF GROWTH The Company plans to expand its business with the formation of subsidiaries in Austria, Spain, Luxembourg and Switzerland. To a significant extent, the Company's future success will be dependent upon its ability to engage in a successful expansion program and will be dependent, in part, upon its ability to secure regulatory approvals in its chosen markets, attract customers for its financial products, maintain adequate financial controls and reporting systems , manage its growth, and obtain additional capital upon favorable terms. There can be no assurance that the Company will be able to successfully implement its planned expansion, finance its growth or manage the resulting larger operation. 3 5 COMPETITION The investment management business is highly competitive. The Company encounters significant competition in connection with the operation of its business in the U.S., but expects initially to encounter only limited competition for brokerage services and the distribution of U.S. mutual funds to its targeted potential clientele in its primary marketing area in Germany. As discussed below, these services are typically provided in Germany today through banks and savings institutions, which are not primarily engaged in providing these services to individual investors. The Company will compete with a large number of investment management firms, commercial banks, insurance companies, broker-dealers and other financial services providers, which have greater resources, assets under management, administration capability and offer a broader array of investment products and services than the Company. Many competitors devote substantial resources to advertising and marketing their mutual funds which may adversely affect the ability of the Company's mutual funds and other new funds to grow. The Company's competitors in the U.S. include numerous enterprises with extensive experience in the financial services sector. These competitive conditions may adversely affect the Company's revenues, profitability and ability to meet its business objectives. Management of the Company believes it has identified a niche market in Germany and the EU for providing securities brokerage services to individual and small institutional investors, including the marketing of U.S. mutual fund products. Brokerage services offered by German banks are targeted for large institutional customers, are expensive and do not address the needs of individual investors. German banks typically encourage private clients to maintain savings accounts, and bank personnel typically lack the incentives and expertise to provide individual customers with U.S. style investment services. The large U.S. investment firms operating in Germany typically market only to large institutional clients and require minimum account balances typically in the $100,000 range. ADAG intends to benefit from the experience and expertise of ADAM, its U.S. sister subsidiary with an established mutual fund operation and broker-dealer distribution network, in providing similar services in Germany and the EU. On the investment banking side, there were only 31 public equity securities offerings in Germany during 1997, and 58 are scheduled for 1998. The Company believes there is a strong and growing demand for investment banking and financial consulting services for emerging growth companies in Germany, from the early financing through the initial public offering stage. Factors affecting the Company's business expansion success include: 1) the abilities, performance records and reputations of its investment managers; and, 2) its ability to develop new investment products and implement marketing strategies in the U.S. and Europe. The Company's ability to retain and increase its investment assets under management could be adversely affected if client accounts underperform the market or if key investment managers leave the Group. The marketability of the Company's investment products, primarily mutual funds, is also dependent, in part, on the relative attractiveness of their investment strategies and practices under prevailing market conditions. There are relatively few barriers to entry by new investment management firms or distributors of U.S. mutual funds in the EU markets. REGULATION The Group's international investment management and broker-dealer operations are subject to extensive regulation, supervision and licensing under various U.S. federal and state laws and regulations and under the securities and corporate laws and regulations of the European countries under which it will market its financial services. Prior to completing the merger, JBRI received approval from the National Association of Securities Dealers, Inc. ("NASD") to its change of ownership through the merger with ADAM. ADAM has filed amendments to the Form BD and Form ADV of JBRI to reflect the change of ownership and provide required disclosure information. ADAM will continue the former operations of JBRI as a registered broker-dealer under the 4 6 Securities Exchange Act of 1934 (the "1934 Act"), as amended, and as a registered investment advisor under the Investment Company Act of 1940, as amended. The Company and various entities of the Group will also be subject to securities regulation in Germany and the various EU jurisdictions where it establishes business operations or distributes financial services products. The securities and investment management laws and regulations generally grant supervisory agencies and bodies broad administrative powers, including the power to limit or restrict an investment management firm from conducting business or distributing products in the event that it fails to comply with such laws and regulations. Possible sanctions could include the suspension of business activities for specified periods of time, revocations of licenses to operate, and other censures and fines. The Company has reviewed its computer systems and has determined that they are in compliance with the requirements of the year 2000. The Company also believes that because of its internal systems and controls and the nature of its financial contracts, it is not likely to incur any material disruptions, expenses or losses in connection with any external relationship related to the year 2000. SERVICEMARK APPLICATION The Company has applied for, but not been issued any registered servicemark for its "AMERICAN DIVERSIFIED(TM)" or "AmDiv(TM)" service-names. No assurance can be given that the Company will be successful in obtaining these marks, or that the servicemarks, if obtained, will afford the Company any competitive advantages. ADAG owns the "AMERICAN DIVERSIFIED" trademark for Germany, which was registered on February 26, 1998 with the German Patent and Trademark Office in Munich, registration No. 39745648. HISTORY OF JBRI The initial business of the Company will be the continuation and expansion of JBRI's investment management services. JBRI was founded in 1961 and is a licensed broker-dealer and registered investment advisor engaged in business as a sponsor, investment manager and distributor of mutual funds. JBRI has served since 1982 as the investment advisor, underwriter and distributor of the Fund, a series portfolio of Rea-Graham Funds, Inc., a mutual fund series company founded by James Buchanan Rea, Sr. and Benjamin Graham. Over the past three years, this has been the principal business activity of JBRI. JBRI generates revenues through its management fees and distribution fees as investment advisor, principal underwriter and distributor of the Fund. Prior to the merger with ADAM, there was no affiliation between JBRI and the Company. JBRI has served as the Fund's investment advisor since 1979. The Fund was originally organized as a private limited partnership in 1976 by its two general partners, Dr. James B. Rea and Benjamin Graham. Mr. Graham authored "Security Analysis" and "The Intelligent Investor," which are recognized texts on the fundamental value of common stocks. The Fund was subsequently incorporated in Maryland and on August 19, 1982, effected a public offering of its shares as an open end diversified investment company registered under the Investment Company Act of 1940. The Fund has continued to operate as a separate series of Rea-Graham Funds, Inc. Pursuant to the investment advisory agreement, the Fund pays JBRI a monthly advisory fee equal on an annual basis to 1% of the first $20,000,000 of the Fund's net assets as of the close of business on the last business day of each calendar month during the Fund's fiscal year; reduced to 0.75% of such net assets in excess of $20,000,000 up to $100,000,000; 0.5% of such net assets in excess of $100,000,000 up to $200,000,000; and 0.45% of all such net assets in excess of $200,000,000. The Fund also pays JBRI a distribution fee payable monthly equal on an annual basis to .35% of the Fund's average daily net assets. 5 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF JBRI'S FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion is based upon and should be read in conjunction with JBRI's financial statements for the period ending December 31, 1996 and December 31, 1997, together with the notes related thereto. Results of Operations Revenues for fiscal year-ended December 31, 1997 were $145,119 as compared to revenues of $166,059 for the fiscal year-ended December 31, 1996, representing a cumulative decrease of approximately 12.6%. The decrease in revenues was primarily due to a reduction of advisory and distribution fees from the Fund, as the Fund's net assets declined from $11,377,574 to $10,154,957 during this period. Operating expenses consist of salary expenses, communications costs, occupancy and equipment rental expenses and other operating expenses. Operating expenses were $214,973 for the fiscal year-ended December 31, 1997 as compared to operating expenses of $214,386 for the fiscal year-ended December 31, 1996. However, operating expenses as a percentage of revenues increased approximately 19% to 148% for fiscal 1997 as compared to 129% for fiscal 1996, as a result of the decline in revenues due to the decline in the Fund's net assets. Net losses from operations for the fiscal year-ended 1997 were $69,854 as compared to $48,327 for the prior fiscal year, representing an increase in net losses of approximately 44.5%. This increase in operating losses is directly attributable to the decrease in revenues resulting from the reduction in advisory and distribution fees generated during 1997, as the Fund's net assets declined. LIQUIDITY AND CAPITAL EXPENDITURES As of December 31, 1997, JBRI had no outstanding long term obligations. Short term obligations consisted of dealer service fees payable, accounts payable and accrued expenses totaling $11,946. JBRI has historically funded operations through cash flows from operations. The Company expects to increase ADAM's net capital to approximately $200,000 during 1998, in connection with the expansion of its broker-dealer and mutual fund activities. JBRI is subject to the net capital rule (Rule 15c3-l) promulgated under the 1934 Act, which prohibits a broker-dealer from engaging in securities transactions when its aggregate indebtedness exceeds 15 times its net capital, as those terms are defined in Rule 15c3-1. The net capital, required net capital and net capital ratio for JBRI as of December 31, 1997 and 1996 were as follows:
1997 1996 --------- --------- Net Capital $ 10,199 $ 58,920 Required Net Capital $ 5,000 $ 5,000 Net Capital Ratio 1.17 to 1 .17 to 1
DESCRIPTION OF PROPERTY The Group currently has two business offices under lease. ADAM has a one-year lease for office space in Los Angeles from CB Commercial, Inc. at $2,370 per month, which is the office space formerly occupied by JBRI. ADAG has entered into a five- year lease expiring January 2003 for office space in Berlin from 58 6 8 Grundstucksverwalt Ungsgesellschaft - Bull and Liedtke, Hamburg, at $3,700 per month. Both premises are in good condition and are adequately insured. It is anticipated that the Company will enter into new office leases as additional subsidiaries are formed and the Group's business activities are expanded into additional EU countries. DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES MANAGEMENT The Company is assembling an international team of managers and entrepreneurs with experience in the Group's market area and a shared commitment to its future growth and success. Peter Hartmann, age 42, Chairman of the Board, President and Chief Executive Officer, has over 20 years of experience with international business development and project management. Between 1992 and January 1997, Mr. Hartmann served as President and Chief Executive Officer of EMDC, an international consulting company specializing in project development with clients in Europe, Russia, Singapore and Vietnam. Mr. Hartmann has only limited experience in the financial services industry. He was engaged by the Company to structure and develop its business and is expected to be replaced as Chief Executive Officer later in 1998 by an experienced financial services professional. James Buchanan Rea Jr., age 42, Director, Executive Vice-President and Chief Operating Officer has over 20 years experience in the mutual fund industry, especially in financial, accounting and operating positions. Mr. Rea is President and Chief Executive Officer of ADAM, the Group's U.S. investment advisory and brokerage subsidiary. He served as President of JBRI, the predecessor of ADAM, since 1986. Klaus Conradi, aged 27, Director, is also the Chief Executive Officer of the Group's German subsidiary, ADAG, is a registered real estate appraiser and a professional banker. Prior to joining the Group, Mr. Conradi served as a Vice-President of the Dresdner Bank and managing director of Imofin, a property development and management group in Berlin. Roland Kuettner, age 43, Director, Chief Financial Officer and Treasurer, qualified as a CPA in 1983 and gained ten years professional experience in North America (the Pacific Northwest and eastern Canada) before moving to Germany. As a Manager in the Accounting and Audit Division of Arthur Andersen & Co., Mr. Kuettner gained extensive experience in dealing with matters affecting financial reporting and control. Thomas Corcovelos, age 47, Director and Secretary of the Company, is a partner in the law firm of Corcovelos & Forry LLP in Long Beach, California. Messrs. Rea, Hartmann, and Corcovelos reside in the U.S. Messrs. Conradi and Kuettner reside in Berlin, Germany. DEPENDENCE ON KEY MANAGEMENT The Company will rely on the business and technical expertise of its executive officers and certain other key employees, particularly its Chief Executive Officer, Peter Hartmann and its Chief Operating Officer, James Buchanan Rea, Jr. The loss of the services of any of these individuals could have a material adverse effect on the Company, although it is anticipated that Mr. Hartmann's replacement will be an experienced financial services 7 9 professional. The Company does not maintain key man life insurance on these individuals. No assurance can be given that their services will be available in the future. The Company's success will also be dependent on its ability to attract and retain additional qualified management personnel. REMUNERATION OF DIRECTORS AND OFFICERS EXECUTIVE COMPENSATION As a newly formed entity, the Company has no prior history of executive compensation. Mr. Rea received aggregate compensation of $91,765 during 1997, as President and Chief Executive Officer of JBRI. The following table sets forth information concerning the compensation to be received for the fiscal year ending August 31, 1998 for services rendered to the Company in all capacities by the Company's executives. The Company had no executive officers under employment during 1997. SUMMARY COMPENSATION TABLE(1)
NAME AND PRINCIPAL POSITION SALARY($) - --------------------------- --------- Peter Hartmann, President and Chief Executive Officer ......................................... $180,000 James Buchanan Rea, Jr., Executive Vice President, Chief Operating Officer .......................................... $100,000(1) Roland Kuettner, Chief Financial Officer and Treasurer ............................................. $100,000(1) Thomas Corcovelos, Secretary ................................... None
- ---------- (1) See "Employment Agreements" below for a description of Mr. Rea's and Mr. Kuettner's benefits entitlements. All other compensation in the form of perquisites and other personal benefits has been omitted because the aggregate amount of such perquisites and other personal benefits constituted the lesser of $50,000 or 10% of the total annual salary and bonus of the named executive for such year. Directors of the Company who are also employees do not receive cash compensation for their services as directors or members of committees of the Board of Directors, but are reimbursed for their reasonable expenses incurred in connections with attending meetings of the Board of Directors or management committees. Non-employee directors are expected to be paid a fee of $1,000 per Board meeting attended, and reimbursement for expenses. EMPLOYMENT AGREEMENTS Mr. Rea has a three-year employment agreement with ADAM and the Company to perform the duties of President and Chief Executive Officer of ADAM at an initial annual salary of $100,000 per year, and an annual discretionary benefits fund of $40,000, and the Company provides personal and family medical insurance coverage. Mr. Rea will also be the designated general securities principal and financial principal of ADAM. If Mr. Rea is terminated without cause or the employment agreement is not renewed, he would receive a severance payment equal to one-quarter of the average annual base salary during the term of his employment plus an amount equal to one-quarter of the highest annual bonus or profit-sharing received during his employment. The discretionary benefits fund includes life and disability insurance, business automobile 8 10 expenses, and business-associated memberships and expenses. Any portion of the benefits fund not expended during a month is paid as additional compensation. Mr. Rea is also entitled to participate in all employee plans and benefits that may be established for executive employees. Bonuses are expected to be determined in the future by the Board based upon an evaluation of performance against the Company's strategic business plan and operating budget. Mr. Kuettner has a three-year employment agreement with the Company to perform the duties of Chief Financial Officer and Treasurer at an initial annual salary of $100,000 per year, and an annual discretionary benefits fund of $40,000, generally on the same terms as the employment contract for Mr. Rea described above, including severance and bonus provisions. SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN SECURITYHOLDERS The Company declared a 10:1 stock split of its common stock, effective November 1, 1997. All amounts of common stock outstanding reflected herein give effect to the stock split. The following table sets forth the number of shares of the Company's capital stock beneficially owned by its officers and directors, all officers and directors as a group, and each shareholder who owns more than 10% of any class of the Company's outstanding capital stock.
Shares Beneficially Owned(1) ----------------------- Name and Address of Beneficial Owner(2) Number Percent - ------------------------------------------------------------------ ----------- ------- COMMON STOCK Peter Hartmann (3) ............................................... 92,375,000 89.6% James Buchanan Rea, Jr ........................................... 2,375,000 2.3% Klaus Conradi (3) ................................................ 90,000,000 87.3% Roland Kuettner .................................................. 500,000 0.5% Thomas Corcovelos ................................................ 500,000 0.5% American Diversified Corporation (3) ............................. 90,000,000 87.3% Officers and Directors as a Group (5 individuals) ............. 102,223,000 99.2%
PREFERRED STOCK As of March 31, 1998, the closing of the private placement, the Company has sold 5,000,000 shares of Series A Preferred Stock to a total of 384 individual preferred shareholders. None of the holders of the shares of Series A Preferred Stock owns more than 10% of the shares. All of these individuals are residents of Germany and none are affiliated with the Company. - ---------- (1) Beneficial ownership is determined in accordance with the applicable rules under the 1934 Act. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of Common Stock subject to options held by that person that are currently exercisable, or become exercisable within 60 days from the date hereof, are deemed outstanding. However, such shares are not deemed outstanding for purposes of computing the percentage ownership of any other person. Percentage ownership is based on 103,027,000 shares of 9 11 Common Stock outstanding (giving effect to the JBRI - ADAM Merger) and 5,000,000 Shares of Series A Preferred Stock. (2) The address of each of the beneficial owners named above is 12100 Wilshire Blvd., Suite 680, Los Angeles, California 90025. (3) Mr. Conradi and Mr. Hartmann are shareholders, officers and directors of American Diversified Corporation ("ADC"). However, they each disclaim beneficial ownership of the Company's shares owned by ADC. ADC is a Delaware corporation organized in 1997. No single shareholder beneficially owns more than 10% of its outstanding capital stock. All of its shareholders other then Mr. Hartmann are residents of Germany or other European countries. INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS Effective March 31, 1998, the merger of JBRI into ADAM was completed and became effective. On January 12, 1998, the shareholders of the Fund approved a new investment advisory agreement with ADAM. Under the terms of the merger, Mr. Rea received 2,375,000 shares of the Company's common stock at the closing in exchange for his 50,500 shares of JBRI stock, and the other JBRI shareholders received aggregate cash payments of $160,875 in consideration for their 49,500 shares of JBRI stock, at a value of $3.25 per share. Mr. Rea is acquiring the Company shares without registration in reliance on the exemption provided by Section 4(2) under the Securities Act of 1933, as amended (the "Securities Act"). Mr. Rea is a sophisticated investor knowledgeable in the securities business. He will continue to serve as President of ADAM, the successor to JBRI. The Company shares issued to Mr. Rea are "restricted securities" and may not be publicly resold except pursuant to a registration under the Securities Act, Rule 144 or other exemption under the Securities Act that may be applicable. A "Bearer Note" issued by Immofin Grundstuecksverwaltungsgessellschaft Conradi & Hilger GbRmbH, a partnership consisting of Messrs. Klaus Conaradi and Josef Hilger, two of the Company's founding shareholders, represents the contributed capital of American Diversified Corporation, a Delaware corporation owned by Messrs. Conradi, Hilger and Hartmann. The note is due on December 31, 1999, accumulates interest at 4% per annum and is secured by a first mortgage on certain real estate holdings of the issuer in Berlin. (See Note 8 to "Consolidated Financial Statements", page F-9). SECURITIES BEING OFFERED No securities are being offered in connection with this filing. There is no public trading market for the Company's common or preferred stock and there is no assurance that a trading market will develop. As of the date of this filing, there were outstanding 103,027,000 shares of Common Stock (giving effect to the JBRI-ADAM merger) held by 18 shareholders, all of which shares were "restricted securities" under applicable U.S. securities laws and may not be publicly resold except pursuant to a registration under the Securities Act, Rule 144 thereunder, or other applicable exception under the Securities Act. The Company completed the sale of 5,000,000 shares of Series A Preferred Stock on March 31, 1998 to 384 shareholders, at $1.00 per share pursuant to a private placement conducted in Europe under the exemption from U.S. securities laws provided under Regulation S. DESCRIPTION OF CAPITAL STOCK The following is a brief description of the material terms of the Company's capital stock. This description does not purport to be complete and is subject in all respects to applicable Nevada law and to the provisions of the Company's Articles of Incorporation and Bylaws, copies of which are on file with the Commission are incorporated by reference herein. General The Company's authorized equity capitalization consists of 110,000,000 shares of voting common stock, $.001 par value, and 50,000,000 shares of preferred stock, $.001 par value, of which 10 12 5,000,000 shares have been designated Series A Preferred Stock, par value $1.00 per share. The shares of preferred sock may be issued from time to time in one or more series. The Board of Directors is authorized to fix the number of shares of any series of preferred stock and to determine the designation of any such series. The Board of Directors is also authorized to determine or alter the rights, preferences, privileges and restrictions granted to or imposed upon any wholly unissued series of preferred stock and, within the limits and restrictions stated in any resolution or resolutions of the Board of Directors originally fixing the number of shares constituting any series, to increase or decrease (but not below the number of shares of such series then outstanding) the number of shares of any such series subsequent to the issue of shares of that series. COMMON STOCK As of March 31, 1998, there were 103,027,000 outstanding shares of common stock (giving effect to the 2,375,000 shares issued to Mr. Rea upon completion of the JBRI-ADAM merger), issued to the Company's founders and Mr. Rea. Holders of common stock are entitled to receive dividends when, as and if declared by the Board of Directors, out of funds legally available therefor. Dividends on any outstanding shares of preferred stock may be required to be paid in full before payment of any dividends on the common stock. Upon liquidation, dissolution or winding up of the Company, holders of common stock are entitled to share ratably in assets available for distribution after payment of all debts and other liabilities and subject to the prior rights of any holders of any preferred stock then outstanding. Holders of common stock are entitled to one vote per share with respect to all matters submitted to a vote of shareholders and do not have cumulative voting rights. Accordingly, holders of a majority of the common stock entitled to vote in any election of directors may elect all of the directors standing for election, subject to the voting rights (if any) of any series of preferred stock that may be outstanding from time to time. The Company's Articles of Incorporation and Bylaws contain no restrictions on the repurchase by the Company of shares of the common stock or preferred stock. All the outstanding shares of common stock are, and additional shares of common stock will be, when, issued, validly issued, fully paid and nonassessable. PREFERRED STOCK As of March 31, 1998, the Company has sold 5,000,000 shares of Series A Preferred Stock, par value $1 per share, pursuant to a private placement conducted in Germany that is exempt from U. S. securities laws under Regulation S. The Series A Preferred Stock is entitled to a cumulative preferential dividend of $.09 per share, when and as declared by the Board of Directors. The Series A Preferred Stock ranks prior to the common stock as to dividends and as to distributions in the event of liquidation, dissolution or winding up of the Company. The Company may redeem the Series A Preferred Stock at any time at the price of $1 per share, as adjusted to give effect to anti-dilution, plus any cumulated but unpaid dividends. The shares are convertible into common stock, at any time in the ratio of three shares of Series A Preferred Stock into one share of common stock and shall be automatically converted into common stock if the Company effects a firm commitment public offering registered under the Securities Act, that results in net proceeds to the Company of at least $10 million. The Board of Directors is authorized to designate with respect to each series of preferred stock the number of shares in each such series, the dividend rates and dates of payment, voluntary and involuntary liquidation preferences, redemption prices, if any, whether or not dividends shall be cumulative and, if cumulative, the date or dates from which the same shall be cumulative, the sinking fund provisions if any, and the terms and conditions on which shares can be converted into or exchanged for shares of another class or series, and the voting rights, if any. As of the date hereof, there were no shares of Preferred Stock issued and outstanding. The Series A Preferred Stock is non-voting. Any series preferred stock issued will rank prior to the common stock as to dividends and as to distributions in the event or liquidation, dissolution or winding up of the Company. The ability of the Board of Directors to issue preferred stock, while providing flexibility in connection with possible acquisitions and other 11 13 corporate purposes, could, among other things, adversely affect the voting powers of holders of common stock. The preferred stock will, when issued, be fully paid and nonassessable. 12 14 PART II Item 1. Market Price of and Dividends on the Registrant's Common Equity and Other Shareholder Matters. There is no current market for the Company's shares of common and preferred stock and the Company has not declared any cash dividends. As of March 31, 1998, there are 18 shareholders of record of the Company's common stock and 384 shareholders of record of the Series A Preferred Stock. Item 2. Legal Proceedings. None Item 3. Changes in and Disagreements with Accountants. None Item 4. Recent Sales of Unregistered Securities. See "Interest of Management and Others in Certain Transactions" above, for a description of the Company's common stock issued in the JBRI-ADAM merger. See "Security Ownership of Management and Certain Securityholders -- Preferred Stock," for a discussion of the 5,000,000 private placement of Series A Preferred Stock to 384 shareholders, which was completed on March 31, 1998. Mr. Peter Hartmann contributed $22,979 in cash and the remainder in services for the 2,375,000 shares of common stock issued to him as of March 1997. Item 5. Indemnification of Directors and Officers. The Articles of Incorporation limit the liability of directors and officers to the fullest extent permitted under Nevada General Corporation Law. As allowed by Nevada Revised Statutes, the Articles of Incorporation and Bylaws of the Company provide that the liability of the directors of the Company for monetary damages shall be eliminated to the fullest extent permissible under Nevada law. This is intended to eliminate the personal liability of a director for monetary damages in an action brought by or in the right of the Company for breach of a director's duties to the Company or its shareholders except for liability for acts or omissions that involve intentional misconduct or knowing and culpable violation of law, for acts or omissions that a director believes to be contrary the best interests of the Company or its shareholders or that involve the absence of good faith on the part of the director, for any transaction from which a director derived an improper personal benefit, for acts or omissions that show a reckless disregard for the director's duty to the Company or its shareholders in circumstances in which the director was aware, or should have been aware, in the ordinary course of performing a director's duties, of a risk of serious injury to the Company or its shareholders, for acts or omissions that constitute an unexcused pattern of inattention that amounts to an abdication of the director's duty to the Company or its shareholders, with respect to certain contracts in which a director has a material financial interest and for approval of certain improper distributions to shareholders or certain loans or guarantees. This provision does not limit or eliminate the rights of the Company or any shareholder to seek non-monetary relief such as an injunction or rescission in the event of a breach of a director's duty of care. II-1 15 PART F/S FINANCIAL STATEMENTS See "Index to Consolidated Financial Statements" for a listing of the consolidated financial statements filed with this Form 10-SB. 16 PART III Item 2. Description of Exhibits See "Exhibit Index" III-1 17 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- AMERICAN DIVERSIFIED HOLDINGS INC. AND SUBSIDIARIES Independent Auditor's Report ................................................... F-1 Consolidated Balance Sheet as of February 28, 1998 and August 31, 1997 ......................................................... F-2 Consolidated Statements of Operations For the Periods From February 4, 1997 (inception) to August 31, 1997 and February 28, 1998 and the Six Months Ended February 28, 1998 .................................. F-3 Consolidated Statement of Stockholders Equity For the Period From February 4, 1997 (inception) to August 31, 1997 and the Six Months Ended February 28, 1998 .................................. F-4 Consolidated Statement of Cash Flows For the Periods From February 4, 1997 (inception) to August 31, 1997 and the Six Months Ended February 28, 1998 .................................. F-5 Notes to Consolidated Financial Statements ..................................... F-6 to F-9 Unaudited Proforma Consolidated Financial Statements ........................... F-10 Unaudited Proforma Consolidated Balance Sheet as of February 28, 1998 ..................................................... F-11 Unaudited Proforma Consolidated Statement of Operations For the Period From February 4, 1997 (inception) to August 31, 1997 .......................................................... F-12 Unaudited Proforma Consolidated Statement of Operations Six Months Ended February 28,1998 ............................. F-13 Notes to Unaudited Pro Forma Consolidated Financial Statements ................. F-14 JAMES BUCHANAN REA, INC Independent Auditor's Report ................................................... F-15 Balance Sheets as of December 31, 1997 and 1996 ................................ F-16 Statements of Operations For the Years Ended December 31, 1997 and 1996 ........ F-17
18 Statements of Changes in Stockholders Equity For the Years ended December 31, 1997 and 1996 ...................................... F-18 Statements of Cash Flows For the Years Ended December 31, 1997 and 1996 ....... F-19 Notes to Financial Statements .................................................. F-20 to F-22
F-1 19 [McGladrey & Pullen, LLP letterhead] INDEPENDENT AUDITOR'S REPORT To the Board of Directors American Diversified Holdings, Inc. Los Angeles, California We have audited the accompanying consolidated balance sheet of American Diversified Holdings, Inc. and subsidiaries as of August 31, 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for the period from February 4, 1997 (inception) to August 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of American Diversified Holdings, Inc. and subsidiaries as of August 31, 1997, and the result of their operations and their cash flows for the period indicated in conformity with generally accepted accounting principles. /s/ McGladrey & Pullen, LLP -------------------------------------- MCGLADREY & PULLEN, LLP New York, New York December 22, 1997, except for the last paragraph of Note 7 as to which the date is March 31, 1998 F-2 20 AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES (A Development Stage Company) CONSOLIDATED BALANCE SHEETS
FEBRUARY 28, AUGUST 31, 1998 1997 ------------ ------------ (Unaudited) ASSETS Cash and cash equivalents $ 306,662 $ 2,264 Debt securities (Note 2) 1,193,049 Capital stock subscriptions receivable (Note 5) 1,842,464 117,000 Prepaid expenses and other 297,592 4,220 Equipment, net of accumulated depreciation of 1998 $3,429; 1997 -0- 40,930 14,320 ------------ ------------ $ 3,680,697 $ 137,804 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Accounts payable and accrued expenses $ 615,038 $ 63,577 Bank overdraft 419,911 ------------ ------------ 1,034,949 63,577 ------------ ------------ Stockholders' Equity (Note 5 and 6): Series A 9% convertible redeemable cumulative preferred stock, $1.00 par value; 5,000,000 shares authorized: Issued and outstanding, 1,432,538 and no shares, at February 28, 1998 and August 31, 1997, respectively 1,427,058 Subscribed for but not paid for and not issued, 2,081,953 and 162,495 shares, at February 28, 1998 and August 31, 1997, respectively 2,081,953 150,545 Common stock, $.001 par value; 110,000,000 shares authorized; issued and outstanding 100,652,000 and 10,000,000 shares at February 28, 1998 and August 31, 1997, respectively 10,107,429 96,754 Unpaid subscriptions as of April 17, 1998 and December 22, 1997, respectively (239,489) (33,545) Deficit accumulated during the development stage (792,278) (139,527) Notes receivable from stockholders (Note 7) (9,938,925) ------------ ------------ 2,645,748 74,227 ------------ ------------ $ 3,680,697 $ 137,804 ============ ============
See Notes to Consolidated Financial Statements. F-3 21 AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES (A Development Stage Company) CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED) ----------------------------- PERIOD FROM PERIOD FROM FEBRUARY 4, FEBRUARY 4, 1997 SIX MONTHS 1997 (INCEPTION) TO ENDED (INCEPTION) TO FEBRUARY 28, FEBRUARY 28, AUGUST 31, 1998 1998 1997 ----------- ------------ --------------- Revenue $ $ $ Expenses (Note 3): Travel and entertainment 93,331 70,845 22,486 Employee compensation and benefits 215,743 194,902 20,841 Professional fees 227,996 161,522 66,474 Advertising and promotion 102,519 95,299 7,220 Administrative 152,669 130,183 22,506 ----------- ------------ ------------- 792,278 652,751 139,527 ----------- ------------ ------------- (Loss) before income taxes (792,278) (652,751) (139,527) Income taxes Net (loss) $ (792,278) $ (652,751) $ (139,527) ----------- ------------ ------------- Average common shares outstanding 51,727,384 100,409,333 10,000,000 ----------- ------------ ------------- Basic and fully diluted (loss) per common share $ (0.02) $ (0.01) $ (0.01) =========== ============ =============
See Notes to Consolidated Financial Statements. F-4 22 AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES (A Development Stage Company) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Period from February 4, 1997 (inception) to August 31, 1997 and Six Months Ended February 28, 1998
Series A 9% Convertible Cumulative Deficit Preferred Stock Common Stock Accumulated Notes --------------------- -------------------- During the Receivable Number of Number of Development Unpaid From Shares Amount Shares Amount Stage Subscriptions Stockholder Total -------------------------------------------------------------------------------------------------------- Balance February 4, 1997, $ -- $ -- $ -- $ -- $ -- $ date of inception Stock Issued: Common Stock: For cash at $.01/share 4,750,000 47,795 47,795 For legal and other services at $.01/share 5,250,000 48,959 48,959 Preferred Stock: For cash at $1.00 share paid by December 22, 1997 126,287 117,000 117,000 Unpaid for at December 22, 1997 36,208 33,545 (33,545) Net (loss) (139,527) (139,527) -------------------------------------------------------------------------------------------------------- Balance, August 31, 1997 162,495 150,545 10,000,000 96,754 (139,527) (33,545) 74,227 (UNAUDITED) Stock issued: Common stock: For cash at $.10/share 142,000 15,550 15,550 In exchange for note receivable from affiliate at $.10/share 90,000,000 9,773,260 (9,773,260) For legal and other services at $.11/share 510,000 56,100 56,100 Interest on notes receivable 165,665 (165,665) -- Preferred stock: For cash and securities at $1.00/share, as of February 28, 1998 1,267,043 1,276,513 33,545 1,310,058 For cash at $1.00/share paid after February 28, 1998 but before April 17, 1998 1,814,688 1,842,464 1,842,464 Unpaid for by April 17, 1998 270,265 239,489 (239,489) Net (loss) (652,751) (652,551) ----------------------------------------------------------------------------------------------------------- Balance, February 28, 1998 3,514,491 $3,509,011 100,652,000 $10,107,429 $(792,278) $(239,489) $(9,938,925) $2,645,748
See Notes to Consolidated Financial Statements F-5 23 AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES (A Development Stage Company) CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) -------------------------------- PERIOD FROM PERIOD FROM FEBRUARY 4, FEBRUARY 4, 1997 SIX MONTHS 1997 (INCEPTION) TO ENDED (INCEPTION) TO FEBRUARY 28, FEBRUARY 28, AUGUST 31, 1998 1998 1997 ------------ ------------ ------------ Cash Flows from Operating Activities Net (loss) $ (792,278) $ (652,751) $ (139,527) Adjustments to reconcile net (loss) to net cash (used in) operating activities: Noncash expenses, professional fees 105,059 56,100 48,959 Depreciation 3,529 3,529 Change in assets and liabilities: Increase in prepaid expenses and other (297,592) (293,372) (4,220) Increase in accounts payable and accrued expenses 615,038 551,461 63,577 ------------ ------------ ------------ Net cash (used in) operating activities (366,244) (335,033) (31,211) ------------ ------------ ------------ Cash Flows from Investing Activities Purchase of equipment $ (44,459) $ (30,139) $ (14,320) ------------ ------------ ------------ Cash Flows from Financing Activities Proceeds from issuance of preferred stock 234,009 234,009 Proceeds from issuance of common stock 63,345 15,550 47,795 Increase in bank overdraft 419,911 419,911 ------------ ------------ ------------ Net cash provided by financing activities 712,264 669,470 47,795 ------------ ------------ ------------ Increase in cash and cash equivalents 306,662 304,398 2,264 Cash and Cash Equivalents Beginning -- 2,264 -- ------------ ------------ ------------ Ending $ 306,662 $ 306,662 $ 2,264 ============ ============ ============ Supplemental schedule of noncash financing activities Issuance of 510,000 for the six months ended February 28, 1998 and 5,250,000 common shares for the period ended August 31, 1997 in exchange for services rendered $ 105,059 $ 56,100 $ 48,959 ============ ============ ============ Issuance of 90,000,000 common shares in exchange for notes receivable $ 9,773,260 $ 9,773,260 $ -- ============ ============ ============ Issuance of 1,196,049 preferred shares in exchange for debt securities $ 1,193,048 $ 1,193,048 $ -- ============ ============ ============
F-6 24 AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AS OF FEBRUARY 28, 1998 AND FOR THE SIX MONTHS ENDED FEBRUARY 28, 1998 IS UNAUDITED) - -------------------------------------------------------------------------------- NOTE 1. NATURE OF THE BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS: American Diversified Holdings, Inc. (the "Company") was organized on February 4, 1997 as a provider of financial services in the United States and Europe. As a development-stage enterprise, the Company has devoted most of its resources since inception to raising capital and implementing the first stages of its business plan. The Company's fiscal year ends on the last day of each August. The Company has established two wholly owned subsidiaries since its inception:
PLANNED OPERATION --------------------------------------- American Diversified AG Wertpapierhandelsbank ("ADAG") Provider of financial services in Germany American Diversified Asset Management, Inc. ("ADAM") Investment adviser to planned mutual funds
A SUMMARY OF THE COMPANY'S SIGNIFICANT ACCOUNTING POLICIES FOLLOWS: Principles of consolidation: The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. All material intercompany accounts and transactions are eliminated in consolidation. Cash and cash equivalents: Cash equivalents include highly liquid debt instruments which have a maturity of three months or less from the date of purchase and other highly liquid investments which are readily convertible into cash. Cash equivalents are stated at cost which approximates market value. Equipment: Equipment is reported at cost and includes expenditures for major improvements. Depreciation will be determined using accelerated methods based on three to five year estimated useful lives. The equipment was placed in service during the six months ended February 28, 1998. Foreign currency transactions: The Company has agreed to fund any cash flow deficits incurred by ADAG, its European subsidiary. Until such time that ADAG generates sales revenue the parents functional currency (U.S. $) will be considered ADAG's functional currency for financial reporting purposes. Investment in debt securities: The Company's investment in debt securities consists of mortgage-backed securities which are classified as available-for-sale. Available-for-sale securities are stated at fair value, and unrealized holding gains and losses, net of the related deferred tax effect, are reported as a separate component of stockholders' equity. Premiums and discounts on investments in debt securities are amortized over the contractual lives of those securities, except for mortgage-backed securities for which prepayments are probable and predictable which are amortized over the estimated expected lives of those securities. The method of amortization results in a constant effect yield on those securities (the interest method). Interest on debt securities is recognized in income as earned. Realized gains and losses are determined on the basis of specific identification. F-7 25 AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AS OF FEBRUARY 28, 1998 AND FOR THE SIX MONTHS ENDED FEBRUARY 28, 1998 IS UNAUDITED) - -------------------------------------------------------------------------------- Income taxes: Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carry forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Fair value of financial instruments: The fair value of cash and cash equivalents, debt securities and capital stock subscriptions receivable approximates carrying amounts because of the short term nature of those instruments. Basic loss per common share: The basic loss per common share is based on the net loss from operations and the weighted average number of shares of common stock outstanding during the period. Common shares issuable upon conversion of preferred stock have not been included in the computation because their inclusion would have had an antidilutive effect (reduced the loss per common share). Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates. Interim Financial Statements: The accompanying financial statements as of February 28, 1998 and for the six months ended February 28, 1998 are unaudited, but in the opinion of management, include all adjustments consisting of normal recurring adjustments necessary for a fair presentation of results of operations for the interim period. Results for the six months ended February 28, 1998 are not necessarily indicative of the results that may be expected for the year ending August 31, 1998. NOTE 2. INVESTMENT IN DEBT SECURITIES The following is a summary of the Company's investment in available-for-sale securities which consist entirely of mortgage-backed securities as of February 28, 1998: Amortized cost $1,193,049 Gross unrealized gains -- Gross unrealized losses -- ---------- Fair value $1,193,049 ==========
NOTE 3. RELATED PARTY TRANSACTIONS The Company has effectively operated out of the offices and residences of the founding stockholders in the United States and Germany. Legal and other services provided by the Company's stockholders and reported as operating expenses in the accompanying financial statements totaled $166,822 (unaudited) during the six months ended February 28, 1998 and $19,639 in the period ended August 31, 1997. F-8 26 AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AS OF FEBRUARY 28, 1998 AND FOR THE SIX MONTHS ENDED FEBRUARY 28, 1998 IS UNAUDITED) - -------------------------------------------------------------------------------- NOTE 4. LEASE COMMITMENT In July 1997, ADAG entered into a long term lease for office facilities in Berlin, Germany. The lease provides for a monthly payment of 5,642 Deutschmarks and expires in 2002. The lease agreement also requires ADAG to pay monthly utilities and value added taxes. Future minimum lease commitments at August 31, 1997 are as follows: 1998 $ 38,827 1999 40,667 2000 42,467 2001 44,287 2002 14,964 -------- $181,212 ========
NOTE 5. PREFERRED STOCK OFFERING The Company's Board of Directors has authorized the issuance of 5,000,000 shares of Series A 9% cumulative convertible redeemable preferred stock. The cumulative dividends are payable semi-annually, when and as declared, at an annual rate of $.09 per share commencing January 1, 1998. The Company may at its option, and subject to certain notification provisions, redeem all or a portion of the preferred stock at the price of $1.00 per share, plus any accrued and unpaid dividends. The stockholders do not have the right to demand redemption of the Series A 9% cumulative convertible preferred stock. Each share is convertible at the option of the holder into common stock at the rate of three preferred shares for one share of common stock. In addition, each share of preferred stock shall be automatically converted into shares of common stock at a conversion price equal to the initial issue price of the preferred shares, subject to certain adjustments, immediately upon the closing of a sale of the Company's common stock in a public offering under the Securities Act of 1933, that results in net proceeds to the Company of at least $10,000,000. The Company commenced the sale of preferred stock in Germany under Regulation S, guidelines established under the Securities Act of 1933 for Securities offers made outside of the United States during August 1997. The Offering is registered with the ABundesaufsichtsamt fuer Wertpapierhandel@, the German governmental agency which regulates German securities transactions. As of August 31, 1997 the Company received subscriptions for 162,495 preferred shares. Subscriptions receivable of $117,000 for these shares were collected by September 1997. Unaudited: During the six months ended February 1998 the Company received subscriptions for an additional 3,351,996 shares of Series A 9% cumulative convertible redeemable preferred stock of which $1,427,058 were collected before February 28, 1998 and $1,842,464 collected before April 14, 1998. All subscriptions for the preferred stock were from unaffiliated investors. NOTE 6. INCOME TAXES The Company has approximately $30,000 of federal and state operating loss carryforwards, which may be F-9 27 AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AS OF FEBRUARY 28, 1998 AND FOR THE SIX MONTHS ENDED FEBRUARY 28, 1998 IS UNAUDITED) - -------------------------------------------------------------------------------- utilized to offset future taxable income. The federal operating loss carryforwards expire in 2012 and the state operating loss carryforwards expire in 2002. The tax benefit recognized for the net operating loss has been offset by an equal increase in the valuation allowance for deferred taxes resulting in no income tax expense or benefit reflected in the accompanying statement of operations. F-10 28 AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AS OF FEBRUARY 28, 1998 AND FOR THE SIX MONTHS ENDED FEBRUARY 28, 1998 IS UNAUDITED) - -------------------------------------------------------------------------------- NOTE 7. EVENTS SUBSEQUENT TO AUGUST 31, 1997 In September 1997, the Company received additional subscriptions for 1,358,547 additional shares of preferred stock. Also in September 1997, the Company issued 9,000,000 (prior to ten-for-one stock split, see below) shares of its common stock in exchange for a note receivable (see Note 8) from an affiliate of one of the Company's shareholders. In November 1997, the Company's Board of Directors approved a ten-for-one stock split which increased the number of authorized voting and non-voting shares to 110,000,000. All transactions in the Company's common stock and the earnings per common share for the periods presented have been adjusted to give retroactive effect to the stock split as if it had occurred at inception. On November 24, 1997, the Company signed an agreement to effect a merger with James Buchanan Rea, Inc. ("JBRI") the investment advisor and distributor of the Rea-Graham Balanced Fund (the "Fund") since 1982. The merger is subject to the approval of the Fund's shareholders. The merger, which will be accounted for as a purchase, will be affected by an exchange of 2,375,000 shares of common stock and cash of $160,875 for the common stock of JBRI. On March 31, 1998, the merger of JBRI with and into ADAM became effective. NOTE 8. NOTE RECEIVABLE FROM STOCKHOLDERS (UNAUDITED) In connection with the Company's founding, a group of stockholders contributed their ownership of a "Bearer Note" secured by a first mortgage on certain real property in Berlin. The note with a face amount 17.5 million Deutschmarks was valued at $9,773,260 is due on December 31, 1999 and accumulates interest at 4% per annum. For U.S. accounting purposes the capital contribution and the accumulated interest thereon of $165,665 are reported as common stock issued and the note receivable from stockholders is reflected as a reduction of stockholders' equity until such time the note and accumulated interest are converted to cash. F-11 29 AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AS OF FEBRUARY 28, 1998 AND FOR THE SIX MONTHS ENDED FEBRUARY 28, 1998 IS UNAUDITED) - -------------------------------------------------------------------------------- UNAUDITED PROFORMA CONSOLIDATED FINANCIAL STATEMENTS The unaudited proforma consolidated financial statements presented on the following pages reflect the proforma effect of the acquisition of James Buchanan Rea, Inc. ("JBRI") and the issuance of notes payable and common stock, as described in the accompanying notes. The proforma adjustments have been applied to the historical unaudited consolidated balance sheet of the Company as of February 28, 1998, the historical consolidated statement of operations for the fiscal periods ended August 31, 1997 and February 28, 1998, the audited balance sheet of JBRI as of December 31, 1997 and the unaudited statements of operations of JBRI for the nine months ended September 30, 1997 and six months ended December 31, 1997. The acquisition will be accounted for using the purchase method of accounting. For purposes of the proforma statements, the purchase price of the assets of JBRI has been allocated to the acquired net assets based on information currently available with regard to the values of such net assets. Final adjustments to recorded amounts may differ from the proforma adjustments presented herein. The proforma statements should be read in connection with the notes thereto. F-12 30 AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) UNAUDITED PROFORMA CONSOLIDATED BALANCE SHEET FEBRUARY 28, 1998
HISTORICAL ADJUSTMENTS AS ADJUSTED ------------ ------------ ------------ ASSETS Cash and cash equivalents $ 306,662 $ 11,366(1)(2) $ 317,998 Debt securities 1,193,049 -- 1,193,049 Accounts receivable -- 13,922(2) 13,922 Capital stock subscriptions receivable 1,842,464 -- 1,842,464 Prepaid expenses 297,592 3,823(2) 301,415 Equipment 40,930 45,344(2) 86,274 Goodwill -- 335,866(2) 335,866 ------------ ------------ ------------ $ 3,680,697 410,321 4,091,018 ============ ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Accounts payable and accrued expenses $ 615,038 $ 11,946(2) $ 626,984 Bank overdraft 419,911 -- 419,911 Note payable to affiliate -- 160,875(1) 160,875 ------------ ------------ ------------ 1,034,949 172,821 1,207,770 ============ ============ ============ Stockholders Equity: Series A 9% convertible redeemable cumulative preferred stock, $.001 par value: 5,000,000 shares authorized Issued and outstanding, 1,432,538 shares 1,427,058 -- 1,427,058 Subscription for but not paid for and not issued, 2,081,953 shares 2,081,953 -- 2,081,953 Common stock, $.001 par value 110,000,000 shares authorized; issued and outstanding 100,652,000 10,107,429 237,500(2) 10,344,929 Unpaid subscription as of April 17,1998 (239,489) -- (239,489) Deficit accumulated during the development stage (792,278) -- (792,278) Note receivable from stockholders (9,938,925) -- (9,938,925) ------------ ------------ ------------ 2,645,748 237,500 2,883,248 ------------ ------------ ------------ $ 3,680,697 $ 410,321 $ 4,091,018 ============ ============ ============
F-13 31 AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AS OF FEBRUARY 28, 1998 AND FOR THE SIX MONTHS ENDED FEBRUARY 28, 1998 IS UNAUDITED) - -------------------------------------------------------------------------------- See Notes to Unaudited Proforma Consolidated Financial Statements F-14 32 AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) UNAUDITED PROFORMA CONSOLIDATED STATEMENT OF OPERATIONS PERIOD FROM FEBRUARY 4, 1997 (INCEPTION) TO AUGUST 31, 1997
HISTORICAL PURCHASE AMERICAN JBRI ACCOUNTING DIVERSIFIED NOTE (A) ADJUSTMENTS PROFORMA ------------ ------------ ------------ ------------ Revenue $ -- $ 96,968 $ -- $ 96,968 Expenses(Note 2): Travel and entertainment 22,486 -- -- 22,486 Employee compensation and benefits 20,841 84,027 -- 104,868 Professional fees 66,474 9,075 -- 75,549 Advertising and promotion 7,220 16,087 -- 23,307 Insurance -- 17,344 -- 17,344 Administrative 22,506 17,796 -- 40,302 Depreciation and amortization -- 2,663 13,062(4) 15,725 Interest -- -- 7,900(3) 7,900 139,527 146,992 20,962 307,481 (Loss) before income taxes (139,527) (50,024) (20,962) (210,513) Income taxes -- -- -- (7) -- Net (loss) $ (139,527) $ (50,024) $ (20,962) $ (210,513) Average common shares outstanding 10,000,000 2,375,000 12,375,000 Basic and fully diluted (loss) per common share $ (0.01) $ -- $ -- $ (0.01)
Note A - JBRI unaudited results of operations are for the nine months ended September 30, 1997 See Notes to Unaudited Proforma Consolidated Financial Statements. F-15 33 AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) UNAUDITED PROFORMA CONSOLIDATED STATEMENT OF OPERATIONS SIX MONTHS ENDED FEBRUARY 28, 1998
HISTORICAL PURCHASE AMERICAN JBRI ACCOUNTING DIVERSIFIED NOTE (B) ADJUSTMENTS PROFORMA ------------- ------------- ------------- ------------- Revenue $ -- $ 82,010 $ -- $ 82,010 Expenses(Note 2): Travel and entertainment 70,845 -- -- 70,845 Employee compensation and benefits 194,902 57,245 -- 252,147 Professional fees 161,522 2,685 -- 164,207 Advertising and promotion 95,299 2,631 -- 97,930 Administrative 130,183 17,796 -- 147,979 Depreciation and amortization -- 1,775 11,196(6) 12,971 Interest -- -- 6,837(5) 6,837 652,751 111,411 18,033 781,995 (Loss) before income taxes (652,751) (29,401) (18,033) (700,185) Income taxes -- -- --(7) -- Net (loss) $ (652,751) $ (29,401) $ (18,033) $ (700,185) Average common shares outstanding 100,409,333 2,375,000 102,784,333 Basic and fully diluted (loss) per common share $ (0.01) $ -- $ -- $ (0.01)
Note B- JBRI unaudited results of operations are for the six months ended December 31, 1997 See Notes to Unaudited Proforma Consolidated Financial Statements. F-16 34 AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO UNAUDITED PROFORMA CONSOLIDATED FINANCIAL STATEMENTS The unaudited proforma consolidated balance sheet is presented as if the acquisition and financing had occurred on February 28, 1998. The unaudited proforma consolidated statement of operations for the period from February 4, 1997 (inception) through August 31, 1997 was prepared as if the acquisition and financing had occurred on February 4, 1997. The unaudited proforma consolidated statement of operations for the six months ended February 28, 1998 was prepared as if the acquisition and financing had occurred on September 1, 1997. These proforma financial statements are not necessarily indicative of the financial position or results of operations that might have occurred had the acquisition and financing taken place at the beginning of the period or as of February 28, 1998, or to project the Company's financial position or results of operations at any future date or for any future period. Adjustments were made as follows: (1) Record issuance of notes payable to affiliate for cash portion of purchase price Cash 160,875 Notes payable 160,875 (2) Record purchase of the net assets of JBRI in exchange for cash and stock. Value assigned to common stock issued for majority interest reflects a premium of 45% over the cash paid to minority shareholders of JBRI. Purchase price allocated as follows: Cash, receivables and other assets 29,111 Property and equipment 45,344 Goodwill 335,866 Accounts payable 11,946 Cash 160,875 Common stock 237,500 (3) Record interest on notes payable at an annual rate of 8.5%, for the period from February 4, 1997 through August 31, 1997. Interest expense 7,900 (4) Record amortization of goodwill over a period of 15 years for the period February 4, 1997 through August 31,1997 Amortization expense 13,062 (5) Record interest on notes payable at an annual rate of 8.5%, for the six months ended February 28, 1998. Interest expense 6,837 (6) Record amortization of goodwill over a period of 15 years for the six months ended February 28, 1998
F-17 35 AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AS OF FEBRUARY 28, 1998 AND FOR THE SIX MONTHS ENDED FEBRUARY 28, 1998 IS UNAUDITED) - -------------------------------------------------------------------------------- Amortization expense 11,196 (7) The tax benefit for the proforma adjustments has been offset by an equal increase in the valuation allowance for deferred taxes resulting in no income tax expense or benefit reflected in the purchase accounting adjustments
F-18 36 [McGladrey & Pullen, LLP letterhead] INDEPENDENT AUDITOR'S REPORT To the Board of Directors James Buchanan Rea, Inc. Los Angeles, California We have audited the accompanying balance sheets of James Buchanan Rea, Inc. as of December 31, 1997 and 1996, and the related statements of operations, changes in stockholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of James Buchanan Rea, Inc. as of December 31, 1997 and 1996, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. /s/ McGladrey & Pullen, LLP -------------------------------------- MCGLADREY & PULLEN, LLP New York, New York March 16, 1998, except for the last paragraph of Note 9 as to which the date is March 31, 1998 F-19 37 JAMES BUCHANAN REA, INC. BALANCE SHEETS December 31, 1997 and 1996
ASSETS 1997 1996 ---------- ---------- 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 ========== ==========
See Notes to Financial Statements. F-20 38 JAMES BUCHANAN REA, INC. STATEMENTS OF OPERATIONS Years Ended December 31, 1997 and 1996
1997 1996 --------- --------- 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) ========= =========
See Notes to Financial Statements. F-21 39 JAMES BUCHANAN REA, INC. STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Years Ended December 31, 1997 and 1996
ADDITIONAL TOTAL COMMON PAID-IN ACCUMULATED STOCKHOLDERS STOCK CAPITAL DEFICIT EQUITY ---------- ---------- ----------- ------------ 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 ========== ========== ========== ==========
See Notes to Financial Statements. F-22 40 JAMES BUCHANAN REA, INC. STATEMENTS OF CASH FLOWS Years Ended December 31, 1997 and 1996
1997 1996 ---------- ---------- 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 ========== ==========
See Notes to Financial Statements. F-23 41 JAMES BUCHANAN REA, INC. NOTES TO FINANCIAL STATEMENTS Note 1. Nature of Business and Significant Accounting Policies Nature of business James Buchanan Rea, Inc. (the Company) is engaged as the investment advisor and principal underwriter of the Rea-Graham Funds Inc. (the Fund). The Company also conducts business as an authorized dealer in Fund shares. The Company operates under the provisions of Paragraph (k)(2)(ii) of Rule 15c3-3 of the Securities and Exchange Commission and, accordingly, is exempt from the remaining provisions of that Rule. Significant accounting policies Securities transactions: Securities transactions and related commission income and expense are recorded on a trade date basis. Revenue recognition: Advisory fees and distribution fees are recognized as earned. Cash equivalents: Cash equivalents include debt instruments which have a maturity of three months or less from the date of purchase and other highly liquid investments which are readily convertible into cash. Cash equivalents are stated at cost which approximates market value. Property and equipment: Property and equipment are stated at cost and include expenditures for additions and major improvements. Depreciation is determined principally by the double-declining-balance method and is based on the following estimated useful lives:
LIFE IN YEARS ------ Automobiles 5 Capital improvements to executive office 5 - 31 Furniture and equipment 5 - 7
Fair value of financial instruments: The fair value of cash and cash equivalents approximate the carrying amount because of the short maturity of those instruments. Net loss per common share: The net loss per common share is based on the net loss from operations and the weighted average number of shares of common stock outstanding during each year. Use of estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates. F-24 42 JAMES BUCHANAN REA, INC. NOTES TO FINANCIAL STATEMENTS NOTE 2. PROPERTY AND EQUIPMENT Property and equipment at December 31, 1997 and 1996 is summarized as follows:
1997 1996 ---------- ---------- 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 ========== ==========
NOTE 3. PROFIT SHARING PLAN The Company participates in an employee profit sharing plan which covers all full-time employees. Annual contributions to the profit sharing plan are determined by the Board of Directors. No contributions were made to the profit sharing plan for 1997 and 1996. NOTE 4. RELATED PARTY TRANSACTIONS The Company is retained as the investment advisor to the Rea-Graham Fund, Inc. (the "Fund"). Under the terms of the agreement, the Company receives a monthly fee of 1/12 of 1% of the first $20,000,000 of the Fund's net assets on the last business day of the month, 1/12 of .75% of the next $80,000,000, 1/12 of .5% of the next $100,000,000, and 1/12 of .45% of monthly net assets in excess of $200,000,000. The Company shares office space, personnel and other administrative costs with the Fund. Total administrative expenses allocated to the Fund for the years ended December 31, 1997 and 1996 aggregated $31,233 and $30,004, respectively. On February 28, 1990, the shareholders of the Fund approved a Plan of Distribution for the Fund (the Plan). The Plan provides that the Fund will pay monthly to the Company a distribution fee charged against the assets of the Fund and equal on an annual basis to .35% of the Fund's average daily net assets, commencing on April 1, 1990. Distribution fees received for the years ended December 31, 1997 and 1996 were $36,647 and $42,582, respectively. Included in other operating expenses is $17,309 and $22,269 representing trail commissions passed on to other dealers in 1997 and 1996, respectively. As principal underwriter and authorized dealer in Fund shares, the Company received commissions of $304 and $590, during 1997 and 1996, respectively. NOTE 5. TOTAL RENTAL EXPENSE Total rent expense, exclusive of Fund allocated expenses (Note 4) and net of sublease rental income of $14,119 in 1995, amounted to $9,133 and $9,380 for the years ended December 31, 1997 and 1996, respectively. F-25 43 JAMES BUCHANAN REA, INC. NOTES TO FINANCIAL STATEMENTS NOTE 6. NET CAPITAL The Company is subject to the net capital rule of the Securities and Exchange Commission. This rule prohibits a broker-dealer from engaging in securities transactions when its aggregate indebtedness exceeds 15 times its net capital as those terms are defined in the Rule 15c3-1. Rule 15c3-1 also provides that equity capital may not be withdrawn or cash dividends paid if the resulting net capital ratio would exceed ten to one. The Company's net capital, required net capital, and net capital ratio as of December 31, 1997 and 1996 were as follows:
1997 1996 ----------- --------- Net Capital $ 10,199 $ 58,920 ----------- --------- Required net capital $ 5,000 $ 5,000 ----------- --------- Net capital ratio 1.17 to 1 .17 to 1 ----------- ---------
NOTE 7. INCOME TAXES The Company has approximately $195,000 and $181,000 of federal and state operating loss carryforwards, respectively, which may be utilized to offset future taxable income as of December 31, 1997. The federal operating loss carryforwards expire from years 2009 to 2012 and the state operating loss carryforwards from years 1999 to 2002. For the years ended December 31, 1997 and 1996, tax benefits recognized for net operating losses were offset by equal increase in the valuation allowance for deferred taxes resulting in no income tax expense or benefit reflected on the Statements of Operations. NOTE 8. OFF-BALANCE-SHEET RISK As discussed in Note 1, the Company's customers' securities transactions are introduced on a fully disclosed basis with its clearing broker-dealer. The clearing broker-dealer carries all accounts of the Company's customers and is responsible for execution, collection and payment of funds, and receipt and delivery of securities, relative to customer transactions. Off-balance-sheet risk exists due to the possibility that customers may be unable to fulfill their contractual commitments, in which case the clearing broker-dealer may charge to the Company any losses it incurs. The Company seeks to minimize this risk through procedures designed to monitor the creditworthiness of its customers and to ensure that customer transactions are executed properly by the clearing broker-dealer. NOTE 9. PENDING MERGER On November 24, 1997, the Company entered into an agreement to merge with American Diversified Asset Management, Inc. (American Diversified) with American Diversified to be the survivor of the merger. The merger will be affected by an exchange of 2,375,000 shares of common stock of American Diversified and cash of $160,875 for the common stock of the Company. The cash proceeds will be utilized to retire the stock of the minority shareholders of the Company. The merger was approved by the shareholders of the Fund on January 12, 1998. On March 31, 1998, the Company's merger into American Diversified Holdings, Inc. became effective. F-26 44 EXHIBIT INDEX
EXHIBIT SEQUENTIALLY NUMBER DESCRIPTION NUMBERED - ------ ----------- ------------ 2.1 Articles of Incorporation * 2.1.1 Amendment to Articles of Incorporation dated April 1, 1997** 2.1.2 Amendment to Articles of Incorporation dated November 20, 1997** 2.1.3 Amendment to Articles of Incorporation dated January 12, 1998** 2.1.4 Certificate of Designation re: Series A Preferred Stock, dated February 4, 1998** 2.2 Bylaws of the registrant* 4.1 Specimen of Common Stock of Registrant* 4.2 Specimen of Series A Preferred Stock of Registrant** 6.1 Form of Investment Management Contract of ADAM with Rea-Graham Balanced Fund, Inc.** 6.2 Form of Investment Sub-Advisory Agreement of ADAM with Ladas & Hulings, Inc. 8.1 Plan and Agreement of Merger and Reorganization among JBRI, ADAM, the Company and certain shareholders of JBRI.* 9.1 Employment Agreement among Registrant, ADAM and James B. Rea, Jr.** 9.1.2 Employment Agreement between Registrant and Roland Kuettner.**
- ---------- * Previously filed with the original Registration Statement on January 14, 1998 ** Being filed herewith 45 SIGNATURES In accordance with Section 12 of the Securities Exchange Act of 1934, the registrant has caused this amendment to its registration statement to be signed on its behalf by the undersigned, thereunto duly authorized. AMERICAN DIVERSIFIED HOLDINGS, INC. (Registrant) Date: May 7, 1998 By /s/ PETER HARTMANN ------------------------------- Peter Hartmann, President EX-2.1.1 2 AMENDMENT TO ARTICLES OF INCORP. - APRIL 1, 1997 1 EXHIBIT 2.1.1 Certificate of Amendment of Articles of Incorporation of AMERICAN DIVERSIFIED HOLDINGS, INC. Pursuant to the provisions of Nevada Revised Statutes, Title 7, Chapter 78, the undersigned officers do hereby certify: FIRST: The name of the Corporation is American Diversified Holdings, Inc. SECOND: The Board of Directors of the Corporation duly adopted the following resolutions on March 27, 1997: RESOLVED, that it is advisable in the judgment of the Board of Directors of the Corporation that number of authorized shares be increased, and that in order to accomplish the same, Article third the Articles of Incorporation be amended to read as follows: "THIRD: The corporation is authorized to issue two classes of common stock, to be designated as "voting" and "non-voting." The total number of voting shares authorized is 1,000,000, all of which are without nominal or par value, and are designated as Voting Common Stock. The total number of non-voting shares authorized is 1,000,000, all of which are without nominal or par value, and are designated as Non-Voting Common Stock." FURTHER RESOLVED, that a special meeting of stockholders having voting power be and it is hereby called and that notice be given in the manner prescribed by the Bylaws of the Corporation and by Nevada Revised Statutes, Title 7, Chapter 78, unless the said stockholders shall waive the notice of meeting in writing or unless all of said stockholders shall dispense with the holding of a meeting and shall take action upon the proposed amendments by a consent in writing signed by them; and 2 FURTHER RESOLVED, that, in the event that the said stockholders shall adopt the aforesaid proposed amendments by a vote to favor thereof by at least a majority of the voting power or by a written consent in favor thereof signed by all of them without a meeting, the Corporation is hereby authorized to make by the hands of its President or a Vice President and by its Secretary or an Assistant Secretary a certificate setting forth the said amendments and to cause the name to be filed pursuant to the provisions of Nevada Revised Statutes, Title 7, Chapter 72. THIRD: The total number of outstanding shares having voting power of the corporation is 1,000,000, and the total number of votes entitled to be cast by the holders of all of said outstanding shares is . FOURTH: The holders of all of the aforesaid total number of outstanding shares having voting power, to wit, shares, dispensed with the holding of a meeting of stockholders and adopted the amendments herein certified by a consent in writing signed by all of them in accordance with the provisions of Nevada Revised Statutes, Title 7, Section 78.320. 3 Signed on March 27, 1997. AMERICAN DIVERSIFIED HOLDINGS, INC. By: /s/ PETER HARTMANN ------------------------------------ Peter Hartmann, President /s/ WILLIAM SMITH ------------------------------------ William Smith, Secretary STATE OF CALIFORNIA ) ) SS.: COUNTY OF ) On March 27, 1997, personally appeared before me, a Notary Public, for the State and County aforesaid, Peter Hartmann, as President of American Diversified Holdings, Inc. and William Smith as Secretary of American Diversified Holding, Inc. who acknowledged that they executed the above instrument. /s/ MARIA P. HOLANDEZ ------------------------------------ Notary Public See Attached "California All-Purpose Acknowledgment" [Notarial Seal] 4 CALIFORNIA ALL-PURPOSE ACKNOWLEDGEMENT State of California ---------- County of San Diego --------- On March 31, 1997 before me, MARIA P. HOLANDEZ, Notary Public -------------- -------------------------------- Date Name and Title of Officer (e.g., "Jane Doe, Notary Public") personally appeared WILLIAM SMITH AND PETER HARTMANN -------------------------------- ???? of ???? [X] proved to me on the basis of satisfactory evidence to be the person(s) whose name(s) are subscribed to the within instrument and acknowledged to me that they executed the same in their authorized capacity(ies), and that by their signature(s) on the instrument the person(s) or the entity upon behalf of [SEAL] which the person(s) acted, executed the instrument. WITNESS my hand and official seal. /s/ MARIA P. HOLANDEZ ---------------------------------------- Signature of Notary Public - ----------------------------------- OPTIONAL ----------------------------------- Though the information below is not required by law, it may prove valuable to persons relying on the document and could prevent fraudulent removal and ???? of this form to another another document. DESCRIPTION OF ATTACHED DOCUMENT Title or Type of Document ______________________________________________________ Document Date: __________________________________ Number of Pages: _____________ Signer(s) Other Than Named Above: ______________________________________________ CAPACITY(IES) CLAIMED BY SIGNER(S) Signer's Name: ________________________ Signer's Name: _______________________ [ ] Individual [ ] Individual [ ] Corporate Officer [ ] Corporate Officer Title(s): _________________________ Title(s): _________________________ [ ] Partner -- [ ] Limited [ ] General [ ] Partner -- [ ] Limited [ ] General [ ] Attorney-in-Fact __________ [ ] Attorney-in-Fact __________ [ ] Trustee Right [ ] Trustee Left [ ] Guardian or Conservator Thumbprint [ ] Guardian or Conservator Thumbprint [ ] Other: ________________ of [ ] Other: ________________ of Signer Signer Top of thumb Top of thumb here here _______________________ __________ _______________________ __________ Signer Is Representing: Signer Is Representing: ___________________________ ___________________________ ___________________________ __________ ___________________________ __________ illegible
EX-2.1.2 3 AMENDMENT TO ARTICLES OF INCORP. - NOV. 20, 1997 1 EXHIBIT 2.1.2 FILED BY THE OFFICE OF THE SECRETARY OF STATE OF THE STATE OF NEVADA NOV 20 1997 NO. C2343-97 /s/ JEAN HELLER - ------------------------------- JEAN HELLER, SECRETARY OF STATE CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION OF AMERICAN DIVERSIFIED HOLDINGS, INC. Pursuant to the provisions of Nevada Revised Statutes, Title 7, Chapter 78, the undersigned officers do hereby certify: FIRST: The name of the Corporation is: American Diversified Holdings, Inc. SECOND: The Board of Directors of the Corporation duly adopted the following resolutions on June 16, 1997: RESOLVED, that it is advisable in the judgment of the Board of Directors of the Corporation that number of authorized shares be increased, and that, in order to accomplish the same, Article third the Articles of Incorporation be amended to read as follows: "THIRD: The corporation is authorized to issue two classes of common stock, to be designated as "voting" and "non-voting" and one class of non-voting preferred shares. The total number of voting shares authorized is 11,000,000, all of which are without nominal or par value, and are designated as Voting Common Stock. The total number of non-voting shares authorized is 1,000,000, all of which are without nominal or par value, and are designated as Non-Voting Common Stock. The total number of preferred non-voting shares is 15,000,000, all of which are with one dollar par value, and are designated as "Non-Voting Preferred Stock." FURTHER RESOLVED, that a special meeting of stockholders having voting power be and it is hereby called and that notice be given in the manner prescribed by the Bylaws of the Corporation and by Nevada Revised Statutes, Title 78, Chapter 78, unless the said stockholders shall waive the notice of meeting in writing or unless all of said stockholders shall dispense with the holding of a meeting and shall take action upon the proposed amendments by a consent in writing signed by them; and 2 - -2- FURTHER RESOLVED, that in the event the said stockholders shall adopt the aforesaid proposed amendments by a vote in favor thereof by at least a majority of the voting power or by a written consent in favor thereof signed by all of them without a meeting, the Corporation is hereby authorized to make by the hands of its President or a Vice President and by its Secretary or an Assistant Secretary a certificate setting forth the said amendments and to cause the same to be filed pursuant to the provisions of Nevada Revised Statutes, Title 7, Chapter 78. THIRD: The total number of outstanding shares having voting power of the corporation is 1,000,000, and the total number of votes entitled to be cast by the holders of all of said outstanding shares is 1,000,000. FOURTH: The holders of all of the aforesaid total number of outstanding shares having voting power, to wit, shares, dispensed with the holding of a meeting of stockholders and adopted the amendments herein certified by a consent in writing signed by all of them in accordance with the provisions of Nevada Revised Statutes, Title 7, Section 78.320. 3 AMERICAN DIVERSIFIED Signed on June 16, 1997 AMERICAN DIVERSIFIED HOLDINGS, INC. By: /s/ Peter Hartmann ------------------------------- Peter Hartmann, President /s/ Torsten Dittrich ------------------------------- Torsten Dittrich, Secretary STATE OF CALIFORNIA ) ) SS: COUNTY OF SAN DIEGO ) On September 15, 1997, personally appeared before me, a Notary Public, for the State and County aforesaid, Peter Hartmann, as President of AMERICAN DIVERSIFIED HOLDINGS, INC., who acknowledged that he executed the above instrument. /s/ Peter Hartmann Subscribed and sworn to before me this /s/ Lydia O. San Jose 15th day of September, 1997 ------------------------------- Notary Public /s/ Lydia O. San Jose - ------------------------------- Notary Public to and for the County of San Diego, State of California Notarial Seal - ----------------------------- LYDIA O. SAN JOSE COMM. #1087783 NOTARY PUBLIC CALIFORNIA SAN DIEGO COUNTY [ILLEGIBLE] - ----------------------------- 4 AMERICAN DIVERSIFIED Signed on June 16, 1997 AMERICAN DIVERSIFIED HOLDINGS, INC. By: /s/ PETER HARTMANN ------------------------------------ Peter Hartmann, President /s/ TORSTEN DITTRICH ------------------------------------ Torsten Dittrich, Secretary On September 11, 1997, personally appeared before me, Notary in Berlin, Federal Republic of Germany, Torsten Dittrich, as Secretary of AMERICAN DIVERSIFIED HOLDINGS, INC., who acknowledged that he executed the above instrument. [SIG] ------------------------------------ Notary [Notarial Seal] 5 AMERICAN DIVERSIFIED Signed on June 16, 1997 AMERICAN DIVERSIFIED HOLDINGS, INC. By: /s/ PETER HARTMANN ------------------------------------ Peter Hartmann, President /s/ TORSTEN DITTRICH ------------------------------------ Torsten Dittrich, Secretary On September 11, 1997, personally appeared before me, Notary in Berlin, Federal Republic of Germany, Torsten Dittrich, as Secretary of AMERICAN DIVERSIFIED HOLDINGS, INC., who acknowledged that he executed the above instrument. [SIG] ------------------------------------ Notary [Notarial Seal] EX-2.1.3 4 AMENDMENT TO ARTICLES OF INCORP. - JAN. 12, 1998 1 EXHIBIT 2.1.3 CERTIFICATE OF AMENDMENT (AFTER ISSUANCE OF STOCK) TO ARTICLES OF INCORPORATION OF AMERICAN DIVERSIFIED HOLDINGS, INC. The undersigned, being the President and Secretary of American Diversified Holdings, Inc., (the "Corporation") hereby declare that the original Articles of Incorporation were filed with the Secretary of State of the State of Nevada on February 5, 1997 under the name AMERICAN DIVERSIFIED HOLDINGS, INC. The Board of Directors has subsequently amended the Articles of Incorporation on April 1, 1997 and November 20, 1997. The Board of Directors of said Corporation by unanimous written consent, effected on the 20th day of December, 1997, adopted a resolution to amend the Articles of Incorporation, as amended. The number of shares of the Corporation's outstanding common stock entitled to vote on an amendment to the Articles is 10,000,000. The following change and amendment have been consented to and approved by a majority vote of the common stock outstanding and entitled to vote thereon. The Third Article of the Corporation's Articles of Incorporation is hereby amended and restated in its entirety as follows: "THIRD: Section 1. Authorized Shares. This Corporation is authorized to issue two classes of shares designated respectively "Common Stock" and "Preferred Stock." The authorized number of shares of Common Stock is 110,000,000 shares, having a par value of $.001 per share, and the authorized number of shares of Preferred Stock is 50,000,000 shares, having a par value of $.001 per share. The shares of Preferred Stock may be issued from time to time in one or more series. The Board of Directors is authorized to fix the number of shares of any series of Preferred Stock and to determine the designation of any such series. The Board of Directors is also authorized to determine or alter the rights, preferences, privileges and restrictions granted to or imposed upon any wholly unissued series of Preferred Stock and, within the limits and restrictions stated in any resolution or resolutions of the Board of Directors originally fixing the number of shares constituting any series, to increase or decrease (but not below the number of shares of such series then outstanding) the number of shares of any such series subsequent to the issue of shares of that series. Section 2. Voting Rights of Stockholders. Each holder of the Common Stock shall be entitled to one vote for each share of stock standing in his name on the books of the Corporation. Each holder of Preferred Stock shall be entitled to vote in the manner prescribed by the Board of Directors. 1 2 Section 3. Consideration for Shares. The Common Stock and Preferred Stock shall be issued for such consideration, as shall be fixed from time to time by the Board of Directors. In the absence of fraud, the judgment of the Directors as to the value of any property for shares shall be conclusive. When shares are issued upon payment of the consideration fixed by the Board of Directors, such shares shall be taken to be fully paid stock and shall be non-assessable. The Articles shall not be amended in this particular." THE UNDERSIGNED, being the President and Secretary of AMERICAN DIVERSIFIED HOLDINGS, INC. hereby declare and certify that the facts herein stated are true, and, accordingly, have each set their hand this 20th day of December, 1997. 2 3 American Diversified Holdings, Inc. Executed December 20, 1997. /s/ PETER HARTMANN -------------------------------------- Peter Hartmann, President STATE OF CALIFORNIA ) ) ss. COUNTY OF ) On December 20, 1997, before me, the undersigned, a notary public, personally appeard Peter Hartmann, known to me, or proved to me on the basis of satisfactory evidence, to be the person whose name is subscribed to this instrument and acknowledged that he executed it. /s/ WILLIAM J. ROBISON -------------------------------------------- (Signature) William J. Robison ---------------------------------------------- (Printed Name) Notary Public in and for the State of California. My commission expires on Jan. 30, 2001. (SEAL) 3 4 American Diversified Holdings, Inc. Executed December 24, 1997. By: /s/ THOMAS CORCOVELOS ---------------------------------- Thomas Corcovelos, Secretary STATE OF CALIFORNIA ) ) ss. COUNTY OF ) On December 24, 1997, before me, the undersigned, a notary public, personally appeard Peter Hartmann, known to me, or proved to me on the basis of satisfactory evidence, to be the person whose name is subscribed to this instrument and acknowledged that he executed it. /s/ NANCY J. SCHUTTEE -------------------------------------------- (Signature) Nancy J. Schuttee ---------------------------------------------- (Printed Name) Notary Public in and for the State of California. My commission expires on January 29, 1998. (SEAL) EX-2.1.4 5 CERTIFICATE OF DESIGNATION RE: SERIES A STOCK 1 EXHIBIT 2.1.4 CERTIFICATE OF DESIGNATION OF AMERICAN DIVERSIFIED HOLDINGS, INC. Providing for the Powers, Designations, Preferences and Relative, Participating, Optional and Other Special Rights, and the Qualifications, Limitations or Restrictions Thereof of Series A Preferred Stock The undersigned James B. Rea, Jr. and Thomas Corcovelos, hereby certify that: ONE: They are the duly elected and acting Executive Vice President and Secretary, respectively, of said Corporation. TWO: The Board of Directors of the corporation (the "Corporation"), pursuant to the provisions of its Articles of Incorporation, duly adopted the following resolutions: RESOLVED, that there is hereby established a series of the Corporation's Series A Preferred Stock, par value $1.00 per share (the "Series A Preferred Stock"), and to the extent that the powers, designation, preferences and relative, participating, optional and other special rights, and the qualifications, limitations and restrictions thereof, of such series, are not fixed by the amended Articles of Incorporation, they are hereby fixed as set forth as Exhibit 1 below. THREE: The number of Series A Preferred Stock authorized shall be 5,000,000 shares and none of such shares are currently outstanding. IN WITNESS WHEREOF, the undersigned have executed this certificate on this 3rd day of February, 1998. American Diversified Holdings, Inc. 2 American Diversified Holdings, Inc. Executed February 3, 1998 By: /s/ JAMES B. REA, JR. ---------------------------------- James B. Rea, Jr. Executive Vice President State of California) ) ss. County of Orange ) On February 3, 1998, before me, the undersigned, a notary public, personally appeared James B. Rea, Jr. known to me, or proved to me on the basis of satisfactory evidence, to be the person whose name is subscribed to this instrument and acknowledged that he executed it. /s/ KELLY J. WOODWARD -------------------------------------------- (Signature) Kelly J. Woodward ---------------------------------------------- (Printed Name) Notary Public in and for the State of California. My commission expires 12-17-99. (SEAL) 2 3 American Diversified Holdings, Inc. Executed January 28, 1998 By: /s/ THOMAS CORCOVELOS ----------------------------------------- Thomas Corcovelos, Secretary State of California ) ) ss. County of Los Angeles ) On January 28, 1998, before me, the undersigned, a notary public, personally appeared Thomas Corcovelos, known to me, or proved to me on the basis of satisfactory evidence, to be the person whose name is subscribed to this instrument and acknowledged that he executed it. /s/ R. STUART JOHNSON -------------------------------------------- (Signature) R. Stuart Johnson ---------------------------------------------- (Printed Name) Notary Public in and for the State of California. My commission expires 12-5-2001. (SEAL) 3 4 EXHIBIT 1 TERMS AND CONDITIONS OF SERIES A PREFERRED STOCK I. Designation and Amount. 1. The distinctive serial designation of this series of Preferred Stock shall be "Series A Convertible Redeemable Preferred Stock" (hereinafter called "Series A Preferred Stock"). Each share of Series A Preferred Stock shall be identical in all respects with the other shares of Series A Preferred Stock. 2. The number of shares in Series A Preferred Stock shall initially be 5,000,000 shares of Series A Preferred Stock, par value $1.00 per share. II. Dividend Provisions. 1. The holders of shares of Series A Preferred Stock shall be entitled to receive, when and as declared by the Board of Directors, but only out of funds legally available therefor, cumulative dividends at an annual rate of Nine Cents ($0.09) per share, payable in two semi-annual installments in arrears on the 1st day of January and July of each year, commencing January 1, 1998, unless such date is not a business day, in which event the dividend shall be payable on the next business day. Such dividends shall accrue on each share of Series A Preferred Stock from the date of its original issuance and shall accrue from day to day, whether or not earned or declared. 2. Dividends on Series A Preferred Stock shall be cumulative. If any dividend in respect of any previous semi-annual period or periods shall not have been paid on, or declared and set apart for, all shares of Series A Preferred Stock at the time outstanding, the deficiency shall be fully paid or declared and set apart for such shares before the Corporation makes any "distribution" (as hereinafter defined) to holders of any Common stock, or any other series or class of the Corporation's stock hereafter issued that ranks junior as to dividends payable solely in Common stock or junior dividend stock. As used in this paragraph, the term "distribution" shall mean the transfer of such cash or property without consideration, whether by way of dividend or otherwise (except a dividend in shares of the Corporation) or the purchase or redemption of shares of the Corporation for cash or property, including any such transfer, purchase or redemption by a subsidiary of the Corporation. The time of any distribution by way of dividend shall be the date of declaration thereof and the time of distribution by purchase or redemption of shares shall be the day cash or property is transferred by the Corporation, whether or not pursuant to a contract of an earlier date; provided that where a negotiable debt security is issued in exchange for shares the time of distribution is the date when the Corporation acquires the shares in such exchange. 3. Dividends in arrears for any past dividend period may be declared and paid at any time. The amount of dividends payable per share of Series A Preferred Stock for each semi-annual period will be computed by dividing the annual dividend amount by two. The amount of dividends payable for the initial dividend period and any period shorter than full semi-annual dividend period 4 5 shall be computed on the basis of a 365-day year. No interest will be payable in respect of any dividend on the Series A Preferred Stock which may be in arrears. 4. The Series A Preferred Stock will have priority as to dividends over the Common Stock. The Corporation shall not hereafter create any class or series of its stock on a parity with or senior to the Series A Preferred Stock with respect to the payment of dividends ("parity dividend stock") so long as any shares of the Series A Preferred Stock are outstanding. III. Liquidation Preference. (a) In the event of any liquidation, dissolution or winding up of this Corporation, either voluntary or involuntary, the holders of Series A Preferred Stock shall be entitled to receive, out of the assets of the Corporation available for distribution to its shareholders, prior and in preference to any distribution of any of the assets of this Corporation to the holders of Common Stock by reason of their ownership thereof, an amount per share equal to the sum of (i) $1.00 for each outstanding share of Series A Preferred Stock (the "Original Series A Issue Price"). If upon the occurrence of such event, the assets and funds thus distributed among the holders of the Series A Preferred Stock shall be insufficient to permit the payment to such holders of the full aforesaid preferential amounts, then, the entire assets and funds of the Corporation legally available for distribution shall be distributed ratably among the holders of the Series A Preferred Stock in proportion to the amount of such stock owned by each such holder. (b) After the distributions to the holders of Series A Preferred Stock required in subparagraph (a) of this Article III above have been paid, the remaining assets of the Corporation available for distribution to shareholders shall be distributed ratably among the holders of other series of preferred stock, if any, and then among holders of Common Stock based on the number of shares of Common Stock and such shares of preferred stock held by each such holder. (c)(i) For purposes of this Article III, a liquidation, dissolution or winding up of this Corporation shall be deemed to be occasioned by, or to include, (A) the acquisition of the Corporation by another entity by means of any transaction or series of related transactions (including, without limitation, any reorganization, merger or consolidation but, excluding any merger effected exclusively for the purpose of changing the domicile of the Corporation or merger into or consolidation with a wholly-owned subsidiary of the Corporation); or (B) a sale of all or substantially all of the assets of the Corporation (with the transaction set forth in (A) and (B) collectively referred to herein as a "Corporate Transaction"), unless the Corporation's shareholders of record as constituted immediately prior to such Corporate Transaction, immediately after such Corporate Transaction (by virtue of securities issued as consideration for the Corporate Transaction or otherwise) hold at least 50% of the voting power of the surviving or acquiring entity. (ii) In any of such events, if the consideration received by the Corporation in a Corporate Transaction is other than cash, its value will be deemed by its fair market value. Any securities shall be valued as follows: (A) Securities not subject to investment letter or other similar restrictions on free marketability covered by (B) below: 5 6 (1) If traded on a securities exchange or through the Nasdaq National Market System or Nasdaq SmallCap, the value shall be deemed to be the average of the closing prices of the securities on such exchange over the thirty (30) day period ending three (3) days prior to the closing; (2) If actively traded over-the-counter, the value shall be deemed to be the average of the closing bid or sale prices (whichever is applicable) over the thirty (30) day period ending three (3) days prior to the closing; and (3) If there is no active public market, the value shall be the fair market value thereof, as mutually determined by the Corporation (acting by its Board of Directors) and the holders of at least a majority of the voting power of all then outstanding shares of Series A Preferred Stock. (B) The method of valuation of securities subject to investment letter or other restrictions on free marketability (other than restrictions arising solely by virtue of a shareholder's status as an affiliate or former affiliate) shall be to make an appropriate discount (as mutually determined by the Corporation and the holders of at least a majority of the voting power of all then outstanding shares of Series A Preferred Stock or which shall be based upon the opinion of an independent investment banking firm retained by the Corporation) from the market value determined as above in (A)(1), (2) or (3) to reflect the approximate fair market value thereof, as mutually determined by the Corporation and the holders of at least a majority of the voting power of all then outstanding shares of Series A Preferred Stock. (iii) The Corporation shall give each holder of record of Series A Preferred Stock written notice of such impending transaction not later than twenty (20) days prior to the shareholders' meeting called to approve such transaction, or twenty (20) days prior to the closing of such transaction, whichever is earlier, and shall also notify such holders in writing of the final approval of such transaction. The first of such notices shall describe the material terms and conditions of the impending transaction and the provisions of this Article III, and the Corporation shall thereafter give such holders prompt notice of any material changes. The transaction shall in no event take place sooner than twenty (20) days after the Corporation has given the first notice provided for herein or sooner than ten (10) days after the Corporation has given notice of any material changes provided for herein; provided, however, that such periods may be shortened upon the written consent of the holders of Series A Preferred Stock that are entitled to such notice rights or similar notice rights and that represent at least a majority of all then outstanding shares of such Series A Preferred Stock. IV. Redemption. (a) The Corporation may at its option, (subject to all of the provision of this Article IV) redeem all or any portion of the Series A Preferred Stock then outstanding, at the price of one dollar ($1.00) per share, payable in cash, plus any accrued and unpaid dividends as of the date set for such redemption. (b) At least 30 but not more than 60 days prior to the date fixed by the Corporation's Board of Directors for redemption of any of the Series A Preferred Stock ( the "Redemption Date"), written notice shall be hand delivered or mailed, first class postage prepaid, to 6 7 each holder of record of the Series A Preferred Stock to be redeemed at the address last shown on the records of the Corporation for such holder or given by the holder to the Corporation for the purpose of notice, notifying such holder of the redemption to be effected and specifying (a) the Redemption Date, (b) the redemption price, (c) the place or places at which payment may be obtained, (d) the method used or to be used in determining what shares are to be redeemed in the event that less than all share are to be redeemed, (e) that on and after the Redemption Date dividends will cease to accrue on such shares, (f) the then effective conversion rate of the shares to be redeemed, (g) the date on which such holder's conversion rights as to such shares terminate, and (h) calling upon such holder to surrender to the Corporation, in the manner and at the place designated, his certificate or certificates represent the shares to be redeemed (the "Redemption Notice"). (c) Any Redemption Notice that is mailed as herein provided shall be conclusively presumed to have been duly given, whether or not the holder receives it; and failure to give a Redemption Notice by mail to the holders of any shares designated for redemption, or any defect in such Redemption Notice, shall not effect the validity of the proceeding for the redemption of any other share of Series A Preferred Stock. (d) Any holder of a share of Series A Preferred Stock shall have the right, following the mailing of any Redemption Notice, to convert such shares of Series A Preferred Stock into shares of Common Stock of the Corporation as provided in Article V below provided only that such holder shall have given the Corporation written notice of intent to so convert prior to the close of business on the business day prior to the Redemption Date relating to such share. (e) On or after the date fixed for redemption as stated in such notice, each holder of the shares called for redemption shall surrender the certificates evidencing such shares to the Corporation at the place designated in such notice and shall thereupon be entitled to receive payment of the redemption price. If less than all the shares represented by any such surrendered certificate or certificates are redeemed, a new certificate shall be issued representing the unredeemed shares. (f) From and after the Redemption Date, all rights of the holders of the Series A Preferred Stock so redeemed (except the right to receive the redemption price without interest upon surrender of their certificate or certificates) shall terminate with respect to such shares, and such shares shall not thereafter be transferred on the books of the Corporation or be deemed to be outstanding for any purpose whatsoever, unless, (a) a given holder shall have given notice of intention to convert as provided in Article V, below or (b) there shall have been a default in payment of the redemption price. Any shares of Series A Preferred Stock not redeemed, shall remain outstanding and entitled to all the rights and preferences provided herein. (g) If fewer than all of the outstanding shares of Series A Preferred Stock are to be redeemed, the Corporation shall designates those shares to be redeemed pro rata or by lot or in such other manner as the Board of Directors may determine. There shall be no mandatory redemption, retirement or sinking fund obligation of the Corporation with respect to the Series A Preferred Stock. In the event that the Corporation is in arrears on the payment of accrued and unpaid dividends on the Series A Preferred Stock, it may not redeem any of the then outstanding shares of the Series A Preferred Stock until all such accrued and unpaid dividends have been paid in full on all outstanding shares of Series A Preferred Stock, unless the holders of a majority of the then outstanding shares of Series A Preferred Stock shall otherwise consent, in writing. 7 8 V. Conversion. The holders of the Series A Preferred Stock shall have conversion rights as follows (the "Conversion Rights"): (a) Right to Convert. The Series A Preferred Stock shall be convertible, at the option of the holder thereof, at any time, at the office of this Corporation or any transfer agent for such stock, into fully paid and nonassessable shares of Common Stock by converting three (3) shares of Series A Preferred Stock for one (1) share of Common Stock. The initial Conversion Price per share for shares of Series A Preferred Stock will be the Original Series A Issue Price; provided, however, that the Conversion Price for the Series A Preferred Stock shall be subject to adjustment as set forth in subsections V(d) and V(e). (b) Automatic Conversion. Each share of Series A Preferred Stock shall automatically be converted into shares of Common Stock at the Conversion Price at the time in effect for such Series A Preferred Stock immediately upon the closing of a sale of the Corporation's Common Stock in a firm commitment, underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, that results in net proceeds to the Corporation of at least $10,000,000. (c) Mechanics of Conversion. Before any holder of Series A Preferred Stock shall be entitled to convert the same into shares of Common Stock, he shall surrender the certificate or certificates therefor, duly endorsed, at the offices of this Corporation or of any transfer agent for the Series A Preferred Stock, and shall give written notice to this Corporation at its principal corporate office, of the election to convert the same and shall state therein the number of shares of Preferred Stock to be converted and the name or names in which the certificate or certificates for shares of Common Stock are to be issued. This Corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Series A Preferred Stock, or to the nominee or nominees of such holder, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled as aforesaid. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Series A Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock as of such date. If the conversion is in connection with an underwritten offering of securities registered pursuant to the Securities Act of 1933 as provided for in paragraph V(b) above, the conversion may, at the option of any holder tendering Series A Preferred Stock for conversion, be conditioned upon the closing with the underwriters of the sale of securities pursuant to such offering, in which event the person(s) entitled to receive the Common Stock upon conversion of the Series A Preferred Stock shall not be deemed to have converted such Series A Preferred Stock until immediately prior to the closing of such sale of securities. (d) Conversion Price Adjustments of Series A Preferred Stock for Certain Dilutive Issuances, Splits and Combinations. The Conversion Price of the Series A Preferred Stock shall be subject to adjustment from time to time as follows: (i)(A) If the Corporation shall issue, after the date upon which any shares of Series A Preferred Stock were first issued (the "Purchase Date" with respect to such series), any Additional Stock (as defined below) without consideration or for a consideration per share less than the Conversion Price for such series in effect immediately prior to the issuance of such Additional Stock, 8 9 the Conversion Price for such series in effect immediately prior to each such issuance shall forthwith (except as otherwise provided in this clause (i)) be adjusted to a price equal to the price paid per share determined by multiplying the Conversion Price by a fraction (x) the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to the issuance of such Additional Stock plus the number of shares of Common Stock which the aggregate consideration received by the Corporation for the total number of shares of Additional Stock so issued would purchase at the Conversion Price in effect immediately prior to such issuance, and (y) the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issuance of Additional Stock plus the number of shares of such Additional Stock so issued. For purposes of the above determination, the number of shares of Common Stock outstanding immediately prior to such issuance shall be calculated as if all shares of Series A Preferred Stock had been fully converted into shares of Common Stock immediately prior to such issuance at the Conversion Price then in effect. (B) No adjustment of the Conversion Price for the Series A Preferred Stock shall be made in an amount less than one cent ($0.01) per share, provided that any adjustments which are not required to be made by reason of this sentence shall be carried forward and shall be either taken into account in any subsequent adjustment made prior to three (3) years from the date of the event giving rise to the adjustment being carried forward, or shall be made at the end of three (3) years from the date of the event giving rise to the adjustment being carried forward, and upon such adjustment the Conversion Price shall be rounded up or down to the nearest cent. Except to the limited extent provided for in subsections (E)(3) and (E)(4), no adjustment of such Conversion Price pursuant to this subsection V(d)(i) shall have the effect of increasing the Conversion Price above the Conversion Price in effect immediately prior to such adjustment. (C) In the case of the issuance of Common Stock for cash, the consideration shall be deemed to be the amount of cash paid therefor before deducting any reasonable discounts, commissions or other expenses allowed, paid or incurred by this Corporation for any underwriting or otherwise in connection with the issuance and sale thereof. (D) In the case of the issuance of the Common Stock for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the fair value thereof as determined by the Board of Directors irrespective of any accounting treatment. (E) In the case of the issuance of options (whether before, on or after the applicable Purchase Date) to purchase or rights to subscribe for Common Stock, securities by their terms convertible into or exchangeable for Common Stock or options to purchase or rights to subscribe for such convertible or exchangeable securities, the following provisions shall apply for all purposes of this subsection V(d)(i) and subsection V(d)(ii): (1) The aggregate maximum number of shares of Common Stock deliverable upon exercise (assuming the satisfaction of any conditions to exercisability, including without limitation, the passage of time, but without taking into account potential antidilution adjustments) of such options to purchase or rights to subscribe for Common Stock shall be deemed to have been issued at the time such options or rights were issued and for a consideration equal to the consideration (determined in the manner provided in subsections V(d)(i)(C) and (d)(i)(D)), if any, received by the Corporation upon the issuance of such options or rights plus the minimum exercise 9 10 price provided in such options or rights (without taking into account potential antidilution adjustments) for the Common Stock covered thereby. (2) The aggregate maximum number of shares of Common Stock deliverable upon conversion of or in exchange (assuming the satisfaction of any conditions to convertibility or exchangeability, including, without limitation, the passage of time, but without taking into account potential antidilution adjustments) for any such convertible or exchangeable securities or upon the exercise of options to purchase or rights to subscribe for such convertible or exchangeable securities and subsequent conversion or exchange thereof shall be deemed to have been issued at the time such securities were issued or such options or rights were issued and for a consideration equal to the consideration, if any, received by the Corporation for any such securities and related options or rights (excluding any cash received on account of accrued interest or accrued dividends), plus the minimum additional consideration, if any, to be received by the Corporation (without taking into account potential antidilution adjustments) upon the conversion or exchange of such securities or the exercise of any related options or rights (the consideration in each case to be determined in the manner provided in subsections V(d)(i)(C) and (d)(i)(D)). (3) In the event of any change in the number of shares of Common Stock deliverable or in the consideration payable to this Corporation upon exercise of such options or rights or upon conversion of or in exchange for such convertible or exchangeable securities, including, but not limited to, a change resulting from the antidilution provisions thereof, the Conversion Price of the Series A Preferred Stock, to the extent in any way affected by or computed using such options, rights or securities, shall be recomputed to reflect such change, but no further adjustment shall be made for the actual issuance of Common Stock or any payment of such consideration upon the exercise of any such options or rights or the conversion or exchange of such securities. (4) Upon the expiration of any such options or rights, the termination of any such rights to convert or exchange or the expiration of any options or rights related to such convertible or exchangeable securities, the Conversion Price of the Series A Preferred Stock, to the extent in any way affected by or computed using such options, rights or securities or options or rights related to such securities, shall be recomputed to reflect the issuance of only the number of shares of Common Stock (and convertible or exchangeable securities which remain in effect) actually issued upon the exercise of such options or rights, upon the conversion or exchange of such securities or upon the exercise of the options or rights related to such securities. (5) The number of shares of Common Stock deemed issued and the consideration deemed paid therefor pursuant to subsections V(d)(i)(E)(1) and (2) shall be appropriately adjusted to reflect any change, termination or expiration of the type described in either subsection V(d)(i)(E)(3) or (4). (ii) "Additional Stock" shall mean any shares of Common Stock issued (or deemed to have been issued pursuant to subsection V(d)(i)(E)) by this Corporation after the Purchase Date other than: (A) Upon conversion of the Series A Preferred Stock or as a dividend or distribution thereon; 10 11 (B) Common Stock issued pursuant to a transaction described in subsection V(d)(iii) hereof; (C) shares of Common Stock issuable to or issued to employees, consultants, directors or vendors (if in transactions with primarily non-financing purposes) of this Corporation directly or pursuant to a stock option plan or restricted stock plan approved by the Board of Directors of this Corporation at any time when the total number of shares of Common Stock so issuable or issued (and not repurchased at cost by the Corporation in connection with the termination of employment) does not exceed One Million (1,000,000) shares, in the aggregate. (D) shares of Common Stock issued or issuable in a firm commitment public offering in connection with which all outstanding shares of Series A preferred Stock will be converted to Common Stock as provided in Section V(b) above. (iii) In the event the Corporation should at any time or from time to time after the Purchase Date fix a record date for the effectuation of a split or subdivision of the outstanding shares of Common Stock, receive a dividend or other distribution payable in additional shares of Common Stock or other securities or rights convertible into, or entitling the holder thereof to receive directly or indirectly, additional shares of Common Stock (hereinafter referred to as "Common Stock Equivalents") without payment of any consideration by such holder for the additional shares of Common Stock or the Common Stock Equivalents (including the additional shares of Common Stock issuable upon conversion or exercise thereof), then, as of such record date (or the date of such dividend distribution, split or subdivision if no record date is fixed), the Conversion Price of the Series A Preferred Stock shall be appropriately decreased so that the number of shares of Common Stock issuable on conversion of each share of such series shall be increased in proportion to such increase of the aggregate of shares of Common Stock outstanding and those issuable with respect to such Common Stock Equivalents with the number of shares issuable with respect to Common Stock Equivalents determined from time to time in the manner provided for deemed issuances in subsection V(d)(i)(E). (iv) If the number of shares of Common Stock outstanding at any time after the Purchase Date is decreased by a combination of the outstanding shares of Common Stock, then, following the record date of such combination, the Conversion Price for the Series A Preferred Stock shall be appropriately increased so that the number of shares of Common Stock issuable on conversion of each share of such series shall be decreased in proportion to such decrease in outstanding shares. (e) Other Distributions. In the event this Corporation shall declare a distribution payable in securities of other persons, evidences of indebtedness issued by this Corporation or other persons, assets (excluding cash dividends) or options or rights not referred to in subsection 4(d)(iii), then, in each such case for the purpose of this subsection 4(e), the holders of the Series A Preferred Stock shall be entitled to a proportionate share of any such distribution as though they were the holders of the number of shares of Common Stock of the Corporation into which their shares of Series A Preferred Stock are convertible as of the record date fixed for the determination of the holders of Common Stock of the Corporation entitled to receive such distribution. 11 12 (f) Recapitalization. If at any time or from time to time there shall be a recapitalization of the Common Stock (other than a subdivision, combination or merger or sale of assets transaction provided for elsewhere in this Section 4 or Section 2) provision shall be made so that the holders of the Series A Preferred Stock shall thereafter be entitled to receive upon conversion of the Series A Preferred Stock the number of shares of stock or other securities or property of the Corporation or otherwise, to which a holder of Common Stock deliverable upon conversion would have been entitled on such recapitalization. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 4 with respect to the rights of the holders of the Series A Preferred Stock after the recapitalization to the end that the provisions of this Section 4 (including adjustment of the Conversion Price then in effect and the number of shares purchasable upon conversion of the Series A Preferred Stock) shall be applicable after that event as nearly equivalent as may be practicable. (g) No Impairment. This Corporation will not, by amendment of its Articles of Incorporation or through any reorganization, recapitalization, transfer or assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by this Corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Section 4 and in the taking of all such action as may be necessary or appropriate in order to protect the conversion rights of the holders of the Series A Preferred Stock against impairment. (h) No Fractional Shares and Certificate as to Adjustments. (i) No fractional shares shall be issued upon the conversion of any share or shares of the Series A Preferred Stock, and the number of shares of Common Stock to be issued shall be rounded to the nearest whole share. Whether or not fractional shares are issuable upon such conversion shall be determined on the basis of the total number of shares of Series A Preferred Stock the holder is at the time converting into Common Stock and the number of shares of Common Stock issuable upon such aggregate conversion. (ii) Upon the occurrence of each adjustment or readjustment of the Conversion Price of Series A Preferred Stock pursuant to this Section 4, this Corporation, at its expense, shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to each holder of Series A Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. This Corporation shall, upon the written request at any time of any holder of Series A Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (A) such adjustment and readjustment, (B) the Conversion Price for such series of Preferred Stock at the time in effect, and (C) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of a share of Series A Preferred Stock. (i) Notices of Record Date. In the event of any taking by this Corporation of a record of the holder of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend) or other distribution, any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, this Corporation shall mail to each holder of Series A Preferred Stock, at least twenty (20) days prior to the date specified therein, a notice specifying the date on which 12 13 any such record is to be taken for the purpose of such dividend, distribution or right, and the amount and character of such dividend, distribution or right. (j) Reservation of Stock Issuable Upon Conversion. This Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of the Series A Preferred Stock, such number of its share of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the Series A Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Series A Preferred Stock, in addition to such other remedies as shall be available to the holder of such Series A Preferred Stock, this Corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes, including without limitation, engaging in best efforts to obtain the requisite shareholder approval of any necessary amendment to these articles. (k) Notices. Any notice required by the provisions of this Section 4 to be given to the holders of shares of Series A Preferred Stock shall be deemed given if deposited in the United States mail, postage prepaid, and addressed to each holder of record at his address appearing on the books of this Corporation. VI. Voting Rights. The holders of each share of Series A Preferred Stock shall have no voting rights until such time as the shares of Series A Preferred Stock are converted into shares of Common Stock in accordance with Article V. VII. Status of Converted or Redeemed Stock. In the event any shares of Series A Preferred Stock are redeemed, purchased or otherwise acquired by the Corporation (including shares surrendered for conversion) such shares shall be canceled and thereupon restored to the status of authorized but unissued shares of preferred stock undesignated as to series, and such shares may thereafter be reissued as part of a new series of preferred stock to be created by the Board of Directors, but not as shares of Series A Preferred Stock. 13 EX-4.2 6 SPECIMEN OF SERIES A PREFERRED STOCK OF REGISTRANT 1 EXHIBIT 4.2 ADH- AMERICAN DIVERSIFIED HOLDINGS, INC. SERIES SERIES A SERIES A PREFERRED STOCK PREFERRED STOCK INCORPORATED UNDER THE LAWS SEE REVERSE FOR CURRENT DEFINITIONS OF THE STATE OF NEVADA CUSIP 02541N20 0 THIS CERTIFIES THAT is the Owner of FULLY PAID AND NON-ASSESSABLE SHARES OF THE SERIES A PREFERRED STOCK, $1.00 PAR VALUE PER SHARE OF AMERICAN DIVERSIFIED HOLDINGS, INC. transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney upon surrender of this Certificate properly endorsed. This Certificate is not valid unless countersigned by the Transfer Agent and registered by the Registrar. Witness the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. Dated: SECRETARY [SEAL] PRESIDENT COUNTERSIGNED AND REGISTERED: CONTINENTAL STOCK TRANSFER & TRUST COMPANY (JERSEY CITY, N.J.) TRANSFER AGENT AND REGISTRAR BY AUTHORIZED OFFICER 2 AMERICAN DIVERSIFIED HOLDINGS, INC. THE SHARES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "SECURITIES ACT") AND MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS (AS DEFINED IN REGULATION S UNDER THE SECURITIES ACT) EXCEPT PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. In addition, the Corporation will furnish to any shareholder, upon request and without charge, a statement of the designations, preferences, limitations and relative rights of the shares of each class authorized to be issued, and the variations in the relative rights and preferences between the shares of each class or series of any class so far as the same have been fixed and determined by the Board of Directors, pursuant to the authority vested by the Certificate of Incorporation in the Board to fix and determine the relative rights and preferences of such class or series and any subsequent class or series. The following abbreviations, when used in the inscription on the face of this Certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common UNIF GIFT MIN ACT - _______________ Custodian _______________ (Cust) (Minor) TEN ENT - as tenants by the entireties under Uniform Gifts to Minors Act _________________________ JT TEN - as joint tenants with right of (State) survivorship and not as tenants in common
Additional abbreviations may also be used though not in the above list. For Value Received, ______________________ hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE ______________________________________ | | | | |____________________________________|__________________________________________ ________________________________________________________________________________ (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE) ________________________________________________________________________________ _________________________________________________________________________ Shares of the Stock represented by the within Certificate, and do hereby irrevocably constitute and appoint _______________________________________________________________________ Attorney to transfer the said stock on the books of the within-named Corporation with full power of substitution in the premises. Dated: ________________________________ _________________________________________ NOTICE: THE SIGNATURE OF THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. SIGNATURE(S) GUARANTEED By _______________________________________________________________________ THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (Banks, Stockbrokers, Savings and Loan Associations and Credit Unions) WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM PURSUANT TO S.E.C. RULE 17Ad-15. EX-6.1 7 FORM OF INVESTMENT MANAGEMENT CONTRACT 1 EXHIBIT 6.1 INVESTMENT ADVISORY AGREEMENT AGREEMENT made as of the 1st day of April, 1998, between REA-GRAHAM FUNDS, INC. (hereinafter referred to as the "Fund") and AMERICAN DIVERSIFIED ASSET MANAGEMENT, INC., a corporation organized under the laws of the State of Nevada (hereinafter referred to as the "Investment Adviser"). 1. The Investment Adviser agrees, during the life of this Agreement, to furnish the Fund with investment research, advice and supervision and will continuously furnish the Fund with an investment program for the assets of the Fund consistent with the provisions of the Articles of Incorporation of the Fund and the investment policies adopted and declared by its Board of Directors. 2. The Investment Adviser is not required to furnish any overhead items or facilities for the Fund including trading desk facilities or daily pricing. In rendering such advisory services to the Fund pursuant to this Agreement, the Investment Adviser may employ, retain or otherwise avail itself of the services or facilities of other persons or organizations for the purpose of providing itself or the Fund with such statistical and other factual information, such advice regarding economic factors and trends, such advice as to occasional transactions in specific securities and other properties and assets, or such other information, advice or assistance as the Adviser may deem necessary, appropriate or convenient for the discharge of its overall responsibilities with respect to the Fund and the other accounts which it or its affiliates serve as investment adviser. 3. In addition to being responsible for supplying recommendations regarding the purchase and sale of securities by the Fund, the Adviser shall recommend brokers and dealers for execution of the Fund's portfolio transactions. The foremost consideration in making such recommendations will be the Fund's obtaining best price and execution. Secondarily, the Adviser may take into account certain additional services provided by broker-dealers to the Fund. The Adviser and any person performing executive, administrative or trading functions for the Fund, whose services are made available to the Fund by the Adviser, are specifically authorized to recommend to the Fund that it allocate brokerage and principal business to firms that provide such services or facilities which, if accepted, might cause the Fund to pay a member of a securities exchange or any other securities broker or dealer an amount of commission or "mark-up" for effecting the securities transaction in excess of the amount of commission, or at a less advantageous price another member of the exchange, broker or dealer would have charged for effecting that transaction, if the Adviser or such person determine in good faith that such amount of commission, or "mark-up", as the case may be, is reasonable in relation to the value of the brokerage and research (as such services 2 are defined in Section 28(e) of the securities and Exchange Act of 1934) provided by ouch member, broker or dealer, viewed in terms of either that particular transaction or the Adviser's evaluation of such person's overall responsibilities with respect to accounts as to which the Adviser or such person exercise investment discretion (as that term is defined in Section 3(a)(35) of the Securities Exchange Act of 1934). 4. The Fund may purchase and/or sell many securities which are also purchased or sold by the Investment Adviser, or its affiliates or other investment advisory clients. The orders for all such securities transactions will be placed for execution by methods so as to be impartial and fair for all parties. 5. In the absence of willful misfeasance, bad faith or gross negligence on the part of the Investment Adviser, or of reckless disregard of its obligations hereunder, the Investment Adviser shall have no liability to the Fund or any shareholder of the Fund for any error of judgment, mistake of law, or any loss arising out of any investment or for any other act or omission in the performance by the Investment Adviser of its duties under this Agreement. 6. The Fund agrees, during the life of this Agreement, to pay to the investment Adviser as compensation for such services a fee of 1/12th of 1% monthly (equivalent to 1% annually) on the first $20,000,000 of the net assets of the Fund as of the close of business on the last business day of each calendar month during the Fund's fiscal year, reduced to 1/12th of .75% monthly (equivalent to .75% annually) of such net assets in excess of $20,000,000 up to $100,000,000, reduced to 1/12th of .5% monthly (equivalent to .5% annually) of such net assets in excess of $100,000,000 up to $200,000,000, and reduced to 1/12th of .45% monthly (equivalent to .45% annually) of all such net assets in excess of $200,000,000. 7. This Agreement shall remain in full force and effect until two years from the date hereof and thereafter from year to year to the extent such continuance is approved annually by the Board of Directors of the Fund or by vote of a majority of the outstanding voting securities of the Fund (as defined by the Investment Company Act of 1940) and also, in either event, approval by a majority of those Directors who are not parties to the Contract or interested persons of any such party. 8. This Agreement may be terminated by the Fund at any time on sixty (60) day's written notice without payment of penalty, provided that such termination by the Fund shall be directed or approved by the vote of a majority of the Directors of the Fund in office at the time or by the vote of a majority of the outstanding voting securities of the Fund (as defined by the Investment Company Act of 1940). 3 9. This Agreement shall automatically and immediately terminate in the event of its assignment. 10. The Investment Adviser will maintain its books and records or duplicate copies thereof relating to the Fund and will comply with Section 31 of the Investment Company Act of 1940 and the rules thereunder. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their duly authorized officers and their respective corporate seals to be hereunto duly affixed and attested. (Seal) REA-GRAHAM FUNDS, INC., on behalf of ATTEST: Rea-Graham Balanced Fund By: - --------------------------- ------------------------------------ Assistant Secretary James B. Rea, Jr., President (Seal) AMERICAN DIVERSIFIED ASSET ATTEST: MANAGEMENT, INC. By: - --------------------------- ------------------------------------ Secretary James B. Rea, Jr., President EX-6.2 8 FORM OF INVESTMENT SUB-ADVISORY AGREEMENT 1 EXHIBIT 6.2 SUB-ADVISORY AGREEMENT AGREEMENT made this 1st day of April, 1998, between American Diversified Asset Management, Inc. (the "Adviser") and Ladas & Hulings, Inc. (the "Sub-Adviser"). WHEREAS, Rea-Graham Funds, Inc. (the "Company") is registered as an open-end, management investment company under the Investment Company Act of 1940, as amended (the "1940 Act"); and WHEREAS, Rea-Graham Balanced Fund (the "Fund") is a separate investment series of the Company; and WHEREAS, the Adviser has been appointed investment adviser to the Fund; and WHEREAS, the Adviser desires to retain the Sub-Adviser to assist it in the provision of a continuous investment program for the Fund and the Sub-Adviser is willing to do so upon the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the promises and mutual covenants herein contained, it is agreed between the parties hereto as follows: 1. Appointment. The Adviser hereby appoints the Sub-Adviser to act as sub-adviser to the Fund as permitted by the Adviser's Investment Advisory Agreement with the Company pertaining to the Fund. Intending to be legally bound, the Sub-Adviser accepts such appointment and agrees to render the services herein set forth for the compensation herein provided. 2. Sub-Advisory Services. Subject to the supervision of the Board of Directors, the Sub-Adviser shall assist the Adviser in providing a continuous investment program with respect to the Fund's portfolio, including investment research and management with respect to all securities and investments and cash equivalents in the Fund. The Sub-Adviser may, subject to the Adviser's review, determine the securities and investments to be purchased, sold or retained by the Fund, and the Sub-Adviser may place orders directly with the issuer or any broker or dealer for such securities and investments. The Sub-Adviser will provide services under this Agreement in accordance with the Fund's investment objective, policies and restrictions as stated in the Fund's prospectus and Statement of Additional Information, which shall be forwarded to the Sub-Adviser by the Adviser from time to time, and resolutions of the Board of Directors applicable to the Fund provided those resolutions are communicated to the Sub-Adviser and a reasonable amount of time is provided in order for it to comply. Without limiting the generality of the foregoing, the Sub-Adviser further agrees that it: (a) will use the same skill and care in providing such services as it uses in providing services to fiduciary accounts for which it has investment responsibilities; - 1 - 2 (b) will conform with all applicable Rules and Regulations of the Securities and Exchange Commission under the 1940 Act applicable to sub-advisers to registered investment companies and in addition will conduct its activities under this Agreement in accordance with any applicable regulations of any governmental authority pertaining to the investment advisory activities of the Sub-Adviser; (c) will place or cause to be placed orders for the Fund either directly with the issuer or with any broker or dealer. In placing orders with brokers and dealers, the Sub-Adviser will attempt to obtain prompt execution of orders in an effective manner at the most favorable price. Consistent with this obligation and to the extent permitted by the 1940 Act, when the execution and price offered by two or more brokers or dealers are comparable, the Sub-Adviser may, in its discretion, purchase and sell portfolio securities to and from brokers and dealers who provide the Sub-Adviser with research advice and other services; (d) will maintain or cause to be maintained all books and records with respect to the securities transactions of the Fund and will furnish the Board of Directors with such periodic and special reports as the Board may request; and (e) will treat confidentially and as proprietary information of the Company all records and other information relative to the Company and the Fund and prior, present, or potential shareholders, and will not use such records and information for any purpose other than performance of its responsibilities and duties hereunder. 3. Services Not Exclusive. Except as provided herein, the services furnished by the Sub-Adviser hereunder are deemed not to be exclusive, and the Sub-Adviser shall be free to furnish similar services to others so long as its services under this Agreement are not impaired thereby. 4. Books and Records. In compliance with the requirements of Rule 31a-3 under the 1940 Act, the Sub-Adviser hereby agrees that all records which it maintains for the Company are the property of the Company and further agrees to surrender promptly to the Company any of such records upon the Company's request. The Sub-Adviser further agrees to preserve for the periods prescribed by Rule 31a-2 under the 1940 Act the records required to be maintained by Rule 31a-1 under the 1940 Act. 5. Expenses. During the term of this Agreement, the Sub-Adviser will pay all expenses incurred by it in connection with its activities under this Agreement other than the cost of securities, commodities and other investments (including brokerage commissions and other transaction charges, if any) purchased for the Fund. 6. Compensation. For the services provided and the expenses assumed with respect to the Fund pursuant to this Agreement, the Sub-Adviser will be entitled to a fee of 1/12th of .50% monthly (equivalent to .50% annually) on the first $20,000,000 of the net assets of the Fund as of the close of business on the last business day of each calendar month during the Fund's fiscal - 2 - 3 year, reduced to 1/12th of .375% monthly (equivalent to .375% annually) of such net assets in excess of $20,000,000 up to $100,000,000, reduced to 1/12th of .25% monthly (equivalent to .25% annually) of such net assets in excess of $100,000,000 up to $200,000,000, and reduced to 1/12th of .225% monthly (equivalent to .225% annually) of all such net assets in excess of $200,000,000. 7. Limitation of Liability. The Sub-Adviser shall not be liable for any error of judgment or mistake of law or for any loss suffered by the Fund in connection with the performance of this Agreement, except a loss resulting from a breach of fiduciary duty with respect to the receipt of compensation for services or a loss resulting from willful misfeasance, bad faith or gross negligence on the part of the Sub-Adviser in the performance of its duties or from reckless disregard by it of its obligations and duties under this Agreement. Notwithstanding the foregoing or any other provision of this Agreement, nothing herein shall in any way constitute a waiver or limitation of any rights that the Company, the Fund or the Adviser may have under the United States federal or State securities laws, which may impose liability on persons who act in good faith. 8. Duration and Termination. Unless sooner terminated, this Agreement shall continue until ____________, 2000, and thereafter shall continue automatically for successive annual periods, provided such continuance is specifically approved at least annually by the Company's Board of Directors or vote of the lesser of (a) 67% of the shares of the Fund represented at a meeting if holders of more than 50% of the outstanding shares of the Fund are present in person or by proxy or (b) more than 50% of the outstanding shares of the Fund, provided that in either event its continuance also is approved by a majority of the Directors who are not "interested persons" (as defined in the 1940 Act) of any party to this Agreement (the "Independent Directors"), by vote cast in person at a meeting called for the purpose of voting on such approval. This Agreement is terminable at any time without penalty, on 60 days' notice, by the Adviser, the Sub-Adviser or by the Board of Directors or by vote of the lesser of (a) 67% of the shares of the Fund represented at a meeting if holders of more than 50% of the outstanding shares of the Fund are present in person or by proxy or (b) more than 50% of the outstanding shares of the Fund. This Agreement will terminate automatically in the event of its assignment (as defined in the 1940 Act). 9. Amendment of this Agreement. No provision of this Agreement may be changed, waived, discharged or terminated orally, but only by an instrument in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought. 10. Governing Law. This Agreement shall be governed by and its provisions shall be construed in accordance with the laws of the State of California. 11. Possession of Fund Assets. At all times the assets of the Fund (consisting of all cash, securities and other instruments held by the Fund) shall remain exclusively under the management and control of the Fund's custodian. At no time will the Sub-Adviser have custody or possession of any such assets of the Fund. - 3 - 4 IN WITNESS WHEREOF, the parties hereto have caused this instrument to be executed by their officers designated below as of the day and year first above written. AMERICAN DIVERSIFIED ASSET MANAGEMENT, INC. By: ------------------------------------------ Name: James B. Rea, Jr. ------------------------------------------ Title: President ------------------------------------------ LADAS & HULINGS, INC. By: /s/ WILLIAM R. HULINGS ------------------------------------------ Name: William R. Hulings ------------------------------------------ Title: President ------------------------------------------ - 4 - EX-9.1 9 EMPLOYMENT AGREEMENT 1 EXHIBIT 9.1 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of January 2, 1998, by and between American Diversified Securities, Inc., a Nevada corporation (the "Company"), American Diversified Holdings. Inc., a Nevada corporation and the parent corporation of the Company("ADH" or the "Parent") and JAMES BUCHANAN REA, Jr. ("Executive"). 1. EMPLOYMENT The Company and ADH (hereinafter referred to collectively as the "Employers") hereby employ Executive and Executive hereby accepts employment upon the terms and conditions set forth below. 2. TERM AND RENEWAL 2.1 TERM. The term of this Agreement shall commence on the date of this Agreement (the "Effective Date"), and shall continue for three years from the Effective Date (the "Original Employment Term"), on the terms and conditions set forth below, unless sooner terminated as provided in Section 5. 2.2 EXTENSION. Following the expiration of the Original Employment Term and provided that this Agreement has not been terminated pursuant to Section 5, and every year thereafter, the Agreement shall be automatically renewed for an additional 12-month period, effective on each anniversary date of the Effective Date. 3. COMPENSATION 3.1 BASE COMPENSATION. For the services to be rendered by Executive under this Agreement, Executive shall be entitled to receive, commencing as of the Effective Date, an initial annual base compensation ("Base Compensation") of $ 100,000, payable in 12 equal monthly installments. Executive shall have the option of taking a bi-monthly advance (not to exceed 1/2 of the monthly installment) against each monthly installment and each discretionary benefits fund payment under Section 3.2 below. 3.2 ANNUAL DISCRETIONARY BENEFITS FUND. Executive shall be entitled to an annual discretionary benefits fund of $40,000 which shall be used for such benefits and perquisites as the Executive shall determine in his sole discretion, including life and disability insurance, car allowances and club memberships. The Executive and Employer shall agree on the amounts and allocations of the benefits and the allowance shall be payable monthly in equal installments. Medical insurance and expenses for the Executive as well as his spouse and children shall be provided under the Company's medical insurance policy, or if not so obtained, shall be reimbursable to Executive. Any shortfall in the amount of the benefits of less than $40,000 shall be paid to Executive as a bonus. The Employee may not carry over unused portions of the annual discretionary benefits fund from year to year. 2 3.3 PENSION/PROFIT SHARING PLANS, ETC. The Executive shall be entitled to participate in all pension, profit sharing, 401(k) and other employee plans and benefits established by the Employers. 3.4 METHOD OF PAYMENT. The monetary compensation payable and any benefits due to Executive hereunder may be paid or provided in whole or in part, from time to time, by the Employers and/or their respective subsidiaries and affiliates, but shall at all times remain the responsibility of the Employers. 4. POSITION AND DUTIES 4.1 POSITION. Executive shall serve as a Director, the President, Chief Executive Officer, and Chief Financial Officer of the Company as well as the designated General and Financial Principal of the Company. Executive shall have such duties as are the usual and customary duties of the such offices. Executive shall have such executive power and authority as shall reasonably be required to enable Executive to discharge the duties of such offices. Executive may, at Executive's discretion, serve the Employers and/or their respective subsidiaries and affiliates in such other offices and capacities as they shall mutually agree. In the event the Employers and Executive mutually agree that Executive shall terminate Executive's service in any one or more of the aforementioned capacities, or Executive's service in one or more of the aforementioned capacities is terminated, Executive's compensation, as specified in this Agreement, shall not be diminished or reduced in any manner. 4.2 DEVOTION OF TIME AND EFFORT. Executive shall use Executive's good faith best efforts and judgment in performing Executive's duties as required hereunder and in the best interests of the Employers. Executive shall devote such time, attention and energies to the business of the Employers as are reasonably necessary to satisfy Executive's required responsibilities and duties hereunder. 4.3 OTHER ACTIVITIES. Executive may engage in other personal and civic activities while employed hereunder, including without limitation charitable, community and other business activities, provided that such other activities do not interfere with the performance of Executive's duties hereunder. 4.4 VACATION. It is understood and agreed that Executive shall be entitled to five (5) weeks vacation per year. During such vacation periods, Executive shall not be relieved of Executive's duties under this Agreement and there will be no abatement or reduction of Executive's compensation hereunder. 4.5 BUSINESS EXPENSES. The Employers shall promptly, but in no event later than ten days after submission of a claim of expenditure, reimburse Executive for all reasonable business expenses including, without limitation, business seminar fees, professional association dues and other reasonable entertainment expenses incurred by Executive in connection 2 3 with the business of the Employers and/or their respective subsidiaries and affiliates, upon presentation to the Employers of written receipts for such expenses. Such reimbursement shall also include, but not be limited to, reimbursement for all reasonable travel expenses, including all airfare, hotel and rental car expenses, incurred by Executive in traveling in connection with the business of the Employers. 4.6 EMPLOYERS' OBLIGATIONS. The Employers shall provide Executive with any and all necessary or appropriate current financial information and access to current information and records regarding all material transactions involving the Employers and/or their representative subsidiaries and affiliates, including but not limited to acquisition of assets, personnel contracts, dispositions of assets, service agreements and registration statements or other state or federal filings or disclosures, reasonably necessary for Executive to carry out Executive's duties and responsibilities hereunder. In addition, the Employers agree to provide Executive, as a condition to Executive's services hereunder, such staff, equipment and office space as is reasonably necessary for Executive to perform Executive's duties hereunder. 5. TERMINATION 5.1 BY EMPLOYERS WITHOUT CAUSE. The Employers may terminate this Agreement without "cause" (as hereinafter defined) at any time following the third anniversary of the Effective Date, provided that the Employers first deliver to Executive the Employers' written election to terminate this Agreement at least 90 days prior to the effective date of termination. 5.2 SEVERANCE PAYMENT. (a) AMOUNT. In the event the Employers terminate Executive's services hereunder pursuant to Section 5.1, Executive shall continue to render services to the Employers pursuant to this Agreement until the date of termination and shall continue to receive compensation, as provided hereunder, through the termination date. In addition to other compensation payable to Executive for services rendered through the termination date, the Employers shall pay Executive no later than the date of such termination, as a single severance payment, an amount equal to the sum of: (i) one-quarter of the Executive's average annual Base Compensation paid hereunder for the preceding thirty-six month period; plus (ii) an amount equal to one-quarter of the highest annual bonus or profit sharing received by Executive during the preceding thirty-six month period (the "Severance Amount"). (b) BENEFITS. In the event Executive's employment hereunder is terminated by the Employers without cause pursuant to Section 5.1 or by Executive pursuant to Section 5.4 or 5.6, then in addition to paying Executive the Severance Amount, the Employers shall continue to provide to Executive and Executive's spouse and children, as applicable, all of the benefits described in Section 3.3 for a period three months commencing on the date of such termination (the "Severance Benefits"). 3 4 (c) LIMITATION. The total of such severance payments shall be reduced to the extent that the payment of such amount would cause Executive's total termination benefits (as determined by Executive's tax advisor) to constitute an "excess" parachute payment under Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), and by reason of such excess parachute payment Executive would be subject to an excise tax under Section 4999(a) of the Code, but only if Executive determines that the after-tax value of the termination benefits calculated with the foregoing restriction exceed those calculated without the foregoing restriction. 5.3 BY THE EMPLOYERS FOR CAUSE. The Employers may terminate Executive for cause at any time, upon written notice to Executive. For purposes of this Agreement, "cause" shall mean: (a) Executive's conviction for commission of a felony or a crime involving moral turpitude; (b) Executive's willful commission of any act of theft, embezzlement or misappropriation against the Employers which, in any such case, is materially and demonstrably injurious to the Employers; (c) Executive's willful and continued failure to substantially perform Executive's duties hereunder (other than such failure resulting from Executive's incapacity due to physical or mental illness), which failure is not remedied within a reasonable time after demand for substantial performance is delivered by the Employers which specifically identifies the manner in which the Employers believe that Executive has not substantially performed Executive's duties; or (d) Executive's death or Disability (as hereinafter defined). In the event Executive is terminated for cause pursuant to this Section 5.3, Executive shall have the right to receive Executive's compensation as otherwise provided under this Agreement through the effective date of termination. Executive shall have no further right to receive compensation or other consideration from the Employers or have any other remedy whatsoever against the Employers as a result of this Agreement or the termination of Executive pursuant to this Section 5.3, except as set forth below with respect to a termination due to Executive's Disability. In the event Executive is terminated by reason of Executive's Disability (but not death), the Employers shall immediately pay Executive a single severance payment equal to the Severance Amount. Said payment shall be in addition to any disability insurance payments to which Executive is otherwise entitled and any other compensation earned by Executive hereunder. For purposes of this Agreement, the term "Disability" shall mean a physical or mental incapacity as a result of which Executive becomes unable to continue the proper performance of Executive's duties hereunder for six consecutive calendar months or for shorter periods aggregating 180 business days in any 12 month period, but only to the extent that such definition does not violate the Americans with Disabilities Act. 4 5 5.4 BY EXECUTIVE FOR GOOD REASON. Executive may terminate this Agreement for good reason upon at least 30 days prior written notice to the Employers. For purposes of this Agreement, "good reason" shall mean: (a) the Employers' material breach of any of their respective obligations hereunder and either such breach is incurable or, if curable, has not been cured within fifteen (15) days following receipt of written notice by Executive to the Employers of such breach by either of the Employers; (b) any removal of Executive from the office specified in the first sentence of Section 4.1 without cause and without Executive's prior written consent; or (c) any material decrease in Executive's authority or responsibilities hereunder without Executive's prior written consent. In the event that Executive terminates this Agreement for good reason pursuant to this Section 5.4, Executive shall have the right to receive Executive's compensation as provided hereunder through the effective date of termination and shall also have the same rights and remedies against the Employers as Executive would have had if the Employers had terminated Executive's employment without cause pursuant to Section 5.1 (including the right to receive the Severance Amount payable and the Severance Benefits to be provided under Section 5.2). 5.5 EXECUTIVE'S VOLUNTARY TERMINATION. Executive may, at any time, terminate this Agreement without good reason upon written notice delivered to the Employers at least ninety (90) days prior to the effective date of termination. In the event of such voluntary termination of this Agreement by Executive: (i) Executive shall have the right to receive Executive's compensation as provided hereunder through the effective date of termination, and (ii) the Employers on the one hand, and Executive, on the other hand, shall not have any further right or remedy against one another except as provided in Sections 6, 7 and 8 hereof which shall remain in full force and effect. 5.6 CHANGE OF CONTROL. Executive may terminate this Agreement, upon at least ten (10) days' prior written notice to the Employers at any time within one (1) year after a "change in control" (as hereinafter defined) of either of the Employers. In the event Executive terminates this Agreement within one (1) year after a change in control pursuant to this Section 5.6, (i) Executive shall continue to render services pursuant hereto and shall continue to receive compensation, as provided hereunder, through the termination date, (ii) the Employers shall pay Executive no later than the date of such termination, as a single severance payment, an amount equal to the Severance Amount and (iii) following such termination, the Employers shall provide the Severance Benefits as required by Section 5.2. For purposes of this Agreement, (a "change in control") shall mean the occurrence of any of the following events: 5 6 (a) a merger, consolidation, share exchange or reorganization involving the Parent, unless (i) the stockholders of the Parent, immediately before such merger, consolidation, share exchange or reorganization, own, directly or indirectly immediately following such merger, consolidation, share exchange or reorganization, at least 80% of the combined voting power of the outstanding voting securities of the corporation that is the successor in such merger, consolidation, share exchange or reorganization (the "Surviving Company") in substantially the same proportion as their ownership of the Voting Securities immediately before such merger, consolidation, share exchange or reorganization; (ii) the individuals who were members of the Incumbent Board immediately prior to the execution of the agreement providing for such merger, consolidation, share exchange or reorganization constitute at least two-thirds (2/3rds) of the members of the board of directors of the Surviving Company; (b) a complete liquidation or dissolution of the Parent; or (c) an agreement for the sale or other disposition of all or substantially all of the assets of the Company or the Parent. A change in control shall not be deemed to occur upon the dilution of existing shareholders through the issuance of capital stocks in one or more successive series of public or private offerings of securities. 5.7 STOCK REPURCHASE (a) The Company hereby irrevocably grants and issues to Executive the right and option to sell to the Company (the "Put") all of the Company's shares of Common Stock now or hereafter owned by Executive (the "Shares") at a purchase price (the "Purchase Price") in the event of any of the following transactions (a "Corporate Transaction") occur: (i) on the date the Executive ceases for any reason to be an employee of the company or its Parent; (ii) a Change in Control as defined in Section 5.6 above; (iii) the sale, transfer or other disposition of all or substantially all of the assets of the Company; or (iv) withdrawal, suspension or termination of the Company as a registered broker dealer under the Securities Exchange Act of 1934; as a registered Investment Advisor under the Investment Company Act of 1940, or as an Investment Advisor to investment companies registered under the Investment Company Act of 1940. 6 7 (b) For purposes of Section 5.7(a) above, the "Purchase Price" shall mean the greater of (i) the price paid for the Shares or (ii) the Fair Market Value of the Shares on the date of such Corporate Transaction (c) Unless otherwise mutually agreeable to the Company and the Executive, for purposes of Section 5(b) above the "Fair Market Value" shall mean: (i) The Company and the Executive shall each appoint an independent, experienced appraiser who is a member of a recognized professional association of business appraisers. The two appraisers shall determine the value of the Shares assuming that the sale would be between a willing buyer and a willing seller, both of whom have full knowledge of the financial and other affairs of the Company. and neither of whom is under any compulsion to sell or buy. The appraisers will value the Company as a whole and determine the value of Executive's Shares as a pro rata portion of the whole without regard to any minority interest valuation. (ii) If the higher of the two appraisals is not more than 10% more than the lower of the appraisals, the Fair Market Value shall be the average of the two appraisals. If the higher of the two appraisals is 10% or more than the lower of the two appraisals, then the third appraiser shall be appointed by the two appraisers, and if they cannot agree on a third appraiser, the American Arbitration Association shall appoint the third appraiser. The third appraiser, regardless of who appoints him or her, shall have the same qualifications as the first two appraisers. (iii) The Fair Market Value after the appointment of the third appraiser shall be the mean of the three appraisals. (iv) The fees and expenses of the appraisers shall be paid one-half by the Company and one-half by the Executive. (d) This provision of this Section 5.7, shall not be applicable in the event Parent has effected a registration and public offering of its Common Stock in the amount of at least $5 million under the Securities Act of 1933, as amended, and there exists a public trading market for the Common Stock. 6. CONFIDENTIALITY During the term of Executive's employment under this Agreement, Executive will have access to and become acquainted with various information relating to the Employers' business operations, marketing data, business plans, strategies, employees, contracts, financial records and accounts, projections and budgets, and similar information. Executive agrees that to the extent such information is not generally available to the public and gives either of the Employers an advantage over competitors who do not know of or use such information, such information and documents constitute "trade secrets" of the Employers. Executive further agrees that all such 7 8 information and documents relating to the business of the Employers whether they are prepared by Executive or come into Executive's possession in any other way, are owned by the Employers and shall remain the exclusive property of the Employers. Executive shall not misuse, misappropriate or disclose any trade secrets of the Employers directly or indirectly, or use them for Executive's own benefit, either during the term of this Agreement or at any time thereafter, except as may be necessary or appropriate in the course of Executive's employment with the Employers unless such action is either previously agreed to in writing by the Employers or required by law. 7. NON-SOLICITATION For a period of three (3) months following the date Executive's employment hereunder is terminated, Executive shall not solicit or induce any of the Employers' employees, agents or independent contractors to end their relationship with either of the Employers, or recruit, hire or otherwise induce any such person to perform services for Executive, or any other person, firm or company. The restrictions set forth in this Section 7 shall not apply if Executive's employment is terminated pursuant to Section 5.1, 5.4 or 5.6. 8. INDEMNIFICATION To the fullest extent permitted under applicable law, the Employers shall indemnify, defend and hold Executive harmless from and against any and all causes of action, claims, demands, liabilities, damages, costs and expenses of any nature whatsoever (collectively, "Damages") directly or indirectly arising out of or relating to Executive discharging Executive's duties hereunder on behalf of the Employers and/or their respective subsidiaries and affiliates, so long as Executive acted in good faith within the course and scope of Executive's duties with respect to the matter giving rise to the claim or Damages for which Executive seeks indemnification. 9. PAYMENT OF FINANCIAL OBLIGATIONS BY EMPLOYERS The payment or provision to the Executive by the Employers of any remuneration, benefits or other financial obligations pursuant to this Agreement, including, without limitation, the payment of Executive's Base Compensation, any cash bonuses or profit sharing, the provision of benefits and perquisites set forth in Section 3.3, the reimbursement of business expenses pursuant to Section 4.5, the payment (if applicable) of the Severance Amount and provision of the Severance Benefits and any indemnification obligations, shall be the joint and several obligations of the Employer. 10. GENERAL PROVISIONS 10.1 ASSIGNMENT; BINDING EFFECT. None of the Employers or Executive may assign, delegate or otherwise transfer this Agreement or any of their respective rights or obligations hereunder without the prior written consent of the other party. Any attempted 8 9 prohibited assignment or delegation shall be void. This Agreement shall be binding upon and inure to the benefit of any permitted successors or assigns of the parties and the heirs, executors, administrators and/or personal representatives of Executive. 10.2 NOTICES. All notices, requests, demands and other communications that are required or may be given under this Agreement shall be in writing and shall be deemed to have been duly given when received if personally delivered; when transmitted if transmitted by telecopy, electronic or digital transmission method with electronic confirmation of receipt; the day after it is sent, if sent for next-day delivery to a domestic address by recognized overnight delivery service (E.G., FEDEX); and upon receipt, if sent by certified or registered mail, return receipt requested. In each case notice shall be sent to: If to the Company or ADH: American Diversified Holdings, Inc. 3525 Del Mar Heights Road, #145 San Diego, California 92130 Attention: Peter Hartmann Telephone: (619) 759-3552 Telecopy: (619) 759-3563 If to Executive: James Rea James Buchanan Rea, Inc. 12100 Wilshire Blvd., #680 Los Angeles, CA 90025 Attention: James Buchanan Rea, Jr. Telephone: (310) 442-2660 Telecopy: (310) 442-2661 Any party may change its address for the purpose of this Section 10.2 by giving the other party written notice of its new address in the manner set forth above. 10.3 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement of the parties, and supersedes all prior agreements, understandings and negotiations, whether written or oral, between the Employers and Executive with respect to the employment of Executive by the Employers. 10.4 AMENDMENTS; WAIVERS. This Agreement may be amended or modified, and any of the terms and covenants may be waived, only by a written instrument executed by the parties hereto, or, in the case of a waiver, by the party waiving compliance. Any waiver by any party in any one or more instances of any term or covenant contained in this Agreement shall neither be deemed to be nor construed as a further or continuing waiver of any such term or covenant of this Agreement. 9 10 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. 10 11 IN WITNESS WHEREOF, the parties hereto have executed this Employment Agreement effective as of the date first written above. AMERICAN DIVERSIFIED HOLDINGS, INC., a Nevada corporation By: /s/ Peter Hartmann ----------------------------------------- Name: Peter Hartmann ----------------------------------------- Title: President ----------------------------------------- AMERICAN DIVERSIFIED SECURITIES, INC., a Nevada corporation By: /s/ James Buchanan Rea, Jr. ----------------------------------------- Name: James Buchanan Rea, Jr. ----------------------------------------- Title: President ----------------------------------------- EXECUTIVE: /s/ James Buchanan Rea, Jr. ------------------------------------------------ James Buchanan Rea, Jr. EX-9.1.2 10 EMPLOYMENT AGREEMENT BETWEEN REGISTRANT & KUETTNER 1 EXHIBIT 9.1.2 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of January 1, 1998, by and between American Diversified Holdings. Inc., its subsidiaries and Roland O. Kuettner ("Executive"). 1. EMPLOYMENT ADH (hereinafter referred to collectively as the "Employers") hereby employs Executive and Executive hereby accepts employment upon the terms and conditions set forth below. 2. TERM AND RENEWAL 2.1 TERM. The term of this Agreement shall commence on the date of this Agreement (the "Effective Date"), and shall continue for three years from the Effective Date (the "Original Employment Term"), on the terms and conditions set forth below, unless sooner terminated as provided in Section 5. 2.2 EXTENSION. Following the expiration of the Original Employment Term and provided that this Agreement has not been terminated pursuant to Section 5, and every year thereafter, the Agreement shall be automatically renewed for an additional 12-month period, effective on each anniversary date of the Effective Date. 3. COMPENSATION 3.1 BASE COMPENSATION. For the services to be rendered by Executive under this Agreement, Executive shall be entitled to receive, commencing as of the Effective Date, an initial annual base compensation ("Base Compensation") of $99,996 payable in 12 equal monthly installments of $8.333. 3.2 ANNUAL DISCRETIONARY BENEFITS FUND. Executive shall be entitled to an annual discretionary benefits fund of $40,000 which shall be used for such benefits and perquisites as the Executive shall determine in his sole discretion, including medical insurance and expenses for the Executive as well as his spouse and children, life and disability insurance, car allowances and club memberships. The Executive and Employer shall agree on the amounts, payment and allocations of the benefits. Any shortfall in the amount of the benefits of less than $40,000 shall be paid to Executive as a bonus. The Employee may not carry over unused portions of the annual discretionary benefits fund from year to year. 3.3 PENSION/PROFIT SHARING PLANS, ETC. The Executive shall be entitled to participate in all pension, profit sharing, 401(k) and other employee plans and benefits established by the Employers. 3.4 METHOD OF PAYMENT. The monetary compensation payable and any benefits due to Executive hereunder may be paid or provided in whole or in part, from time to 2 time, by the Employers and/or their respective subsidiaries and affiliates, but shall at all times remain the responsibility of the Employers. 4. POSITION AND DUTIES 4.1 POSITION. Executive shall serve as a Director, Treasurer and Chief Financial Officer of the Company and its Subsidiaries. Executive shall have such duties as are the usual and customary duties of the such offices. Executive shall have such executive power and authority as shall reasonably be required to enable Executive to discharge the duties of such offices. Executive may, at Executive's discretion, serve the Employers and/or their respective subsidiaries and affiliates in such other offices and capacities as they shall mutually agree. In the event the Employers and Executive mutually agree that Executive shall terminate Executive's service in any one or more of the aforementioned capacities, or Executive's service in one or more of the aforementioned capacities is terminated, Executive's compensation, as specified in this Agreement, shall not be diminished or reduced in any manner. 4.2 DEVOTION OF TIME AND EFFORT. Executive shall use Executive's good faith best efforts and judgment in performing Executive's duties as required hereunder and in the best interests of the Employers. Executive shall devote such time, attention and energies to the business of the Employers as are reasonably necessary to satisfy Executive's required responsibilities and duties hereunder. 4.3 OTHER ACTIVITIES. Executive may engage in other personal and civic activities while employed hereunder, including without limitation charitable, community and other business activities, provided that such other activities do not interfere with the performance of Executive's duties hereunder. 4.4 VACATION. It is understood and agreed that Executive shall be entitled to four weeks vacation per year. During such vacation periods, Executive shall not be relieved of Executive's duties under this Agreement and there will be no abatement or reduction of Executive's compensation hereunder. 4.5 BUSINESS EXPENSES. The Employers shall promptly, but in no event later than ten days after submission of a claim of expenditure, reimburse Executive for all reasonable business expenses including, without limitation, business seminar fees, professional association dues and other reasonable entertainment expenses incurred by Executive in connection with the business of the Employers and/or their respective subsidiaries and affiliates, upon presentation to the Employers of written receipts for such expenses. Such reimbursement shall also include, but not be limited to, reimbursement for all reasonable travel expenses, including all airfare, hotel and rental car expenses, incurred by Executive in traveling in connection with the business of the Employers. 4.6 EMPLOYERS' OBLIGATIONS. The Employers shall provide Executive with any and all necessary or appropriate current financial information and access to current information and records regarding all material transactions involving the Employers and/or their 2 3 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 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) 4 5 days following receipt of written notice by Executive to the Employers of such breach by either of the Employers; (b) any removal of Executive from the office specified in the first sentence of Section 4.1 without cause and without Executive's prior written consent; or (c) any material decrease in Executive's authority or responsibilities hereunder without Executive's prior written consent. In the event that Executive terminates this Agreement for good reason pursuant to this Section 5.4, Executive shall have the right to receive Executive's compensation as provided hereunder through the effective date of termination and shall also have the same rights and remedies against the Employers as Executive would have had if the Employers had terminated Executive's employment without cause pursuant to Section 5.1 (including the right to receive the Severance Amount payable and the Severance Benefits to be provided under Section 5.2). 5.5 EXECUTIVE'S VOLUNTARY TERMINATION. Executive may, at any time, terminate this Agreement without good reason upon written notice delivered to the Employers at least ninety (90) days prior to the effective date of termination. In the event of such voluntary termination of this Agreement by Executive: (i) Executive shall have the right to receive Executive's compensation as provided hereunder through the effective date of termination, and (ii) the Employers on the one hand, and Executive, on the other hand, shall not have any further right or remedy against one another except as provided in Sections 6, 7 and 8 hereof which shall remain in full force and effect. 5.6 CHANGE OF CONTROL. Executive may terminate this Agreement, upon at least ten (10) days' prior written notice to the Employers at any time within one (1) year after a "change in control" (as hereinafter defined) of either of the Employers. In the event Executive terminates this Agreement within one (1) year after a change in control pursuant to this Section 5.6, (i) Executive shall continue to render services pursuant hereto and shall continue to receive compensation, as provided hereunder, through the termination date, (ii) the Employers shall pay Executive no later than the date of such termination, as a single severance payment, an amount equal to the Severance Amount and (iii) following such termination, the Employers shall provide the Severance Benefits as required by Section 5.2. For purposes of this Agreement, (a "change in control") shall mean the occurrence of any of the following events: (a) a merger, consolidation, share exchange or reorganization involving the Parent, unless (i) the stockholders of the Parent, immediately before such merger, consolidation, share exchange or reorganization, own, directly or indirectly immediately following such merger, consolidation, share exchange or reorganization, at least 55% of the combined voting power of the outstanding voting securities of the corporation that is the successor in such merger, consolidation, share exchange or reorganization (the "Surviving Company") in 5 6 substantially the same proportion as their ownership of the Voting Securities immediately before such merger, consolidation, share exchange or reorganization; (ii) the individuals who were members of the Incumbent Board immediately prior to the execution of the agreement providing for such merger, consolidation, share exchange or reorganization constitute at least two-thirds (2/3rds) of the members of the board of directors of the Surviving Company; (b) a complete liquidation or dissolution of the Parent; or (c) an agreement for the sale or other disposition of all or substantially all of the assets of the Company or the Parent. 6. CONFIDENTIALITY During the term of Executive's employment under this Agreement, Executive will have access to and become acquainted with various information relating to the Employers' business operations, marketing data, business plans, strategies, employees, contracts, financial records and accounts, projections and budgets, and similar information. Executive agrees that to the extent such information is not generally available to the public and gives either of the Employers an advantage over competitors who do not know of or use such information, such information and documents constitute "trade secrets" of the Employers. Executive further agrees that all such information and documents relating to the business of the Employers whether they are prepared by Executive or come into Executive's possession in any other way, are owned by the Employers and shall remain the exclusive property of the Employers. Executive shall not misuse, misappropriate or disclose any trade secrets of the Employers directly or indirectly, or use them for Executive's own benefit, either during the term of this Agreement or at any time thereafter, except as may be necessary or appropriate in the course of Executive's employment with the Employers unless such action is either previously agreed to in writing by the Employers or required by law. 7. NON-SOLICITATION For a period of one (1) year following the date Executive's employment hereunder is terminated, Executive shall not solicit or induce any of the Employers' employees, agents or independent contractors to end their relationship with either of the Employers, or recruit, hire or otherwise induce any such person to perform services for Executive, or any other person, firm or company. The restrictions set forth in this Section 7 shall not apply if Executive's employment is terminated pursuant to Section 5.1, 5.4 or 5.6. 6 7 8. INDEMNIFICATION To the fullest extent permitted under applicable law, the Employers shall indemnify, defend and hold Executive harmless from and against any and all causes of action, claims, demands, liabilities, damages, costs and expenses of any nature whatsoever (collectively, "Damages") directly or indirectly arising out of or relating to Executive discharging Executive's duties hereunder on behalf of the Employers and/or their respective subsidiaries and affiliates, so long as Executive acted in good faith within the course and scope of Executive's duties with respect to the matter giving rise to the claim or Damages for which Executive seeks indemnification. 9. PAYMENT OF FINANCIAL OBLIGATIONS BY EMPLOYERS The payment or provision to the Executive by the Employers of any remuneration, benefits or other financial obligations pursuant to this Agreement, including, without limitation, the payment of Executive's Base Compensation, any cash bonuses or profit sharing, the provision of benefits and perquisites set forth in Section 3.3, the reimbursement of business expenses pursuant to Section 4.5, the payment (if applicable) of the Severance Amount and provision of the Severance Benefits and any indemnification obligations, shall be the joint and several obligations of the Employer. 10. GENERAL PROVISIONS 10.1 ASSIGNMENT; BINDING EFFECT. None of the Employers or Executive may assign, delegate or otherwise transfer this Agreement or any of their respective rights or obligations hereunder without the prior written consent of the other party. Any attempted prohibited assignment or delegation shall be void. This Agreement shall be binding upon and inure to the benefit of any permitted successors or assigns of the parties and the heirs, executors, administrators and/or personal representatives of Executive. 10.2 NOTICES. All notices, requests, demands and other communications that are required or may be given under this Agreement shall be in writing and shall be deemed to have been duly given when received if personally delivered; when transmitted if transmitted by telecopy, electronic or digital transmission method with electronic confirmation of receipt; the day after it is sent, if sent for next-day delivery to a domestic address by recognized overnight delivery service (E.G., FEDEX); and upon receipt, if sent by certified or registered mail, return receipt requested. In each case notice shall be sent to: If to the Company or ADH: American Diversified Holdings, Inc. 3525 Del Mar Heights Road, #145 San Diego, California 92130 Attention: Peter Hartmann Telephone: (619) 759-3552 Telecopy: (619) 759-3563 7 8 If to Executive: Roland O. Kuettner Aachener Str. 1 10713 Berlin Telephone:(30) 821 94 46 or (172) 80 95 027 Telecopy: (30) 612 70 96 Any party may change its address for the purpose of this Section 10.2 by giving the other party written notice of its new address in the manner set forth above. 10.3 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement of the parties, and supersedes all prior agreements, understandings and negotiations, whether written or oral, between the Employers and Executive with respect to the employment of Executive by the Employers. 10.4 AMENDMENTS; WAIVERS. This Agreement may be amended or modified, and any of the terms and covenants may be waived, only by a written instrument executed by the parties hereto, or, in the case of a waiver, by the party waiving compliance. Any waiver by any party in any one or more instances of any term or covenant contained in this Agreement shall neither be deemed to be nor construed as a further or continuing waiver of any such term or covenant of this Agreement. 10.5 PROVISIONS SEVERABLE. In case any one or more provisions of this Agreement shall be invalid, illegal or unenforceable, in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not, in any way, be affected or impaired thereby. If any provision hereof is determined by any court of competent jurisdiction to be invalid or unenforceable by reason of such provision extending the covenants and agreements contained herein for too great a period of time or over too great a geographical area, or being too extensive in any other respect, such provision shall be interpreted to extend only over the maximum period of time and geographical area, and to the maximum extent in all other respects, as to which it is valid and enforceable, all as determined by such court in such action. 10.6 ATTORNEY'S FEES. If any legal action, arbitration or other proceeding, is brought for the enforcement of this Agreement, or because of an alleged dispute, breach or default in connection with any of the provisions of this Agreement, the prevailing party shall be entitled to recover reasonable attorneys' fees and other costs incurred in that action or proceeding, including any appeal of such action or proceeding, in addition to any other relief to which that party may be entitled. 10.7 GOVERNING LAW. This Agreement shall be construed, performed and enforced in accordance with, and governed by the laws of the State of California without giving effect to the principles of conflict of laws thereof. 10.8 COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which shall constitute the same instrument. 8 9 IN WITNESS WHEREOF, the parties hereto have executed this Employment Agreement AMERICAN DIVERSIFIED HOLDINGS, INC., /s/ Peter Hartmann -------------------------------------------- Peter Hartmann President EXECUTIVE: /s/ Roland Kuettner -------------------------------------------- Roland Kuettner -----END PRIVACY-ENHANCED MESSAGE-----