-----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, RJUSQcKp3Bf6mh4Iz5dVJLIdCwoHxCgZ/O77YK44zkdhsiYP1+zImXTI7uBEiADK 8J1tMg8CzGTc4G++YhyRmw== 0000950116-97-001873.txt : 19971015 0000950116-97-001873.hdr.sgml : 19971015 ACCESSION NUMBER: 0000950116-97-001873 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19971014 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NAM CORP CENTRAL INDEX KEY: 0000925741 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-LEGAL SERVICES [8111] IRS NUMBER: 232753988 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-21419 FILM NUMBER: 97694549 BUSINESS ADDRESS: STREET 1: 1010 NORTHERN BLVD STREET 2: STE 336 CITY: GREAT NECK STATE: NY ZIP: 11021 MAIL ADDRESS: STREET 1: 1010 NORTHERN BLVD., SUITE 336 CITY: GREAT NECK STATE: NY ZIP: 11021 10-K 1 U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------- FORM 10-KSB |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 1997 |_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 0-21419 NAM CORPORATION --------------- (Name of small business issuer as specified in its charter) Delaware 23-2753988 -------- ---------- (State or Other Jurisdiction (I.R.S. Employer of Incorporation or Organization) Identification No.) 1010 NORTHERN BOULEVARD, SUITE 336 GREAT NECK, NEW YORK 10021 -------------------------- (Address of Principal Executive Offices) (516) 829-4343 -------------- (Issuer's Telephone Number, Including Area Code) Securities registered under Section 12(b) of the Exchange Act: None Securities registered under Section 12(g) of the Exchange Act: Title of each class Name of each exchange on which registered - ------------------- ----------------------------------------- Common Stock .001 Par Value NASDAQ Small Cap Market Warrants NASDAQ Small Cap Market Units NASDAQ Small Cap Market Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Check if there is no disclosure of delinquent files in response to Item 405 of Regulation S-B is not contained in this Form, and no disclosure will be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this form 10-KSB or any amendments to this Form 10-KSB.|X| State issuer's revenues for its most recent fiscal year. $3,377,062 ---------- The aggregate market value of the voting stock held by non-affiliates per the closing stock price of September 18, 1997 is $ 6,554,054. As of September 18, 1997, 3,334,978 shares of common stock of the issuer were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Part I. -- None Part II. -- None Part III. -- Proxy statement to be filed by October 28, 1997 Transitional Small Business Disclosure Format Yes____ No__X__ 2 PART I From time to time, including in this annual report on Form 10-KSB, NAM Corporation (the "Company") may publish forward-looking statements relating to such matters as anticipated financial performance, business prospects, future operations, new products, research and development activities, and similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, the Company notes that a variety of factors could cause the Company's actual results to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. The risks and uncertainties that may affect the operations, performance, development and results of the Company's business include, without limitation, the following: changes in the markets and/or regions currently served by the Company and in those markets and/or regions that the Company may expand into; changes in the insurance industry; the Company's inability to retain current or new hearing officers; and changes in the public court system. ITEM 1. DESCRIPTION OF BUSINESS The Company The Company provides alternative dispute resolution ("ADR") services principally to insurance companies, law firms, large self-insured corporations and municipalities. An ADR proceeding is designed to replace the public court system as a forum for resolving civil disputes. The Company offers its clients personalized attention and access to qualified hearing officers (generally retired judges) to either mediate or arbitrate their disputes. The cases currently handled by the Company are primarily disputes involving claims for injury to persons or property allegedly arising out of acts of negligence and are usually covered primarily by insurance. The Company believes it is one of the leading providers of ADR services in New York State based upon the number of cases processed since 1993. The Company has offices currently located in New York, Massachusetts, Pennsylvania, South Carolina, Tennessee and Wisconsin, through which it has the ability to provide ADR services on a nationwide basis with a roster of over 900 qualified hearing officers. The Company believes that the ADR business is a growing service industry based upon the continuing inability of the public court system to manage effectively its docket of civil cases. An ADR proceeding is intended to streamline the traditional cumbersome public litigation process. As compared to the public court system, an ADR proceeding generally offers litigants a faster resolution, confidentiality, reduced expense, flexibility in procedures and solutions, and control over the process. The ADR proceeding also has the potential to preserve business relations among the parties because of its less adversarial nature and potential for a prompt resolution. The Company's objective is to become one of the leading providers of ADR services on a national basis. The Company intends to achieve this goal by employing the following strategies. Firstly, the Company intends to open offices in regions where it does not presently have an office. During the second half of the fiscal year ended June 30, 1997, the Company established an office in Wisconsin with an additional location in Illinois to cover the midwest region of the country. Secondly, management seeks and reviews opportunities to acquire companies with a market niche in desirable locations. Thirdly, the Company is pursuing exclusive agreements with the home offices of large corporations in order to obtain contracts on a national basis. Finally, the 3 Company intends to increase awareness of its services beyond the insurance market by creating and executing a large- scale advertising campaign. The Company believes that the domestic ADR industry is, other than a few national entities, generally fragmented into small ADR service providers. The Company further believes that the trend in the ADR industry is towards consolidation of providers who are capable of offering national and regional ADR programs. The Company's planned expansion will enable it to exploit this trend. In addition, the Company intends to increase its marketing of its ADR services to litigants in other types of disputes, including complex commercial issues, construction, employment and worker's compensation cases. The Company was formed on January 12, 1994 under the laws of the State of Delaware. On October 31, 1994 the Company acquired all of the outstanding common stock of National Arbitration & Mediation, Inc. ("NA&M"), a New York corporation, formed on February 6, 1992, which was owned by the Company's Chief Executive Officer and President, and the Company's Executive Vice President. NA&M began operations in March 1992 as a provider of ADR services. Services Offered Arbitration. The Company's arbitration procedure follows a format which is essentially similar to a non-jury trial in the public court system. This procedure is designed to grant the parties a forum in which to present their cases, while at the same time sparing the litigants the time delays and some of the cumbersome procedures commonly associated with public court trials. The Company's hearings are generally governed by its rules of procedure. The parties, however, may depart from these rules and proceed in the fashion they deem desirable for the resolution of the case. The parties select a panel member from the Company's list of hearing officers. The hearings are non-public, thereby providing a level of confidentiality not readily available in the public court system. Subject to the parties' agreement, the proceedings may include discovery, examination of non-party witnesses, the filing of post-hearing briefs and other matters that may arise in the conduct of non-jury trials. The arbitrations are usually one of the following: (i) a regular arbitration, in which the hearing officer has authority to issue a ruling and/or award a remedy without limitations; (ii) a "high/low" arbitration, where the parties may choose to set the parameters of the award by pre-selecting the high and low dollar limits that can be awarded by the hearing officer; and (iii) the so-called "baseball" arbitration, which typically involves the submission by each party of their last best figure and the reason why it should be accepted; the hearing officer's binding recommendation is restricted to either one figure or the other. These types of arbitration are not exclusive, and the hearing officers may fashion remedies in accordance with whatever parameters are agreed to by the parties. Generally arbitration decisions are binding in nature and, unless otherwise stipulated by the parties, are appealable in only limited circumstances in the public court system. The Company does not currently offer any type of appeal procedure. The Company's arbitration decisions are generally enforceable in the public court system by following prescribed filing procedures in the applicable local jurisdiction. Mediation (Settlement Conferencing). The mediation method used by the Company is settlement conferencing, in essence a non-binding process. The principal advantage of settlement 4 conferencing is that it provides an opportunity for parties to reach an early, amicable resolution without undue expense and time-consuming litigation. The voluntary process of settlement conference mediation can be an effective tool for a wide variety of disputes, including tort claims and commercial conflicts. Settlement conferences are attended by each party to the dispute and/or a representative of each party and a hearing officer selected by the parties from a list available in the applicable region. Each party may choose to submit a settlement conference memorandum setting forth a brief summary of facts, indicating, for example, why each party has or does not have liability and, if applicable, a statement of the party's damage. At the settlement conference, each party is given an opportunity to describe the facts of the case and explain its position. Thereafter, the hearing officer meets privately with each side on an alternating basis to evaluate their respective cases, and receives proposed concessions that each party might make, and potential settlement figures that each party may offer, with a view toward guiding the parties to the settlement of their dispute. Discussion concerning settlement figures and possible concessions and potential settlement figures are typically not discussed between a party and the hearing officer without the other party's express consent to disclosing its position. In many instances, the settlement conference procedure results in the resolution of all issues. Other ADR Services. In addition to mediations and arbitrations, the Company offers, among other services, advisory opinions and specialized dispute resolution programs depending on the parties' particular needs. The Company also offers Case Resolution Days which are events usually scheduled at an insurance company client's office in which the Company arranges for parties to hold high volume direct settlement meetings without the participation of a hearing officer. In the event that the individual meetings do not resolve the dispute, the Company provides a hearing officer to mediate the dispute if the parties wish to pursue settlement. On-Line Case Management Software Service. It is currently expected that during fiscal 1998 the Company will offer to its clients the ability to be "on-line" with the Company. This will enable clients to submit cases electronically and to review the status of their cases from their offices. This service will also allow them to integrate their arbitration calendar into their offices' case-management system. As of June 30, 1997, the Company maintains an e-mail address and offers analog and digital communications capabilities. By providing customized software to clients, clients will be able to prepare case submission files and send them, through a modem, either individually or in batches to the Company's system. The submissions are expected to be entered on a daily basis by the Company. Clients will also be able to utilize an in-house "Bulletin Board" type system to access updates in software, rosters and schedules of hearing officers, status of hearings and promotional materials. In addition, the Company presently maintains an Internet Website. The Company plans to enhance the Website to enable clients to review rosters and schedules of hearing officers and promotional material, and to submit cases directly. It is expected that this Internet service will be available during fiscal 1998. Video Conferencing. The Company has the ability to offer video conferencing capabilities to its clients which allow them to participate and observe hearings without leaving their offices and thereby reducing certain costs to the client associated with the ADR process. This capability allows the Company to provide services to a wider range of clients on a geographical basis. In addition, the video conferencing equipment, which can be purchased or leased directly from the Company, has applications beyond the ADR area for clients. 5 Marketing and Sales As of September 18, 1997, the Company employed 18 account representatives to market its ADR services. Account representatives solicit prospective clients through telemarketing efforts and in-person meetings. They also provide presentations, educational seminars relating to ADR services and periodic monitoring of a client's ADR activity. Account representatives are typically compensated based upon a draw against commissions earned which are based on total collected revenue from a representative's clients. In the New York office, account executives are grouped into sales teams, which are directly managed by supervisors who are also account executives. The supervisors in the New York office, as well as account executives in the regional offices, are supervised directly by a regional manager. Regional managers report to the Executive Vice President and the Chief Executive Officer. Several of the employment agreements with regional managers provide for additional compensation based on the profits of the manager's operation. With regard to the hiring and training of account executives, they are usually interviewed by each office's regional manager and then by the Executive Vice President or Chief Executive Officer. Account executives are trained by a supervisor, or the office's regional manager, over approximately a two-week period. This training period can vary depending on the overall abilities of each candidate, the level or lack of prior experience and their aptitude to assimilate the required marketing skills. The training includes the development of sales techniques and the introduction to customers of the Company. After this initial period, the new account executive's performance is closely monitored. In addition, staff meetings are generally held twice a week to review progress against goals and to enhance marketing skills. The majority of clients of the Company are insurance carriers and law firms. One insurance company customer represented approximately 14% and 15% of total revenues for the years ended June 30, 1997 and 1996, respectively. However, the Company works with more than 70 individual offices of the insurance company, which in total equal the aforementioned percentages of revenue. The next largest insurance company customer represented less than 3% and 4% of revenues for the years ended June 30, 1997 and 1996, respectively. The balance of the revenue base is distributed among approximately 1,950 and 1,800 clients, respectively, in fiscal 1997 and 1996. The Company, when appropriate, seeks membership contracts with its clients. For an annual fee, an exclusivity arrangement or a commitment to refer a minimum volume of cases, members will receive a discount on each case referred to the Company. As of September 18, 1997, the Company had in excess of 40 written contracts. Further, the Company is devoting its efforts to obtaining volume commitments from existing and new clients. Competition The ADR business is highly competitive, both on a national and regional level. Management believes that barriers to entry in the ADR business are relatively low, and new competitors can begin doing business relatively quickly. The basis of this belief is that the provision of ADR services only requires the consent of all parties to a dispute to submit their dispute to be resolved through a proposed ADR provider. There are two types of competitors, not-for-profit and for-profit entities. The Company believes the largest not-for-profit competitor is the American Arbitration Association which has significant market share in complex commercial 6 cases. The insurance industry has also continued its support for Arbitration Forums, a not-for-profit organization created to service primarily the insurance subrogation market. The Company believes that the domestic ADR industry is, other than a few national entities, generally fragmented into small ADR service providers. The Company believes that Judicial Arbitration Mediation Services, Inc./Endispute ("JAMS") is the largest for-profit ADR provider in the country. In New York State, the Company's competitors include, among others, Settlement Systems, Inc., Expedite NYC, JAMS, Resolute, Inc. and Island Arbitration and Mediation. In addition, several public court systems, including the federal and certain state courts in New York, the Company's major market, have instituted court coordinated programs. To the extent that the public courts reduce case backlogs and provide effective dispute resolution mechanisms, the Company's business opportunities in such markets may be significantly reduced. Increased competition could decrease the fees the Company is able to charge for its services, and limit the Company's ability to obtain experienced hearing officers, and thus could have a materially adverse effect on the Company's ability to be profitable in the future. In addition, the Company competes with other ADR providers to retain the services of qualified hearing officers. As compared to the majority of its competitors, the Company believes that it competes based primarily upon reputation, price, and the ability to manage scheduling of hearings effectively. The management of the Company believes it has certain advantages which enable it to better serve its clients. These advantages include (1) exclusive agreements with qualified hearing officers, who are generally former judges, (2) software that provides detailed case management reporting that can be customized to meet a client's needs, (3) account executives dedicated to specified clients, (4) the ability to monitor and control the scheduling of matters, and (5) videoconferencing capability which allows clients to participate or observe a proceeding without leaving their office. There can be no assurance, however, that these perceived advantages will enable the Company to compete successfully in the future. Government Regulation ADR services that are offered by private companies, such as the Company, are not presently subject to any form of local, state or federal regulation. ADR services that are offered by the public courts are subject to the rules set forth by each jurisdiction and the dictates of the individual judge assigned to preside over the dispute. Employees As of September 18, 1997, the Company employed 41 persons, including 2 part-time employees; of these, 3 were in executive positions, one of which devotes substantially all her attention to sales; 1 performs the duties of a hearing officer/regional manager; 23 were sales managers and sales account representatives and 14 were engaged in administrative and clerical activities. Hearing Officers As of September 18, 1997, the Company maintained relationships with over 900 hearing officers and has exclusive agreements with respect to ADR proceedings with approximately 40 of 7 them. These hearing officers accounted for approximately 57% of the number of cases handled by the Company for the year ended June 30, 1997. The balance of non-exclusive hearing officers make their services available to the Company on a case-by-case basis. With the exception of the exclusive hearing officers, the remainder of the Company's roster of hearing officers can provide their services to competing ADR providers. Compensation to the hearing officers is based on the number of proceedings conducted and the length of time of such proceedings. All active hearing officers are requested to execute confidentiality agreements regarding the Company and its clients. ITEM 2. DESCRIPTION OF PROPERTIES The Company currently maintains 6 leased facilities, all of which are located in office buildings. The Company leases 4,800 square feet of space at 1010 Northern Boulevard, Great Neck, New York for its corporate headquarters and for providing ADR services in the metropolitan New York area. The lease expires October 2000. The Company is contemplating leasing additional space in the same building if it becomes available during the 1998 fiscal year. The Company also leases: (i) 2,168 square feet of space, which lease expires February 2000, for its Philadelphia, Pennsylvania office; (ii) 174 square feet of space, which lease expires December 1997, for its Easton, Massachusetts office; (iii) 1,630 square feet of space, which lease expires January 1998, for its Greenwood, South Carolina office; (iv) 601 square feet of space, which lease expires March 1998, for its Hendersonville, Tennessee office; and (v) 1,262 square feet of space, which lease expires February 1998, for its Milwaukee, Wisconsin office. The Company believes this space is adequate for its reasonably anticipated future needs. The aggregate rental expense for all of the Company's offices was $190,356 during the year ended June 30, 1997. ITEM 3. LEGAL PROCEEDINGS There is no material litigation currently pending against the Company. ITEM 4. SUBMISSION OF MATERIALS TO A VOTE OF SECURITY HOLDERS None. 8 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS A. The Company's Units, consisting of one share of Common Stock and one redeemable Warrant, Common Stock and Warrants are quoted on the NASDAQ SmallCap Market under the trading symbols "NAMCU", "NAMC" and "NAMCW", respectively, and have been quoted since the Company commenced public trading on November 18, 1996. Prior to that date, there was no public market for the Company's Securities. The following table sets forth the range of high and low closing sales prices (based on transaction data as reported by the NASDAQ SmallCap Market) for each fiscal quarter during the periods indicated.
Units Common Stock Warrants High Low High Low High Low ------------------------------------------------------- Second quarter (11/18/96-12/31/96) $6.50 $4.50 $4.50 $3.50 $1.75 $1.00 Third quarter (01/01/97-03/31/97) 5.97 4.25 5.00 3.50 1.50 1.00 Fourth quarter (04/01/97-06/30/97) 4.97 3.75 4.25 3.00 1.38 0.75
On September 18, 1997 the closing bid price for the Units, Common Stock and Warrants, as reported by the NASDAQ SmallCap Market, were $4.125, $3.125 and $1.00, respectively. As of September 18, 1997 there were in excess of 300 holders of the Company's securities. The payment by the Company of dividends, if any, in the future rests within the discretion of its Board of Directors and will depend, among other things, upon the Company's earnings, capital requirements and financial condition, as well as other relevant factors. The Company paid a cash dividend to certain executives who were shareholders of NA&M, in connection with undistributed earnings relating to when NA&M was an S-Corporation. The Company also declared a 25% stock dividend on February 1, 1995. In connection with the initial public offering in November 1996, the Company effected a one for two reverse stock split on March 29, 1996 and a stock dividend of 14.436% per share. The Company does not contemplate or anticipate paying any dividends upon its Common Stock in the foreseeable future. B. In November 1996, the Company raised additional capital through an initial public offering of its Securities. The public offering consisted of 1,400,000 Units, each Unit consisting of one share of Common Stock and one redeemable Warrant. Of the total Units sold, 150,000 Units were offered by two executive officers of the Company. In addition, there was an overallotment option for 210,000 Units which was exercised by the underwriter, resulting in a total of 1,610,000 Units being sold, of which 1,460,000 Units were sold by the Company. Gross proceeds to the Company totaled $5,840,000. Offering expenses approximated $1,138,456 and consisted of the following: (a) underwriting discounts, non-accountable expense allowance and reimbursable expenses of $791,165 and (b) legal, accounting, printing and other fees incurred in connection with the initial public offering of $347,291. The net proceeds of $4,701,544 were utilized as follows: (a) $78,000 for the benefit of selling shareholders as the Company agreed to pay the underwriting costs associated with shares sold by two executive officers in connection with the initial public offering; (b) $48,000 as a consulting fee to the underwriter; (c) $444,537 to repay outstanding notes payable plus interest from a past private placement offering, and (d) approximately $400,000 relating to opening a new office in Wisconsin; commencement of an advertising program and for 9 working capital and general corporate purposes. The remaining funds of approximately $3,700,000 are invested in U.S. government securities, corporate preferred securities and a diversified portfolio of marketable equity securities. The above information updates Form SR filed by the Company in February 1997 pursuant to former Rule 463. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General The Company provides alternative dispute resolution ("ADR") services to insurance companies, law firms, large self-insured corporations and municipalities. To date, the Company has focused the majority of its marketing efforts on developing relationships, and expanding existing relationships, with insurance companies which the Company believes are some of the largest consumers of ADR services. The Company opened for business in March 1992 in New York and currently has offices in New York, Pennsylvania, Massachusetts, Tennessee, South Carolina and the Midwest. The Midwest region, with headquarters in Wisconsin, commenced operations in the third quarter of the 1997 fiscal year. The Company's objective is to become one of the leading providers of ADR services nationally. To accomplish this goal, the Company plans to open up new offices in regions where it does not presently have offices, which may include the acquisition of existing ADR companies. In addition, the Company intends to increase its marketing of its ADR services to litigants in other types of disputes, including complex commercial issues, construction, employment and worker's compensation cases. Future Trends Management believes that the ADR industry is, and will be, undergoing a consolidation of ADR service providers so as to better serve clients requiring national and regional ADR programs. The Company's objective is to expand its national presence to exploit this trend. In addition, ADR clients are beginning to seek volume discounts on the charges applied by the Company for services rendered. The Company believes that this trend may have an overall positive impact on the Company because the discounts are usually applied only when an ADR client makes a commitment to refer a minimum number of cases to the Company. As a result of the proposed expansion by opening new offices, as well as enhancing the status of present offices, the Company may incur net losses in the short-term future as a result of the investment of resources over the time it takes for offices to mature and become profitable, if ever. Significant start-up costs will be incurred in connection with opening and operating offices, including expenses such as leases, office equipment, furnishings, and salaries for management, sales and clerical personnel. In these new areas, organizations similar to and in competition with the Company may have been doing business for some time, and therefore will have competitive advantages over the Company. These advantages include contacts with potential consumers of the Company's services, such as law firms and insurance companies, and with qualified retired judges and lawyers who act as hearing officers. In addition, the account representatives who establish the new offices are very important to the success of such offices. While management of the Company believes that in the future, the Company may be competitive in some or all of the planned new markets, there is no assurance that any of the Company's new offices will ever 10 be profitable. For example, the Company opened up an office in the Minneapolis, Minnesota area in August 1994 and closed it in April 1995 due to its disappointing performance. Additionally, the Company plans to initiate an aggressive marketing campaign in the 1998 fiscal year. There is no assurance that this effort will result in a higher revenue base. Year ended June 30, 1997 Compared to Year ended June 30, 1996 Results of Operations Revenues. Revenues increased 7% to $3,377,062 for the year ended June 30, 1997 from $3,147,886 for the year ended June 30, 1996. Management attributes this growth in sales to a higher level of business with existing as well as new clients in all offices other than Pennsylvania. Excluding Pennsylvania, revenues grew by approximately 14% over the prior period for all other offices combined. Management believes that the Pennsylvania office will continue to experience a lower volume of cases heard during the 1998 fiscal year. The Company has focused its resources in re-staffing and rebuilding this location in an effort to reverse this trend. Cost of Services. Cost of services, direct costs incurred for hearing officers, increased 17% to $853,048 for the year ended June 30, 1997 from $727,613 for the year ended June 30, 1996. The higher volume of business serviced resulted in greater hearing officer fees. In addition, cost of services as a percentage of revenues increased slightly to 25% in the 1997 fiscal year from 23% in the prior period. The ratio of cost of services to revenues will fluctuate based on the number of hours per case, as well as the ability (or inability) of an office to take advantage of volume arrangements with hearing officers as such lowers the cost per case. Sales and Marketing. Sales and marketing costs decreased 4% to $1,412,348 for the year ended June 30, 1997 from $1,472,152 for the year ended June 30, 1996. Furthermore, sales and marketing costs as a percentage of revenues for the year ended June 30, 1997 decreased to 42% from 47% for the year ended June 30, 1996. In fiscal year 1996 and prior, all employees were considered to spend a majority of their time performing sales-related functions. As a result, this expense category includes all salary and related payroll and employee benefit costs as well as advertising and promotional expenses in fiscal 1996. In fiscal 1997, the Company expanded in size and was organizationally restructured to provide for future growth. Sales and marketing costs include amounts directly related to the production of sales; that is, salaries and commissions for sales executives, sales managers and account executives and applicable payroll taxes and employee benefits; advertising; promotions and travel and entertainment. Salaries and related expenses for individuals who do not spend a majority of their time involved in marketing the Company's services are included in general and administrative expenses in fiscal 1997. If sales and marketing costs had been classified in the same manner in fiscal 1996 as it was in fiscal 1997, this category of expense would have increased by approximately $380,000. Most of this increase (approximately $281,000) relates to salary and related items. Firstly, higher sales commissions were incurred based on the higher volume of business. Secondly, personnel were hired and upgraded to staff and support the Company's expansion plans. In particular, sales management was strengthened at the Company's headquarters in New York to better prepare the Company for higher revenue levels. Finally, the Midwest region, with personnel in Wisconsin and Illinois, opened during the third quarter of fiscal 1997. Additionally, during the later half of fiscal 1997, the Company embarked on an advertising campaign with the goal of creating an increased national presence through a variety of media. As a result, advertising costs increased by approximately $60,000. Marketing efforts at a higher spending level are planned for the 1998 fiscal year. There can be no assurance that such expenditures will produce higher revenues in the near future. 11 General and Administrative. General and administrative costs increased 138% to $1,761,994 for the year ended June 30, 1997 from $741,892 for the year ended June 30, 1996. Furthermore, general and administrative costs as a percentage of revenues for the year ended June 30, 1997 increased to 52% from 24% for the comparable prior period. As explained previously, in fiscal 1996, general and administrative costs do not include any salary or salary related expenses. However, in fiscal 1997, this category includes salaries of executives, accounting, data processing and administration/clerical and related payroll taxes and employee benefits, which were previously included in sales and marketing, as well as all other overhead costs. If general and administrative costs had been classified in the same manner in fiscal 1996 as it was in fiscal 1997, this category of expense would have increased by approximately $609,000. Of this increase, salary-related costs increased by approximately $219,000 as the Company upgraded and expanded personnel, particularly at its headquarters in New York. All corporate activities, including marketing, finance, data processing, billing and collections, purchasing, scheduling of hearings, etc., are centralized in New York. Management believes that this structure enhances the control environment as well as produces a more streamlined and efficient approach as the Company grows. In addition, a portion of the increase relates to higher rent expense (which increased by approximately $54,000). To support business opportunities throughout the country, larger office space was obtained in four locations and a new office was opened in Wisconsin. Higher costs with respect to professional fees, insurance, employee recruitment, stock market fees, depreciation, office supplies and stationery were due to the expansion of the Company and its status as a publicly traded entity. Such costs increased by approximately $298,000 in total. Other Income (Expense). Other income (expense) changed from a net expense of ($67,105) for the year ended June 30, 1996 to income of $12,771 for the year ended June 30, 1997. In fiscal 1997, other income was composed primarily of (i) investment income, generated from available proceeds received from the initial public offering, less (ii) interest expense from a past private placement financing and (iii) costs incurred for the benefit of selling shareholders. In connection with the initial public offering, the Company contributed warrants underlying units sold by two executive officers and also agreed to pay the underwriting costs associated with shares sold by them. With respect thereto, the Company expensed $115,500, of which $37,500 related to the contributed warrants, upon the consummation of the initial public offering in the second quarter of fiscal 1997. Other expenses in the prior fiscal year included a write-off of previously deferred offering costs of $61,127 associated with a public offering that was abandoned in October 1995 and interest expense of $32,000 relating to a past private placement financing. This debt was satisfied in full on November 20, 1996 with proceeds from the initial public offering. Provision for Income Taxes. The Company's tax expense for the year ended June 30, 1997 and 1996 was $0 and $3,525, respectively. There was no tax provision during the 1997 fiscal year due to losses incurred during the period. As of June 30, 1997, the Company had net operating loss carryforwards for Federal tax purposes of approximately $440,000. Net Income (Loss). For the year ended June 30, 1997, the Company had a net loss of ($637,557) as compared to net income of $135,599 for the year ended June 30, 1996. As discussed above, this change was primarily due to higher general and administrative expenditures incurred as an investment in the Company's infrastructure in anticipation of future growth. In addition, the current period was adversely affected by non-recurring charges incurred in connection with the initial public offering. 12 Year ended June 30, 1996 as Compared to Year ended June 30, 1995 Revenues. Revenues increased 41% to $3,147,886 for the year ended June 30, 1996 from $2,235,030 for the year ended June 30, 1995 due to expansion into new markets, increased business with existing clients and overall increased consumer acceptance of ADR services. Cost of Services. Cost of services increased 59% to $727,613 for the year ended June 30, 1996 from $458,661 for the year ended June 30, 1995. This increase was attributable to the Company's higher level of business from the expansion into new offices which resulted in additional hearing officers' fees. In addition, cost of services as a percentage of revenues increased slightly to 23% in the 1996 fiscal year from 21% in the prior comparable period. Sales and Marketing. Sales and marketing costs increased 51% to $1,472,152 for the year ended June 30, 1996 from $976,230 for the year ended June 30, 1995. Much of this increase was related to the Company's expansion into new offices, which included an increase in sales commissions and salaries of new hires. Sales and marketing costs as a percentage of revenues was 47% and 44%, respectively, during the years ended June 30, 1996 and 1995. General and Administrative. General and administrative costs increased 27% to $741,892 for the year ended June 30, 1996 from $584,920 for the year ended June 30, 1995. Such costs increased due to higher overhead associated with the Company's opening of new offices. Furthermore, general and administrative costs as a percentage of revenues for the year ended June 30, 1996 decreased to 24% from 26% for the prior comparable period. Other Expenses, net. Other expenses, net, increased by 239% to $67,105 for the year ended June 30, 1996 from $19,817 for the year ended June 30, 1995. This increase was primarily due to a write-off of previously deferred offering costs of $61,127 associated with a public offering that was abandoned in October 1995 and interest expense of $32,000 relating to a private placement financing. Provision for Income Taxes. The Company's tax expense for the year ended June 30, 1996 and 1995 was $3,525 and $10,379, respectively. Net Income. Net income for the year ended June 30, 1996 decreased 27% to $135,599 from $185,023 for the year ended June 30, 1995. The 1996 fiscal year was adversely affected by a write-off of charges incurred in connection with an abandoned initial public offering attempt in October 1995. Liquidity and Capital Resources At June 30, 1997, the Company had a working capital surplus of $3,853,430 as compared to a working capital deficit of $464,426 at June 30, 1996. This change in working capital was primarily due to the Company's completion of its initial public offering on November 18, 1996. Net cash used in operating activities was $535,152 for the year ended June 30, 1997 versus cash provided by operating activities of $263,390 in the prior year. The decline is attributable to the decrease in net income (loss) from income of $135,599 for the year ended June 30, 1996 to a loss of ($637,557) for the year ended June 30, 1997. Net cash used in investing activities was $3,725,439 for the year ended June 30, 1997 versus $127,949 for the year ended June 30, 1996. Additional investing activity occurred during the 1997 fiscal year when the net proceeds from the initial public offering were received. Such amount was invested in 13 U.S. government securities, corporate preferred securities, and a diversified portfolio of marketable equity securities. Net cash provided by financing activities was $4,404,603 for the year ended June 30, 1997 versus cash used in financing activities of $160,037 for the year ended June 30, 1996. The change primarily pertains to proceeds from the initial public offering. A portion of the proceeds were utilized to repay promissory notes in the aggregate amount of $400,000. The notes bore interest at a rate of 8% per annum, and were originally due June 30, 1996. Subsequently, the due dates of the notes were extended to December 31, 1996. On November 20, 1996, the notes were repaid in full. The Company believes that existing cash balances and cash generated from operations, based on the Company's current business plan, will be sufficient to meet the Company's liquidity needs through at least fiscal 1998. During fiscal year 1998, the Company expects to utilize these funds to increase its marketing efforts and to create an increased national presence through advertising in a variety of media. The Company also intends to upgrade and enhance its computer capabilities to better serve its clients. Funds may also be used to open new offices and/or to acquire ADR companies. ITEM 7. FINANCIAL STATEMENTS Information in response to this item is set forth in the Financial Statements, beginning on Page F-1 of this filing. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES. The Company filed Form 8-K on March 11, 1997 with respect to a change in accountants. 14 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Reports of Independent Certified Public Accountants F-2 - F-3 Financial Statements Consolidated Balance Sheets F-4 Consolidated Statements of Operations F-5 Consolidated Statements of Changes in Stockholders' Equity F-6 Consolidated Statements of Cash Flows F-7 Notes to Consolidated Financial Statements F-8 - F-22 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors and Stockholders NAM Corporation We have audited the accompanying consolidated balance sheet of NAM Corporation and Subsidiaries (the "Company") as of June 30, 1997, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the year 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 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of NAM Corporation and Subsidiaries as of June 30, 1997, and the consolidated results of their operations and their consolidated cash flows for the year then ended in conformity with generally accepted accounting principles. GRANT THORNTON LLP Melville, New York August 25, 1997 F-2 Independent Auditors' Report ---------------------------- The Board of Directors and Stockholders NAM Corporation: We have audited the accompanying consolidated balance sheet of NAM Corporation as of June 30, 1996 and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated 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 consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimate 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 NAM Corporation as of June 30, 1996 and the results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Jericho, New York September 18, 1996 F-3
NAM Corporation and Subsidiaries CONSOLIDATED BALANCE SHEETS June 30, ASSETS 1997 1996 ------------ ----------- CURRENT ASSETS Cash and cash equivalents $ 175,486 $ 31,474 Marketable securities 3,792,381 - Accounts receivable (net of allowance for doubtful accounts of $80,000 and $40,000, respectively) 408,260 455,956 Other receivables 34,490 5,873 Prepaid expenses 54,682 53,010 ---------- --------- Total current assets 4,465,299 546,313 FURNITURE AND EQUIPMENT - AT COST, less accumulated depreciation 201,113 216,507 ORGANIZATION COSTS (net of accumulated amortization of $21,885 and $13,293, respectively) 21,077 29,669 DEFERRED OFFERING COSTS - 112,001 OTHER ASSETS 39,756 34,503 ---------- --------- $4,727,245 $ 938,993 ========== ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 158,846 $ 239,261 Accrued liabilities 140,192 199,571 Accrued payroll and employee benefits 174,115 45,527 Deferred revenues 138,716 126,380 Notes payable - private placement - 400,000 ---------- --------- Total current liabilities 611,869 1,010,739 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY (DEFICIT) Preferred stock - $.001 par value; 5,000,000 shares authorized; none issued - - Common stock - $.001 par value; 15,000,000 shares authorized; 3,334,978 and 1,813,075 shares issued and outstanding in 1997 and 1996, respectively 3,335 1,813 Paid-in capital 4,772,569 28,739 Accumulated deficit (739,547) (101,990) Unrealized gain on marketable securities 79,224 - Unearned compensation (205) (308) ---------- --------- Total stockholders' equity (deficit) 4,115,376 (71,746) ---------- --------- $4,727,245 $ 938,993 ========== =========
The accompanying notes are an integral part of these statements. F-4 NAM Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS Year ended June 30,
1997 1996 ------------ ---------- Net revenues $3,377,062 $3,147,886 ---------- ---------- Operating costs and expenses Cost of services 853,048 727,613 Sales and marketing expenses 1,412,348 1,472,152 General and administrative expenses 1,761,994 741,892 ---------- ---------- 4,027,390 2,941,657 ---------- ---------- (Loss) income from operations (650,328) 206,229 Other income (expenses) Other income 140,809 26,022 Costs incurred for the benefit of selling shareholders (115,500) - Offering costs on transaction not consummated - (61,127) Interest expense (12,538) (32,000) ---------- ---------- 12,771 (67,105) ---------- ---------- (Loss) income before provision for income taxes (637,557) 139,124 Provision for income taxes - 3,525 ---------- ---------- NET (LOSS) INCOME $ (637,557) $ 135,599 ========== ========== Net (loss) income per common share $(.23) $.07 ==== === Weighted average common stock and common stock equivalents 2,762,348 1,947,504 ========== ==========
F-5 The accompanying notes are an integral part of these statements. NAM Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Years ended June 30, 1997 and 1996
Unearned Unrealized compensation- Total Common stock Additional gain on stock stockholders ------------------- paid-in Retained marketable bonus equity Shares (1) Amount capital deficit securities plan (deficit) ---------- ------ ------- -------- ----------- ---------- ---------- Balances at July 1, 1995 1,805,923 $ 3,156 $ 27,396 $(104,648) $(1,077) $ (75,173) Net income 135,599 135,599 Distributions to shareholders (132,941) (132,941) Earned portion of stock bonus plan 769 769 Reverse 1-for-2 stock split (1,578) 1,578 Shares issued pursuant to stock dividend 228 (228) Shares issued pursuant to restricted stock award 7,152 7 (7) --------- ------ ---------- --------- -------- ----------- Balances at June 30, 1996 1,813,075 1,813 28,739 (101,990) (308) (71,746) Net loss (637,557) (637,557) Shares issued pursuant to initial public offering 1,460,000 1,460 4,700,084 4,701,544 Shares issued pursuant to restricted stock award 61,903 62 (62) Unrealized gain on marketable securities $79,224 79,224 Compensation related to stock option plan and contributed warrants 43,808 43,808 Earned portion of stock bonus plan 103 103 --------- ------ ---------- --------- ------- -------- ----------- Balances at June 30, 1997 3,334,978 $3,335 $4,772,569 $(739,547) $79,224 $ (205) $4,115,376 ========= ===== ========= ========= ======= ======== ==========
(1) Share amounts have been restated to reflect the 1-for-2 stock split and 14.436% stock dividend in March 1996. The accompanying notes are an integral part of these statements. F-6 NAM Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended June 30,
1997 1996 ----------- ---------- Cash flows from operating activities Net (loss) income $ (637,557) $ 135,599 Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities Depreciation and amortization 58,653 49,744 Provision for bad debts 40,000 15,622 (Gains) on sales of marketable securities (7,123) -- Earned portion of stock bonus plan 103 769 Compensation related to stock option plan and contributed warrants 43,808 -- Changes in operating assets and liabilities Decrease (increase) in accounts receivable 7,696 (110,428) (Increase) decrease in other receivables (28,617) 11,630 (Increase) in prepaid expenses (1,672) (44,162) (Increase) decrease in other assets (5,252) 23,680 (Decrease) increase in accounts payable and accrued liabilities (146,115) 171,588 Increase in accrued payroll and employee benefits 128,588 9,979 Increase (decrease) in deferred revenues 12,336 (631) ------------ --------- Net cash (used in) provided by operating activities (535,152) 263,390 ------------ --------- Cash flows from investing activities Purchases of marketable securities (4,086,959) -- Proceeds from maturities of marketable securities 325,000 -- Proceeds from sales of marketable securities 62,373 -- Increase in payable for securities purchased 15,263 -- Purchases of furniture and equipment (41,116) (124,535) Increase in organization costs -- (3,414) ------------ --------- Net cash used in investing activities (3,725,439) (127,949) ------------ --------- Cash flows from financing activities Issuance of common stock, net of issuance costs 4,701,544 -- Repayment of notes payable (400,000) -- Distributions to shareholders (8,942) (123,999) Decrease (increase) in deferred offering costs 112,001 (36,038) ------------ --------- Net cash provided by (used in) financing activities 4,404,603 (160,037) ------------ --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 144,012 (24,596) Cash and cash equivalents at beginning of year 31,474 56,070 ------------ --------- Cash and cash equivalents at end of year $ 175,486 $ 31,474 ============ ========== Supplemental disclosures of cash flow information: Noncash financing activities Dividend distribution declared but unpaid $ -- $ 8,942 ============= ==========
The accompanying notes are an integral part of these statements. F-7 NAM Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1997 and 1996 NOTE 1 - ORGANIZATION AND NATURE OF BUSINESS NAM Corporation ("NAM") provides a broad range of Alternative Dispute Resolution ("ADR") services, including arbitration and mediation, in the United States. NAM incorporated on January 12, 1994 and began operations on February 15, 1994. On October 31, 1994, National Arbitration & Mediation, Inc. ("NA&M"), which was owned by NAM's Chief Executive Officer and Executive Vice President, was acquired by and became a wholly-owned subsidiary of NAM. The transaction was accounted for as a transfer of assets between companies under common control, with the assets and liabilities of NA&M combined with those of NAM at their historical carrying values. NA&M also provided a broad range of ADR services, including arbitrations and mediations. NA&M began operations in March 1992. On November 18, 1996, NAM completed an Initial Public Offering ("IPO") of its securities, which resulted in the sale of 1,400,000 units, each unit consisting of one share of common stock and one redeemable warrant. Of this total, 150,000 shares of common stock were not newly issued; rather, they were sold by two executive officers of NAM. On December 3, 1996, an additional 210,000 units were sold upon the exercise of an overallotment option by the underwriter. Units were sold at a price of $4.00 per unit. Effective March 29, 1996, NAM authorized a 1-for-2 reverse stock split and a 14.436% stock dividend. All share amounts included in the accompanying consolidated financial statements have been restated to reflect these transactions. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A summary of the significant accounting and reporting policies applied on a consistent basis which conform with generally accepted accounting principles follow: a. Basis of Presentation The accompanying consolidated financial statements of NAM Corporation and Subsidiaries include the accounts of its wholly-owned subsidiaries, NA&M, National Video Conferencing, Inc., a Delaware corporation formed in April 1995 and Michael Marketing, Inc., a Delaware corporation F-8 NAM Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) June 30, 1997 and 1996 NOTE 2 (continued) formed in November 1991 (collectively referred to herein as the "Company"). The Company operates in only one business segment, ADR. All significant intercompany transactions and balances were eliminated in consolidation. b. 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 revenues and expenses during the reporting period. Actual results may differ from those estimates. Estimates are used when accounting for the allowance for uncollectible accounts receivable, depreciation, taxes and contingencies, among others. c. Revenue Recognition The Company principally derives its revenues from fees charged for arbitration and mediation services. Each party to a proceeding is charged an administrative fee, a portion of which is nonrefundable when each party agrees to utilize the Company's services. The Company recognizes revenue when the arbitration or mediation occurs. Fees received prior to the arbitration or mediation are reflected as deferred income. d. Cash and Cash Equivalents Cash and cash equivalents consist of cash on hand, money market funds and short-term notes with a maturity at date of purchase of three months or less. e. Marketable Securities Investments classified as marketable securities include fixed maturities (bonds and redeemable preferred stocks) and equity securities (common and nonredeemable preferred stocks) which are reported at their fair values. Unrealized gains or losses on these securities are reported as a separate component of stockholders' equity, net of related tax effects. The Company categorizes F-9 NAM Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) June 30, 1997 and 1996 NOTE 2 (continued) all fixed maturity and equity securities as available-for-sale in order to provide the Company flexibility to respond to various factors, including changes in market conditions and tax planning considerations. Investment income, consisting of interest and dividends, is recognized when earned. Realized gains and losses on sales, maturities or liquidation of investments are determined on a specific identification basis. The amortization of premiums and accretion of discounts for fixed maturity securities are computed on a straight-line basis. Fair values of investments are based on quoted market prices or on dealer quotes. f. Furniture and Equipment Furniture and equipment are stated at cost, less accumulated depreciation. Depreciation is computed using the straight-line method to allocate the cost of those assets over their expected useful lives which range from five to seven years. g. Organizational Costs Organizational costs arose from NAM's organization in 1994. Organizational costs are amortized over five years. h. Income Taxes The Company follows the asset and liability method of accounting for income taxes by applying statutory tax rates in effect at the balance sheet date to differences among the book and tax bases of assets and liabilities. The resulting deferred tax liabilities or assets are adjusted to reflect changes in tax laws or rates by means of charges or credits to income tax expense. A valuation allowance is recognized to the extent a portion or all of a deferred tax asset may not be realizable. i. Offering Costs Costs incurred in connection with the IPO in November 1996, consisting of professional fees directly associated with the offering, were charged to additional paid-in capital during the year ended June 30, 1997. A prior attempt at an initial public offering was abandoned in October 1995, at which time expenditures amounting to $61,127 were expensed to fiscal 1996 operations. F-10 NAM Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) June 30, 1997 and 1996 NOTE 2 (continued) j. Net (Loss) Income Per Share For the year ended June 30, 1996, net income per share was computed based on the weighted average number of shares of common stock and common stock equivalents outstanding during such fiscal year, which were retroactively adjusted to give recognition to the change in the capital structure as a result of contingently issuable shares, stock dividends and the reverse stock split. Net loss per share for the year ended June 30, 1997 is based on the weighted average number of shares of common stock outstanding during the period. Common stock equivalents were excluded in fiscal 1997 as the effect of their conversion is antidilutive. k. Accounting Pronouncements Not Yet Adopted In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 128, "Earnings per Share," which is effective for financial statements for both interim and annual periods ending after December 15, 1997. Early adoption of the new standard is not permitted. The new standard eliminates primary and fully diluted earnings per share and requires presentation of basic and diluted earnings per share together with disclosure of how the per share amounts were computed. The adoption of this new standard is not expected to have a material impact on the calculation and disclosure of earnings per share in the financial statements. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). This statement is effective for years beginning after December 15, 1997. SFAS No. 130 establishes standards to report and display comprehensive income and its components in a full set of general-purpose financial statements. Management does not expect SFAS No. 130 to have a material impact on the Company's financial statements. F-11 NAM Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) June 30, 1997 and 1996 NOTE 3 - MARKETABLE SECURITIES Marketable securities are carried at estimated fair value. A summary of investments in marketable securities and a reconciliation of amortized cost to the estimated fair value follow:
Gross Gross Estimated Amortized unrealized unrealized fair cost gains losses value ---------- ---------- ----------- ---------- June 30, 1997 Fixed maturities U.S. Treasury securities $2,088,713 $ 97 $ (1,225) $2,087,585 Corporate preferred securities 550,000 500 - 550,500 ---------- ---------- --------- ---------- 2,638,713 597 (1,225) 2,638,085 Equity securities 1,074,444 89,657 (9,805) 1,154,296 ---------- ---------- --------- ---------- Total marketable securities $3,713,157 $90,254 $(11,030) $3,792,381 ========== ======= ======== ==========
The amortized cost and estimated fair value of investments in fixed maturities classified as securities available-for-sale at June 30, 1997 are shown below by contractual maturity. Actual maturities may differ from contractual maturities because borrowers have the right to call obligations without call penalties. Estimated Amortized fair cost value ---------- ---------- Due in one year or less $2,088,713 $2,087,585 Due after ten years 550,000 550,500 ---------- ---------- $2,638,713 $2,638,085 ========== ========== F-12 NAM Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) June 30, 1997 and 1996 NOTE 3 (continued) Proceeds on sales of securities were $62,373. Gains of $7,123 and losses of $0 were realized on these sales. Net unrealized gains, net of tax effects, on marketable securities were $79,224 at June 30, 1997. During fiscal 1997, no income taxes were provided on the unrealized gains due to the Company's net operating loss. Investment income, consisting primarily of interest, dividends and gains (losses) on sales of securities less investment expenses, was $136,572 and $0 for the years ended June 30, 1997 and 1996, respectively. Such amounts are included in other income in the accompanying consolidated financial statements. NOTE 4 - FURNITURE AND EQUIPMENT Furniture and equipment consist of the following: June 30, --------------------------------- 1997 1996 --------- -------- Furniture $ 159,447 $140,543 Equipment 191,093 168,881 --------- -------- 350,540 309,424 Less accumulated depreciation (149,427) (92,917) --------- -------- $ 201,113 $216,507 ========= ======== Depreciation expense for the years ended June 30, 1997 and 1996 was $56,510 and $42,846, respectively. F-13 NAM Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) June 30, 1997 and 1996 NOTE 5 - NOTES PAYABLE - PRIVATE PLACEMENT In the second half of 1994, the Company offered units, consisting of a total of $400,000 in 8% promissory notes and 143,023 shares of restricted common stock, for total proceeds of $402,000 in a private placement. The promissory notes, recorded at par value, were payable on June 30, 1996 and required annual payments of accrued interest. This financing was offered in minimum units of $5,025 denominations and multiples thereof, with each person and/or firm participating therein purchasing a $5,000, 8% promissory note and 1,787 restricted shares of NAM's common stock with a par value of $0.001 per share. The maturity of these notes was extended and repaid along with interest due of $44,537 with proceeds from the November 1996 IPO. NOTE 6 - INCOME TAXES The provision for income taxes for the year ended June 30, 1996 consists solely of state and local taxes. Temporary differences which give rise to deferred taxes at June 30, 1997 are summarized as follows: Deferred tax assets Net operating loss and other carryforwards $ 139,000 Provision for bad debts 32,000 Deferred compensation 26,000 Deferred rent 6,000 --------- 203,000 Deferred tax liabilities Depreciation 17,000 --------- Net deferred tax asset before valuation allowance 186,000 Valuation allowance (186,000) --------- Net deferred tax asset $ - ========= At June 30, 1996, the Company had temporary differences relating to bad debts and depreciation which offset and resulted in no deferred taxes. F-14 NAM Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) June 30, 1997 and 1996 NOTE 6 (continued) The Company has recorded a full valuation allowance to reflect the estimated amount of deferred tax assets which may not be realized. The Company's effective income tax rate differs from the statutory Federal income tax rate as a result of the following: 1997 1996 --------- ------- Provision (benefit) at statutory rate $(216,769) $ 36,675 State and local taxes, net of Federal benefit -- 2,327 Nondeductible expenses 30,589 -- Other -- 1,013 Increase (decrease) in the valuation allowance 186,180 (36,490) --------- -------- $ -- $ 3,525 ========= ======== The provision for Federal income taxes has been determined on the basis of a consolidated tax return. At June 30, 1997, the Company had a net operating loss carryforward for Federal income tax reporting purposes amounting to approximately $440,000, expiring in 2012. No Federal taxes were paid in the years ended June 30, 1997 and 1996. NOTE 7 - STOCKHOLDERS' EQUITY a. Initial Public Offering In November 1996, the Company raised additional capital through an IPO. The offering consisted of 1,400,000 units, each unit consisting of one share of common stock and one redeemable warrant. Of the total units sold, 150,000 units were offered by two executive officers of the Company. Each redeemable warrant entitles the holder to purchase one share of common stock at $6.00 per unit, subject to adjustment, at any time from issuance until November 13, 2001. Such warrants are redeemable by the Company, with the prior written consent of the underwriter, at a redemption price of $.05 commencing November 13, 1997 provided that the average closing bid price of the common stock equals or exceeds $9.00, subject to adjustment, F-15 NAM Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) June 30, 1997 and 1996 NOTE 7 (continued) for a specified period of time. In addition, there was an overallotment option for 210,000 units which was exercised by the underwriter, resulting in a total of 1,610,000 units being sold, of which 1,460,000 units were sold by the Company. Gross proceeds to the Company totaled $5,840,000 and offering expenses aggregated $1,138,456, resulting in net proceeds of $4,701,544. In connection with the IPO, the Company contributed warrants underlying units sold by two executive officers and agreed to pay the underwriting costs associated with shares sold by them. With respect thereto, the Company expensed $115,500 during the year ended June 30, 1997, of which $37,500 related to the contributed warrants. b. Stock Award Plan In June 1994, the Company adopted an Executive Stock Bonus Plan. Under the plan, the Company granted shares to three employees pursuant to their employment agreements. All of the shares vest after providing two to five years of service to the Company from the grant date. The estimated market value per share at date of grant was $0.01. These amounts were recorded as unearned compensation and are shown as a separate component of stockholders' equity. The Company recognized compensation expense of $103 and $769 during the years ended June 30, 1997 and 1996, respectively, representing the amortization of unearned compensation over the vesting period. During the year ended June 30, 1997, 60,193 shares were issued upon vesting. As of June 30, 1997, 36,744 awards are outstanding, all of which will vest in June 1999 provided such employees are employed by the Company at that time. In addition, in September 1994, the Company granted the manager of a regional office restricted common stock for the purchase price of $0.17 per share, pursuant to his employment agreement. Of the total shares granted, 7,152 vested and were issued in June 1996, while the remaining 35,761 shares will vest in June 1999 if the manager is still employed by the Company. In December 1994, the Company entered into an agreement with a hearing officer whereby the hearing officer had a contractual right to receive 6,500 shares of restricted common stock or a payment in cash, not to exceed $26,000, on March 1, 1997. The agreement was reflected as deferred compensation and amortized over the related term. The hearing officer elected to receive a cash settlement in lieu of the shares during the year ended June 30, 1997. F-16 NAM Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) June 30, 1997 and 1996 NOTE 7 (continued) c. Stock Option Plan In May 1996, the Company adopted an Incentive and Nonqualified Stock Option Plan (the "Plan") for employees, officers, directors, consultants and advisors of the Company, pursuant to which the Company may grant options to purchase up to 750,000 shares of the Company's common stock. The Plan is administered by the board of directors, which has the authority to designate the number of shares to be covered by each award and the vesting schedule of such award, among other terms. The option period during which an option may be exercised shall not exceed ten years from the date of grant and will be subject to such other terms and conditions of the Plan. Unless the board of directors provides otherwise, option awards terminate when a participant's employment or services end, except that a participant may exercise an option to the extent that it was exercisable on the date of termination for a period of time thereafter. The Plan will terminate automatically on April 1, 2006. Commencing June 30, 1997, directors who are not officers of the Company receive annually, on the last trading day of June, stock options for 1,000 shares at an exercise price equal to the fair market value of the stock on the date of grant. Such options vest immediately upon grant. In addition to the stock options granted under the Plan, a hearing officer of the Company has a contractual right under his agreement to receive options to purchase 10,000 shares of common stock provided services are being rendered to the Company through November 18, 1998 (the obligation and vesting date). Price per share will be the closing bid price on the obligation date. The Company's stock option awards granted to employees, directors and consultants as of and for the year ended June 30, 1997 are summarized as follows: Outstanding at beginning of year - Awards granted 155,500 Awards exercised - Awards canceled - ------- Outstanding at end of year 155,500 ======= F-17 NAM Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) June 30, 1997 and 1996 NOTE 7 (continued) Stock option awards are granted at prices equal to the closing bid price on the date of grant. Options granted during the year ended June 30, 1997 ranged in price from $3.00 to $4.38 per share with a weighted-average exercise price of $3.18 per share. As of June 30, 1997, 16,000 options were vested, all with an exercise price of $3.00 per share. The remaining options vest over a five-year period based on the terms of the specific grant. The exercise period for awards granted during 1997 is either 6, 8 or 10 years from the grant date. The weighted-average remaining contractual life of such awards as of June 30, 1997 was 7.34 years. The weighted-average fair value of options granted during the year was $1.66 per option. As of June 30, 1997, 594,500 shares were available for granting of options under the Plan. Effective in fiscal 1997, the Company adopted Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS No. 123"). SFAS No. 123 allows for a choice of the method of accounting used for stock-based compensation. Entities may elect the "intrinsic value" method based on APB Opinion No. 25, "Accounting for Stock Issued to Employees,"("APB No. 25") or the new "fair value" method contained in SFAS No. 123. The Company has elected to continue to account for stock-based compensation under the guidelines of APB No. 25. Accordingly, no compensation expense was recognized concerning options granted to key employees and to members of the board of directors, as such options were granted to board members in their capacity as directors. Compensation expense of $6,308 was recognized in fiscal 1997 for options granted to consultants. If the Company had elected to recognize compensation expense based upon the fair value at the grant date for options granted to key employees and to members of the board of directors consistent with the methodology prescribed by SFAS No. 123, the Company's net loss and net loss per share would be as follows: 1997 ---------- Net loss As reported $(637,557) Pro forma (679,965) Net loss per common share As reported $(.23) Pro forma (.25) F-18 NAM Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) June 30, 1997 and 1996 NOTE 7 (continued) Pro forma disclosure of net income and net income per share for fiscal 1996 is not applicable, as all options were granted in fiscal 1997 in connection with the IPO. These pro forma amounts may not be representative of future disclosures because they do not take into effect pro forma compensation expense related to awards made before 1996. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions: risk-free interest rates ranging from 6.04% to 6.71%; no anticipated dividends; expected terms ranging from 3 to 6 years; and expected stock price volatility of 60.17%. d. Dividends NA&M was taxed under the provisions of Subchapter S of the Internal Revenue Code. NA&M's Subchapter S Corporation status was terminated when NA&M was acquired by and became a wholly-owned subsidiary of NAM, a C Corporation. The Company paid the balance of its undistributed Subchapter S earnings to its shareholders prior to the November 1996 IPO. At June 30, 1996, the balance of the distribution aggregating $8,942 is reflected as dividends payable and was included in accrued liabilities. NOTE 8 - TRANSACTIONS WITH RELATED PARTIES Certain members of the board of directors also perform services for the benefit of the Company. Such services include those of public relations, legal and other professional, and hearings. The related expenditures for these services for the year ended June 30, 1997 were $166,932, of which $66,776 was charged to additional paid-in capital as it was incurred in connection with the November 1996 IPO. F-19 NAM Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) June 30, 1997 and 1996 NOTE 9 - COMMITMENTS AND CONTINGENCIES a. Leases The Company has lease agreements for office space in New York, Pennsylvania, Massachusetts, Tennessee, South Carolina and Wisconsin. Rent expense for the office space amounted to $190,356 and $136,515 for the years ended June 30, 1997 and 1996, respectively. The minimum lease payments under these noncancelable office leases as of June 30, 1997 are as follows: 1998 $174,000 1999 143,000 2000 117,000 2001 39,000 -------- $473,000 ======== Rental expense for equipment amounted to $14,406 and $12,003 for the years ended June 30, 1997 and 1996, respectively. The minimum lease payments under these noncancelable equipment leases as of June 30, 1997 are as follows: 1998 $ 7,700 1999 2,200 2000 700 ------- $10,600 ======= b. Employment/Consulting Agreements The Company expects to enter into an employment agreement with their Chief Executive Officer retroactive to July 1, 1997. F-20 NAM Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) June 30, 1997 and 1996 NOTE 9 (continued) The Company has also entered into employment agreements with two officers expiring through December 31, 1999. Such agreements contain renewal options after the initial term. The Company has also entered into employment agreements with certain of its regional office managers. Certain of these agreements provide for additional compensation based on the profits of the manager's operation. In July 1996, the Company entered into a financial public relations consulting agreement with two individuals who are founders of the Company, current stockholders and former directors. The agreement has a four-year term and provides for annual payments of $48,000 payable in equal monthly payments of $4,000 through November 2000. The related expense for the year ended June 30, 1997 was $28,000. NOTE 10 - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS At June 30, 1997 and 1996, the Company's financial instruments included cash and cash equivalents, marketable securities, receivables, accounts payable and notes payable. The fair values of cash and cash equivalents, receivables, accounts payable and notes payable approximated carrying values because of the short-term nature of these instruments. The estimated fair values of marketable securities were determined based on broker quotes or quoted market prices. NOTE 11 - CREDIT CONCENTRATIONS Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, marketable securities and accounts receivable. The Company maintains its cash which consists primarily of demand deposits and an insured money market fund with one financial institution. Such balances generally do not exceed the Federally insured limits. Additionally, the Company maintains its cash equivalents and all other investments with one financial institution. However, a majority of the funds consist of short-term government securities with the remainder invested in investment grade corporate redeemable preferred securities and a diversified portfolio of marketable equity securities. Other than F-21 NAM Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) June 30, 1997 and 1996 NOTE 11 (continued) investments issued or guaranteed by the U.S. government, the Company's only investment in a single entity in excess of 10% of stockholders' equity at June 30, 1997 was redeemable preferred securities issued by Allstate with a fair value of $500,000. The Company primarily sells its services to insurance companies and law firms. One insurance company customer represented approximately 14% and 15% of total revenues for the years ended June 30, 1997 and 1996, respectively. However, the Company works with more than 70 individual offices of the insurance company, which in total equal the aforementioned percentages of revenue. The next largest insurance company customer represented less than 3% and 4% of revenues for the years ended June 30, 1997 and 1996, respectively. The balance of the revenue base is distributed among approximately 1,950 and 1,800 clients, respectively, in fiscal 1997 and 1996. As a result, management does not believe trade receivables represent a significant concentration of credit risk due to the diversity of customers. The Company monitors exposure to credit losses and maintains allowances for anticipated losses considered necessary under the circumstances. F-22 PART III ITEM 9. (Directors, Executive Officers, Promoters and Control Persons, Compliance with Section 16(a) of the Exchange Act); ITEM 10. (Executive Compensation); ITEM 11 (Security Ownership of Certain Beneficial Owners and Management); and ITEM 12 (Certain Relationships and Related Transactions) will be incorporated in the Company's Proxy Statement to be filed within 120 days of June 30, 1997, and are incorporated herein by reference. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit Number Description of Document - ------ ----------------------- 3.1 Certificate of Incorporation, as amended (1) 3.2 By-Laws of the Company (1) 10.1 1996 Stock Option Plan, amended and restated** 10.2 Employment Agreement between Company and Roy Israel, as amended(1) 10.3 Employment Agreement between Company and Cynthia Sanders(1) 10.4 Employment Agreement between Company and Daniel Jansen (1) 10.5 Employment Agreement between Company and Patricia Giuliani-Rheaume** 10.6 Lease Agreement for Great Neck, New York facility (1) 11.1 Computation of Net (Loss) Income per Common Share ** 21.1 List of Subsidiaries (1) 27 Financial Data Schedule **
- ----------------- (1) Incorporated herein in its entirety by reference to the Company's Registration Statement on Form SB-2, Registration No. 333-9493, as filed with the Securities and Exchange Commission on August 2, 1996. ** Filed herewith. Reports on Form 8-K: None during the fourth quarter. 15 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
NAM CORPORATION Date: September 26, 1997 By: /s/ Roy Israel -------------- Roy Israel, Chairman of the Board and CEO
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Date: September 26, 1997 By: /s/ Roy Israel --------------- Roy Israel, Chairman of the Board and CEO Date: September 26, 1997 By: /s/ Patricia Giuliani-Rheaume ----------------------------- Patricia Giuliani-Rheaume, Vice President, Chief Financial Officer and Treasurer Date: September 26, 1997 By: /s/ Cynthia Sanders ------------------- Cynthia Sanders, Executive Vice President and Director Date: September 26, 1997 By: /s/ Daniel P. Jansen -------------------- Daniel P. Jansen, National Accounts Manager and Director Date: September 26, 1997 By: /s/ Michael I. Thaler --------------------- Michael I. Thaler, Director Date: September 26, 1997 By: /s/ Stephen H. Acunto --------------------- Stephen H. Acunto, Director
16 EX-10 2 EXHIBIT 10.1 NAM CORPORATION AMENDED AND RESTATED 1996 INCENTIVE AND NONQUALIFIED STOCK OPTION PLAN --------------------------------------- 1. Purpose The purpose of this Stock Option Plan (the "Plan") is to encourage and enable key employees (which term, as used herein, shall include officers), and directors, of NAM Corporation or a parent (if any) or subsidiary thereof (collectively, unless the context otherwise requires, the "Corporation"), consultants, and advisors to the Corporation, and other persons or entities providing goods or services to the Corporation to acquire a proprietary interest in the Corporation through the ownership of common stock of the Corporation. As used herein, the term "parent" or "subsidiary" shall mean any present or future corporation which is or would be a "parent corporation" or "subsidiary corporation" of the Corporation as the term is defined in section 424 of the Internal Revenue Code of 1986, as amended (the "Code") (determined as if the Corporation were the employer corporation). Such directors, consultants, advisors, and other persons or entities providing goods or services to the Corporation and entitled to receive options hereunder are hereinafter collectively referred to as the "Associates," and the relationship of the Associates to the Corporation is hereinafter referred to as "association with" the Corporation. An employee or Associate to whom an option has been granted is referred to as a "Grantee". Such ownership will provide such Grantees with a more direct stake in the future welfare of the Corporation and encourage them to remain employed by or associated with the Corporation. It is also expected that the Plan will encourage qualified persons to seek and accept employment or association with the Corporation. 2. Administration (a) The Plan shall be administered by the Board of Directors (the "Board"). (b) As it applies to the administration of the Plan, a majority of the members of the Board shall constitute a quorum, and the action of a majority of the members of the Board present at a meeting at which a quorum is present, as well as actions taken pursuant to the unanimous written consent of all of the members of the Board without holding a meeting, shall be deemed to be actions of the Board. All actions of the Board and all interpretations and decisions made by the Board with respect to any question arising under the Plan shall be final and conclusive and shall be binding upon the Corporation and all other interested parties. (c) Subject to the terms and conditions of the Plan, the Board shall be responsible for the overall management and administration of the Plan and shall have such authority as shall be necessary or appropriate in order to carry out its responsibilities, including, without limitation, the authority to (i) interpret and construe the Plan and to determine the terms of all options granted pursuant to the Plan, including, but not limited to, the persons to whom, and the time or times at which grants shall be made, the number of options to be included in the grants, the number of options which shall be treated as incentive stock options (in the case of options granted to employees) as described in section 422 of the Code, the number of options which do not qualify as incentive stock options ("nonqualified options"), and the terms and conditions thereof; (ii) to adopt rules and regulations and to prescribe forms for the operation and administration of the Plan; and (iii) to take any other action not inconsistent with the provisions of the Plan that it may deem necessary or appropriate. 3. Eligibility and Participation (a) Key employees and Associates are eligible to receive options. Each option shall be granted, and the number of shares and the vesting schedule of such shares subject thereto shall be determined by the Board. (b) Directors who are not officers of the Corporation shall receive, on an annual basis on the last trading day of each June starting June 1997, stock options for 1,000 shares of the Corporation's Common Stock, at an exercise price equal to the fair market value of the stock on the date of grant, and such options shall vest immediately upon grant. The fair market value shall be determined in accordance with Section 8 hereof. 4. Shares Subject to the Plan (a) Options shall be evidenced by written agreements which shall, among other things (i) designate the option as either an incentive stock option or a nonqualified stock option, (ii) specify the number of shares covered by the option; (iii) specify the exercise price, determined in accordance with paragraph 7 hereof, for the shares subject to the option; (iv) specify the option period determined in accordance with paragraph 6 hereof; (v) set forth specifically or incorporate by reference the applicable provisions of the Plan; and (vi) contain such other terms and conditions consistent with the Plan as the Board may, in its discretion, prescribe. (b) The stock to be offered and delivered under the Plan, pursuant to the exercise of an option, shall be shares of the Corporation's authorized common stock and may be unissued shares or reacquired shares, as the Board may from time to time determine. Subject to -2- adjustment as provided in paragraph 13 hereof, the aggregate number of shares to be delivered under the Plan shall not exceed seven hundred and fifty thousand (750,000) shares. If an option expires or terminates for any reason during the term of the Plan prior to the exercise thereof in full, the shares subject to but not delivered under such option shall be available for options thereafter granted. 5. Incentive Stock options (a) An option designated by the Board as an "incentive stock option" is intended to qualify as an "incentive stock option" within the meaning of section 422 of the Code. An incentive stock option shall be granted only to an employee of the Corporation. (b) No incentive stock option shall provide any person with a right to purchase shares to the extent that such right first becomes exercisable during a prescribed calendar year and the sum of (i) the fair market value (determined as of the date of grant) of the shares subject to such incentive stock option which first become available for purchase during such calendar year, plus (ii) the fair market value (determined as of the date of grant) of all shares subject to incentive stock options previously granted to such person under all plans of the Corporation first become available for purchase during such calendar year exceeds $100,000. (c) Without prior written notice to the Board, a Grantee may not dispose of shares acquired pursuant to the exercise of an incentive stock option until after the later of (i) the second anniversary of the date on which the incentive stock option was granted, or (ii) the first anniversary of the date on which the shares were acquired; provided, however, that a transfer to a trustee, receiver, or other fiduciary in any insolvency proceeding, as described in section 422(c)(3) of the Code, shall not be deemed to be such a disposition. The optionee shall make appropriate arrangements with the Corporation for any taxes which the Corporation is obligated to collect in connection with any disposition of shares acquired pursuant to the exercise of an incentive stock option, including any Federal, state or local withholding taxes. (d) Should Section 422 of the Code be amended during the term of the Plan, the Board may modify the Plan consistently with such amendment. 6. Term of Option Period The term during which options may be granted under the Plan shall expire on April 1, 2006 and the option period during which each option may be exercised shall, subject to the provisions of paragraph 12 hereof, be during such period, expiring not later than the tenth anniversary (the fifth anniversary in the case of incentive stock options granted to a person who owns (within the meaning of section 424(d) of the Code) more than 10 percent of the total -3- combined voting power of all classes of stock of the Corporation at the time such option is granted) of the date the option is granted, as may be determined by the Board. 7. Option Price The price at which shares may be purchased upon exercise of a particular option shall be such price as may be fixed by the Board but in no event less than the minimum required in order to comply with any applicable law, rule or regulation and, in the case of incentive stock options, shall not be less than 100 percent, or in the case of incentive stock options granted to an optionee who is a 10 percent stockholder (within the meaning of paragraph 6 hereof), shall not be less than 110 percent, of the fair market value (as defined in paragraph 8) of such shares on the date such option is granted. 8. Stock as Form of Exercise Payment At the discretion of the Board, a Grantee who owns shares of the Corporation's common stock may elect to use such shares, with the value thereof to be determined as the fair market value of such shares on the day prior to the date of exercise of the option, to pay all or part of the option price required under the Plan. As used herein, fair market value shall be deemed to be the closing price on such day of the Corporation's common stock if the Corporation's common stock is then traded on a national securities exchange or the closing bid price on such day of the Corporation's common stock, if such stock is traded on the NASDAQ National Market System or Small-Cap Market System or, if not so traded, the average of the closing bid and asked prices thereof on such day. 9. Exercise of Options (a) Each option granted shall be exercisable in whole or in part at any time, or from time to time, during the option period as the Board may provide in the terms of such option; provided that the election to exercise an option shall be made in accordance with applicable federal and state laws and regulations. (b) No option may at any time be exercised with respect to a fractional share. (c) No shares shall be delivered pursuant to the exercise of any option, in whole or in part, until qualified for delivery under such securities laws and regulations as may be deemed by the Board to be applicable thereto, until such shares are listed on each securities exchange on which the Corporation's common stock may then be listed, until, in the case of the exercise of an option, payment in full of the option price is received by the Corporation in cash or stock as provided in paragraph 8 and until payment in cash of any applicable withholding taxes is received by the Corporation. Unless prior to the exercise of the option the shares of the -4- Corporation's common stock issuable upon such exercise have been registered with the Securities and Exchange Commission pursuant to the Securities Act of 1933, the notice of exercise shall be accompanied by a representation or agreement of the individual exercising the option to the Corporation to the effect that such shares are being acquired for investment and not with a view to the resale or distribution thereof or such other documentation as may be required by the Corporation unless in the opinion of counsel to the Corporation such representation, agreement, or documentation is not necessary to comply with said Act. No holder of an option, or such holder's legal representative, legatee, or distributee shall be or be deemed to be a holder of any shares subject to such option unless and until a certificate or certificates therefor is issued in his name. 10. Acceleration of Vesting (a) An option shall automatically be vested and immediately exercisable in full upon the occurrence of any of the following events: (i) Any person within the meaning of Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, other than the Corporation, has become the beneficial owner, within the meaning of Rule 13d-3 under such Act, of 30 percent or more of the combined voting power of the Corporation's then outstanding voting securities, unless such ownership by such person has been approved by the Board immediately prior to the acquisition of such securities by such person; (ii) The first day on which shares of the Corporation's common stock are purchased pursuant to a tender offer or exchange offer, unless such offer is made by the corporation or unless such officer has been approved or not opposed by the Board; (iii) The stockholders of the Corporation have approved an agreement to merge or consolidate with or into another corporation (and the Corporation is not the survivor of such merger or consolidation) or an agreement to sell or otherwise dispose of all or substantially all of the Corporation's assets (including a plan of liquidation), unless the Board has resolved that options shall not automatically vest; or (iv) During any period of two consecutive years, individuals who at the beginning of such period constitute the Board of the Corporation cease for any reason to constitute at least a majority thereof, unless the election or the nomination for the election by the Corporation's stockholders of each new director was approved by a vote of at least a majority of the directors then still in office who were directors at the beginning of the period. -5- (b) Other than upon the occurrence of any of the events described in paragraph 10(a), the Board shall have the authority at any time or from time to time to accelerate the vesting of any individual option and to permit any stock option not theretofore exercisable to become immediately exercisable. 11. Transfer of Options Options granted under the Plan may not be transferred except by will or the laws of descent and distribution and, during the lifetime of the Grantee to whom granted, may be exercised only by such or by such Grantee's guardian or legal representative. 12. Termination of Employment (a) Except as specifically provided in this paragraph 12, if the Grantee's employment or association with the Corporation shall terminate for any reason before the Option has vested in full, then the unvested portion of the Option shall automatically terminate on the date of termination of employment or association and all rights and interests of the Grantee in and to such unvested portion shall thereupon terminate. (b) After the date on which an incentive stock option vests, if the Grantee's employment by the Corporation is terminated for any reason, the incentive stock option shall be exercisable for the lesser of (i) three (3) months from the date of such termination of employment or (ii) the balance of such incentive stock option's term; provided, however, that in the event that the termination is as a result of the death or disability (within the meaning of section 22(e)(3) of the Code) of the Grantee, the incentive stock options held by such Grantee which were otherwise exercisable on the date of his termination of employment shall expire unless exercised by such Grantee, or, in the case of the death of a Grantee, by his heirs, legatees, or personal representatives, within a period of twelve (12) months after the date of termination of employment. In no event, however, shall any incentive stock option be exercisable after ten years from the date it was granted. Nothing in the Plan or in any option shall confer upon any Grantee the right to continue in the employ of the Corporation or interfere in any way with the right of the Corporation to terminate the employment of a Grantee at any time. The Board's determination that a Grantee's employment has terminated and the date thereof shall be final and conclusive on all persons affected thereby. (c) The Board may, if it determines that to do so would be in the Corporation's best interests, provide in a specific case or cases for the exercise of options which would otherwise terminate upon termination of employment with the Corporation for any reason, upon such terms and conditions as the Board determines to be appropriate. -6- (d) In the case of a Grantee on an approved leave of absence, the Board may, if it determines that to do so would be in the best interests of the Corporation, provide in a specific case for continuation of options during such leave of absence, such continuation to be on such terms and conditions as the Board determines to be appropriate. Leaves of absence for such period and purposes conforming to the personnel policy of the Corporation as may be approved by the Board shall not be deemed terminations or interruptions of employment. 13. Adjustments Upon Changes in Capitalization (a) If the Corporation's outstanding common stock is hereafter changed by reason of reorganization, merger, consolidation, recapitalization, reclassification, stock split-up, combination, or exchange of shares or the like, or dividends payable in shares of the Corporation's common stock, an appropriate adjustment shall be made by the Board in the aggregate number of shares available under the Plan and in the number of shares and price per share subject to outstanding options. If the Corporation shall be reorganized, consolidated, or merged with another corporation, or if all or substantially all of the assets of the Corporation shall be sold or exchanged, the holder of an option shall, after the occurrence of such a corporate event, be entitled to receive upon the exercise of his option the same number and kind of shares of stock or the same amount of property, cash, or securities as he would have been entitled to receive upon the happening of any such corporate event as if he had exercised such option and had been, immediately prior to such event, the holder of the number of shares covered by such option. All adjustments made pursuant to this paragraph to the terms or conditions of an incentive stock option shall be subject to the requirements of section 424 of the Code. (b) Any adjustment in the number of shares shall apply proportionately to only the unexercised portion of any option granted hereunder. If fractions of a share would result from any such adjustment, the adjustment shall be revised to the next higher whole number of shares. 14. Termination, Modification, and Amendment (a) The Plan shall terminate on April 1, 2006, which is 10 years from the earlier of the date of its adoption by the Board or the date on which the Plan is approved by the stockholders of the Corporation and no option shall be granted after termination of the Plan. (b) The Plan may from time to time be terminated, modified, or amended by the affirmative vote of the holders of a majority of the outstanding shares of the Corporation entitled to vote thereon. -7- (c) The Board may at any time terminate the Plan or from time to time make such modifications or amendments of the Plan as it may deem advisable including, without limitation, modifications to reflect changes in applicable law; provided, however, that the Board of Directors shall not (i) modify or amend the Plan in any way that would disqualify any incentive stock option issued pursuant to the Plan as an incentive stock option as defined in section 422 of the Code or (ii) without approval by the affirmative vote of the holders of a majority of the outstanding shares of the Corporation entitled to vote thereon, increase (except as provided by paragraph 14) the maximum number of shares as to which options may be granted under the Plan. (d) No termination, modification, or amendment of the Plan, may, without the consent of the Grantee, adversely affect the rights conferred by such option. 15. Effective Date The Plan became effective on April 1, 1996 upon the adoption by the Board subject to the approval by the affirmative vote of the holders of a majority of the outstanding shares of the Corporation which occurred on May 29, 1996. All options granted prior to the date of such stockholder approval shall be subject to such approval. -8- EX-10 3 EXHIBIT 10.5 AGREEMENT THIS AGREEMENT (the "Agreement") is being made as of this 16th day of January, 1997, between NAM Corporation, a Delaware corporation, with offices at 1010 Northern Boulevard, Suite 336, Great Neck, New York 11021 (the "Company"), and Patricia Giuliani-Rheaume, an individual residing at 58 Lindron Avenue, Smithtown, New York 11787 (the "Employee"). W I T N E S S E T H : WHEREAS, the Employee has expertise in providing the services sought by the Company; and WHEREAS, the Company desires to employ the Employee during the term of this Agreement, and Employee is willing to be employed subject to the terms and conditions contained in this Agreement. NOW, THEREFORE, in consideration of the mutual premises and agreements contained herein, and intending to be legally bound hereby, the parties agree as follows: 1. Engagement and Duties. During the term of this Agreement, the Company shall employ Employee and Employee agrees to be employed by the Company as Vice President, Treasurer and Chief Financial Officer and to devote her full time and efforts in performing the services requested by the Company. The Employee shall at all times serve at the direction of the Chief Executive Officer. 2. Term. This Agreement shall commence on February 3, 1997 and shall continue until December 31, 1999 (the "Initial Term"). This Agreement shall automatically renew for an additional one (1) year (the "First Renewal Term") period unless the Company or the Employee gives notice of termination at least forty-five (45) days prior to the end of the Initial Term. Thereafter, this Agreement shall automatically renew for additional one (1) year periods (the "Successive Renewal Term") unless the Company or Employee gives notice of termination at least forty-five (45) days prior to the end of the First Renewal Term or any Successive Renewal Term thereafter. 3. Compensation. As compensation for her services hereunder, the Company shall pay Employee a base salary of $116,000 per annum ("Base Salary") which shall be payable in equal bi-weekly installments. In addition, Employee shall receive from the Company the following: (a) Employee shall be entitled to receive an annual bonus at the discretion of the Chief Executive Officer which will be paid in accordance with the policies of the Company; (b) The Base Salary shall be increased each year of only the Initial Term by a minimum of 5% beginning in January 1998. Thereafter, all increases to the Base Salary will be at the discretion of the Board of Directors. (c) Employee shall receive a signing bonus of $5,000 which shall be paid as part of the first payment of salary received by the Employee. (d) Employee shall receive $400 a month toward the lease and operation of an automobile. -2- (e) Upon execution of the Agreement, the Employee shall be granted options to purchase 40,000 shares of Common Stock (the "Options") with an exercise price equal to the closing bid price on the date of this Agreement as reported by the NASDAQ Small Cap Market. The Options shall vest as follows: (i) 1/3 on December 31, 1997, (ii) 1/3 on December 31, 1998, and (iii) 1/3 on December 31, 1999, as long as the Employee is employed by the Company on each date pursuant to this Agreement. If the Employee is not employed by the Company on such dates, then the Employee will have no rights or interests to the non-vested portions of the Options. The Options shall be for 6 years from the date hereof and shall be subject to the terms and conditions of the Company's 1996 Stock Option Plan and memorialized in a stock option certificate to be issued by the Company. Employee shall also be eligible to receive additional options under the Plan at the discretion of the Board of Directors. 4. Benefits/Vacation. Employee shall be entitled to participate in all benefit programs offered by the Company subject to the terms and conditions of such programs. In addition, Employee shall receive a life insurance policy of $250,000 and shall not contribute toward her full family health insurance coverage. The Employee shall also be eligible to take 10 days of paid vacation time per year beginning June 1, 1997 in accordance with Company's policy. 5. Expenses. Employee shall be entitled to reimbursement of reasonable expenses incurred on behalf of the Company. At the end of each month, Employee shall submit an itemized expense report with each expense documented by appropriate receipts. -3- Reimbursement of an expense shall be at the sole discretion of the Company and Employee shall receive reimbursement in accordance with Company policy. 6. Employee's Representations. Employee hereby represents and warrants that she has full power and authority to enter into this contract and that she has no obligation, contractual or otherwise, (i) to provide services to any entity or person besides the Company; or (ii) that would conflict with her obligations to the Company under this Agreement. 7. Inability to Work/Death. (a) If Employee is mentally or physically unable to perform his duties under this Agreement for a period of ninety (90) days then the Company may terminate this Agreement upon ten (10) days notice and the Company shall be liable to Employee only for the amount of Base Salary owed through the date of termination as set forth in the notice. (b) If Employee dies during the term of this Agreement, this Agreement shall terminate on the date of her death and the Company shall be liable to Employee only for the amount of Base Salary owed through such date. 8. Termination. (a) Notwithstanding anything herein contained, if on or after the date hereof and prior to the end of the term of this Agreement, Employee is terminated "For Cause" (as defined below) then the Company shall have the right to give notice of termination of Employee's services hereunder as of a date to be specified in such notice, and this Agreement shall terminate on the date so specified. Termination "For Cause" shall mean Employee shall: (i) be convicted of a felony crime, (ii) commit any act or omit to take any action in bad faith and to the -4- detriment of the Company, (iii) commit an act of moral turpitude, (iv) commit an act of fraud against the Company, or (v) materially breach any term of this Agreement and fail to correct such breach within five (5) days after commission thereof. If Employee is terminated pursuant to this subsection then the Company shall be liable to Employee only for the amount of Base Salary owed through the date of termination as set forth in the notice. (b) Notwithstanding anything herein contained, the Employee may be terminated "Without Cause" upon notice from the Company. If Employee is terminated "Without Cause" during the first year of this Agreement, Employee shall receive as severance a payment equal to three months of the Base Salary in effect at the time of termination which shall be paid in equal bi-weekly installments over the three month period following the date of termination as set forth in the notice. If Employee is terminated "Without Cause" after the first year, Employee shall receive as severance a payment equal to six months of the Base Salary in effect at the time of termination which shall be paid in equal bi-weekly installments over the six month period following the date of termination as set forth in the notice. 9. Confidentiality. In order to induce the Company to enter into this Agreement, Employee hereby agrees that, except with the written consent of the Company, Employee shall keep confidential and not divulge to any person that is not affiliated with the Company, during the term of this Agreement or any time thereafter, any of the Company's confidential information and business secrets, including, without limitation, confidential information and business secrets relating to such matters as the Company's finances and operations, the materials, processes, and procedures used in the Company's operations, the names of the Company's clients and their requirements, and the names of the Company's suppliers. All papers, books, -5- and records of every description, including, without limitation, handbooks, manuals, client lists, computer software, programs, modules, or source codes, as well as all reproductions thereof, relating to the business and affairs of the Company, its clients or suppliers, whether or not prepared by Employee, shall be the sole and exclusive property of the Company. Employee shall surrender all tangible evidence of such information to the Company at the termination of this Agreement or at any time during the term of this Agreement upon request by the Company. 10. Non-Compete. In consideration of the compensation to be received by Employee from the Company, Employee shall not: (a) during the period Employee is employed with the Company, engage in, or otherwise directly or indirectly be employed by, or act as a consultant or lender to, or be a director, officer, employee, owner, member or partner of, any business or organization that is or shall then be competing with the Company; and (b) for a period of one (1) year after the termination of this Agreement, directly or indirectly, (i) market or provide any competitive services to, or solicit any business from, any clients of the Company; or (ii) solicit, contact, or employ or offer to employ any person who is employed by the Company at the time that Employee ceases being employed by the Company or any person hired by the Company after such time. If any restriction contained in this section shall be deemed invalid, illegal, or unenforceable by reason of the extent, duration, or geographical scope thereof, or otherwise, then the court making such determination shall have the right to reduce such extent, duration, geographical scope or other provision hereof to the fullest extent allowed by law, and in its reduced form such restriction shall then be enforceable in the manner contemplated hereby. -6- 11. Arbitration. The parties agree that in the event of any dispute or controversy arising out of or in connection with this Agreement, or any alleged breach thereof, (a "Dispute"), the parties shall arbitrate the Dispute before three arbitrators with the arbitration to be held in New York City under the rules promulgated by National Arbitration and Mediation. The Company and the Employee shall each choose 1 arbitrator and then the 2 arbitrators chosen shall jointly choose the 3rd arbitrator. The parties shall have 10 business days from receipt of a demand for arbitration in which to choose an arbitrator. If a party fails to choose an arbitrator within such time period then the arbitrator chosen by the non-defaulting party shall choose an arbitrator and the arbitration shall proceed before only 2 arbitrators. Nothing in this Agreement shall prevent the Company or the Employee from seeking appropriate injunctive relief in aid of arbitration to enforce any provision of this Agreement from a federal or state court located in New York, and the parties irrevocably and unconditionally consent to the exclusive jurisdiction of such courts in New York solely for any such injunctive action. The decision of the arbitrators will be final and binding upon the parties, and the judgment of a court of competent jurisdiction may be entered thereon. Fees of the arbitrator and the cost of arbitration shall be borne as determined by the arbitrators. 12. Modification. This Agreement sets forth the entire understanding of the parties with respect to the subject matter hereof, supersedes all existing agreements between them concerning such subject matter, and may be modified only by a written instrument duly executed by each party. -7- 13. Notices. All notices, requests, demands, and other communications hereunder must be in writing and shall be deemed to have been duly given if delivered by hand, mailed within the continental United States by first class, certified mail, return receipt requested, postage and registry fees prepaid, or sent by Federal Express or any other nationally recognized overnight courier, or sent by telecopy or facsimile transmission (with receipt confirmed), to the applicable party and addressed to the addresses set forth in the preamble. Any notice or other communication given by certified mail shall be deemed given at the time of certification thereof, except for a notice changing a party's address which shall be deemed given at the time of receipt thereof. Any notice or other communication given by overnight courier shall be deemed given one day after delivery to such courier. Any notice or other communication sent by telecopy or facsimile transmission shall be deemed given at the time of confirmation of receipt. 14. Waiver. Any waiver by either party of a breach of any provision of this Agreement shall not operate as or be construed to be a waiver of any other breach of such provision or of any breach of any other provision of this Agreement. The failure of a party to insist upon strict adherence to any term of this Agreement on one or more occasions shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. Any waiver must be in writing. 15. Merger. In the event of a future disposition of the properties and business of the Company, substantially as an entirety, by merger, consolidation, sale of assets, sale of stock, or otherwise, then the Company may elect to assign this Agreement and all of its rights and obligations hereunder to the acquiring or surviving corporation. -8- 16. Binding Effect. Employee's rights and obligations under this Agreement shall not be transferable by assignment or otherwise, such rights shall not be subject to encumbrance or the claims of Employee's creditors, and any attempt to do any of the foregoing shall be void. The provisions of this Agreement shall be binding upon and inure to the benefit of Employee and his heirs and personal representatives, and shall be binding upon and inure to the benefit of the Company and its successors and those who are its assigns. 17. Headings. The headings in this Agreement are solely for the convenience of reference and shall be given no effect in the construction or interpretation of this Agreement. 18. Miscellaneous. (a) This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. (b) It shall be governed by, and construed in accordance with, the laws of the State of New York, without giving effect to the rules governing conflicts of laws. (c) Employee irrevocably consents to the jurisdiction of the courts of the State of New York and of all federal courts located in such state in connection with any action or proceeding arising out of or relating to this Agreement or the breach thereof. In any such action or proceeding, Employee waives personal service of any summons, complaint, or other process and agrees that service thereof may be made in accordance with Section 14 hereof. -9- IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first written above. NAM CORPORATION /s/ Patricia Giuliani-Rheaume By:/s/ Roy Israel - ----------------------------- --------------------- Patricia Giuliani-Rheaume Name: Roy Israel Title: CEO -10- EX-11.1 4 COMPUTATION OF NET INCOME PER COMMON SHARE NAM CORPORATION Exhibit 11.1 STATEMENT RE: COMPUTATION OF NET (LOSS) INCOME PER COMMON SHARE Year Ended June 30 1997 1996 ---- ---- Net (Loss) Income (637,557) 135,599 Weighted average common shares outstanding (1) 2,762,348 1,806,531 Common stock equivalents due to contingently issuable shares (1)(2) -- 140,973 Total weighted average common shares and equivalents outstanding (1) 2,762,348 1,947,504 Earnings per common and common share equivalents (0.23) 0.07 Total weighted average common shares and equivalents outstanding (1) 2,762,348 1,947,504 Additional dilutive shares -- -- Total shares for fully dilutive earnings per share (1) 2,762,348 1,947,504 Fully diluted earnings per common and common share equivalents (0.23) 0.07 (1) Share amounts have been restated to reflect the 1 for 2 reverse stock split and 14.436% stock dividend in March 1996. (2) There were 72,505 contingently issuable shares for the year ended June 30, 1997. However, they are not common stock equivalents for the above computation as they would be anti-dilutive. E-1 EX-27 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET, CONSOLIDATED STATEMENT OF OPERATIONS AND CONSOLIDATED STATEMENT OF CASH FLOWS INCLUDED IN THE COMPANY'S FORM 10-KSB FOR THE YEAR ENDING JUNE 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS JUN-30-1997 JUN-30-1997 175 3,792 488 80 0 4,465 350 149 4,727 612 0 0 0 3 4,112 4,727 3,377 3,377 853 4,027 128 0 12 (638) 0 (638) 0 0 0 (638) (0.23) (0.23)
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