U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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
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(Name of small business issuer as specified in its charter)
Delaware 23-2753988
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(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
1010 NORTHERN BOULEVARD, SUITE 336
GREAT NECK, NEW YORK 10021
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(Address of Principal Executive Offices)
(516) 829-4343
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(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
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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__
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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
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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
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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
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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.
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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
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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.
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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