SECURITIES EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Nine Months Ended September 30, 1996 Commission File Number 0-3296
ETHIKA CORPORATION
(Formerly Dixie National Corporation)
(Exact name of registrant as specified in its charter)
MISSISSIPPI 64-0440887
(State of other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
107 THE EXECUTIVE CENTER
HILTON HEAD ISLAND, SOUTH CAROLINA 29928
(Address of Principal Executive Office)
Registrant's telephone number including area code: (803) 785-7850
NONE
Former name, former address, and former fiscal year, if changed since last
report.
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 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 [ ]
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK AS OF THE LATEST PRACTICABLE DATE.
CLASS OUTSTANDING AT NOVEMBER 15, 1996
COMMON STOCK, $1.00 PAR VALUE 13,824,273
<PAGE>
ETHIKA CORPORATION
INDEX
PAGE
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 1996 and
December 31, 1995.........................................3
Consolidated Income Statement for the Three
and Nine Months ended September 30, 1996 and 1995.........4
Consolidated Statements of Cash Flows for the Nine
Months ended September 30, 1996 and 1995..................5
Notes to Consolidated Financial Statements................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................8
PART II: OTHER INFORMATION
Item 1. Legal Proceedings.........................................9
Item 4. Submission of Matters to a Vote of Security Holders.......9
Item 6. Exhibits and Reports on Form 8-K..........................9
SIGNATURES..................................................................10
2
<PAGE>
ETHIKA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------ ------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $2,375,393 $1,377,869
Accounts receivable - miscellaneous 118,988 14,027
Federal income tax receivable 302,000 302,000
Leases receivable - current portion 102,342 98,097
Investment in marketable securities 0 2,227,904
Inventory 20,969 0
----------- -----------
Total Current Assets 2,919,692 4,019,897
Plant, Property, and Equipment
Plant, property, and equipment (at cost) 1,445,386 1,225,445
Accumulated depreciation (884,987) (814,510)
----------- -----------
Total Plant, Property, and Equipment (net) 560,399 410,935
Non-Current Assets
Leases receivable - non-current portion (note 5) 305,152 373,175
Investment in TRS (note 3) 0 137,946
Goodwill Net - (note 3 & 4) 2,901,046 61,970
Option - TRS (note 3) 0 100,000
----------- -----------
Total Non-current Assets 3,206,198 673,091
----------- -----------
Total Assets $6,686,289 $5,103,923
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $454,905 $42,578
Notes payable 893 41,667
Mortgage note payable - current portion 113,345 107,862
----------- -----------
Total Current Liabilities 569,143 192,107
Non-current Liabilities
Mortgage note payable - non-current portion 234,689 320,973
Deferred taxes 131,483 127,483
----------- -----------
Total Non-Current Liabilities 366,172 448,456
----------- -----------
Total Liabilities 935,315 640,563
----------- -----------
Stockholders' Equity
Common stock 13,825,385 10,598,773
Discount on common stock (1,831,584) (996,222)
Treasury stock (1,604) (1,112)
Retained earnings (deficit) (6,241,223) (5,138,079)
----------- -----------
Total Stockholders' Equity 5,750,974 4,463,360
----------- -----------
Total Liabilities and Stockholders' Equity $6,686,289 $5,103,923
=========== ===========
See Accompanying Notes to Consolidated Financial Statements
</TABLE>
3
<PAGE>
ETHIKA CORPORATION AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENT AND CHANGES IN RETAINED EARNINGS (DEFICIT)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30,1996 AND 1995 (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
<S> <C> <C> <C> <C>
1996 1995 1996 1995
------------ ------------ ------------ ------------
(NOTE 2) (NOTE 2)
------------ ------------
REVENUES
Rental income $ 45,000 $ 138,775
Software sales 164,364 202,816
------------ ------------
Total Revenue 209,364 341,591
EXPENSES
Wages, benefits, and related costs 274,687 601,134
Materials 64,665 81,990
Depreciation 10,735 29,035
Amortization of intangibles 149,308 288,448
Interest expense 9,143 $ 97,752 28,564 $ 391,212
General and administrative expenses 398,712 306,671 942,244 658,039
------------ ------------ ------------ ------------
Total Operating Expenses 907,250 404,423 1,971,415 1,049,251
------------ ------------ ------------ ------------
OPERATING INCOME (LOSS) (697,886) (404,423) (1,629,824) (1,049,251)
NON-OPERATING INCOME (LOSS)
Interest income - investments 16,414 10,930 72,170 74,487
Lease income - Fry Guy, Inc. (note 5) 13,757 54,000 47,368 54,000
TRS loss (note 3) 0 (265,643)
Gain on disposal of marketable securities 1,625 0 672,785 0
------------ ------------ ------------ ------------
Total Non-operating Income (loss) 31,796 64,930 526,680 128,487
------------ ------------ ------------ ------------
Income (loss) from continuing operations (666,090) (339,493) (1,103,144) (920,764)
before income taxes
Income taxes
Income (loss) from continuing operations (666,090) (339,493) (1,103,144) (920,764)
Income (loss) from operation of discontinued (211,151) (1,047,874)
subsidiary (note 2)
Estimated (loss) on disposal of Dixie Life)
(note 2) 0 (355,296) 0 (4,032,296)
------------ ------------ ------------ ------------
Net income (loss) (666,090) (905,940) (1,103,144) (6,000,934)
Retained earnings (deficit) at beginning
of period (5,575,133) (3,383,501) (5,138,079) 1,711,493
------------ ------------ ------------ ------------
Retained earnings (deficit) at end of
period ($6,241,223) ($4,289,441) ($6,241,223) ($4,289,441)
============ ============ ============ ============
Earnings per share:
Income (loss) from continuing operations ($.048) ($.032) ($.088) ($.088)
============ ============ ============ ============
Income (loss) from discontinued operations 0 ($.054) 0 ($.484)
============ ============ ============ ============
Net income (loss) ($.048) ($.086) ($.088) ($.572)
============ ============ ============ ============
See Accompanying Notes to Consolidated
Financial Statements
</TABLE>
4
<PAGE>
ETHIKA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1996 1995
------ ------
<S> <C> <C>
Cash Flows from Operating Activities
Net income (loss) from continuing operations ($1,103,144) ($920,764)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 29,035 78,694
Amortization 288,448
Increase (decrease) in accounts payable (35,326) 37,092
(Increase) decrease in lease and accounts receivable (64,385)
(Increase) decrease in inventory 119 0
------------ ------------
Total adjustments to net income (loss) 217,891 115,786
------------ ------------
Net cash provided by operating activities (885,253) (804,978)
Cash flows from investing activities:
Proceeds from sale of marketable securities 2,227,904
Decrease in equity investments (253,507)
Increase in Fry Guy, Inc. leases 64,500 (531,567)
Increase in accounts receivable loan to TRS
(Increase) decrease in fixed assets (34,545) (49,645)
------------ ------------
Net cash provided (used) by investing activities 2,004,352 (581,212)
Cash flows from financing activities:
Payments on debts (80,801) (74,793)
Decrease in notes payable (40,774) 50,000
------------ ------------
Net cash provided (used) by investing activities (121,575) (24,793)
------------ ------------
Net cash provided (used) by discontinued operations 0 920,291
------------ ------------
Net increase (decrease) in cash and cash equivalents 997,524 (490,692)
Cash and cash equivalents - beginning of period 1,377,869 5,319,456
------------ ------------
Cash and cash equivalents - end of period $2,375,393 $4,828,764
============ ============
</TABLE>
5
<PAGE>
ETHIKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 1996
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Ethika
Corporation ("Corporation") have been prepared in accordance with generally
accepted accounting principles for interim financial information and with
instructions to Form 10-Q and Article 10 of Regulations S-X. Accordingly, they
do not include all of the detail and disclosures required by generally
accepted accounting principles for complete financial statements. Operating
results for the nine months ended September 30, 1996 are not necessarily
indicative of the results that may be expected for the year ending December
31, 1996. More detailed information is contained in the Notes to Consolidated
Financial Statements included in the Corporation's Form 10-K Annual Report for
the year ended December 31, 1995.
All adjustments, which in the opinion of Management are necessary for a fair
presentation of such financial statements, are included and consist only of
normal recurring adjustments.
NOTE 2 - DISCONTINUED OPERATIONS - DIXIE NATIONAL LIFE INSURANCE COMPANY
On October 2, 1995 the Corporation completed the sale of Dixie National Life
Insurance Company ("Dixie Life"), which was 99.3% owned by the Corporation to
Standard Life Insurance Company of Indiana. Dixie Life represented virtually
all of the Corporation's assets and operations. Accounting Principles Board
Opinion No. 30 (APB 30) required reporting the operations of discontinued
operations as a single net amount in the statement of operations. Beginning on
January 1, 1996, the Corporation started reporting its insurance operations as
discontinued operations and accordingly has restated its September 30, 1995
and December 31, 1995 financial statements as herein presented to reflect this
change.
NOTE 3 - ACQUISITION OF TEXT RETRIEVAL SYSTEMS, INC. ("TRS")
On April 2, 1996 the Corporation exercised its option and completed the 100%
acquisition of TRS, a privately-held corporation based in Ponte Vedra Beach,
Florida. In October 1995 the Corporation acquired the option with a 35%
initial ownership interest in TRS. Under the terms of the TRS agreement, the
Corporation issued 100,000 shares of its common stock to the prior owners and
granted TRS a $750,000 line of credit for working capital purposes. To
complete the acquisition of TRS, the Corporation issued 2,500,000 additional
shares of its common stock. The 2,500,000 additional shares of its common
stock having a $1 per share par value had a market value of $.7965 per share
at the date of acquisition resulting in recording a discount on the
Corporation's common stock of $508,750. The final purchase price to be paid
for TRS and numbers of shares to
6
<PAGE>
be issued will be determined based upon certain performance criteria to be
measured for the twelve months ending June 30, 1997.
TRS publishes electronic reference libraries that link related data sources
for convenient access by personal computers. The electronic libraries, often
containing thousands of pages, are connected by hypertext cross-reference
links. This permits users to access massive documents while avoiding
time-consuming manual research. One of the latest TRS products is an
employer's compliance library, HR/Comply, which links all federal employment
laws and related regulations to a compendium of state statutes and
regulations. Other TRS libraries include comprehensive compliance data for the
retail and public housing markets.
Since its incorporation in 1994, TRS has been involved in the development and
packaging of software used in its electronic libraries, and in the marketing
of its products. TRS has 28 employees including 3 software writers and 12
marketers.
The Corporation accounted for its initial investment in TRS under the equity
method of accounting. The Corporation recorded a loss of $265,643 for the
three months ended March 31, 1996 (revised loss from the previously-reported
loss of $143,333). At the date of the initial acquisition, the Corporation's
investment exceeded its share of the underlying equity in the assets of TRS by
$61,970. The total amount of goodwill recognized by completing the 100%
acquisition of TRS is $3,050,824. For financial statement purposes, the
goodwill will be amortized over a sixty-month period. The consolidated
statements of operations for nine months ended September 30, 1996 include
$278,280 of amortization. See Item 2 Management's Decision and Analysis of
Financial Condition and Results of Operations for the discussion of TRS'
performance since acquisition.
NOTE 4 - ACQUISITION OF COMPASS DATA SYSTEMS, INC.
On August 17, 1996 the Corporation acquired 100% of the outstanding shares of
Compass Data Systems, Inc. ("CDS"), a privately-held corporation. CDS is
located in Salt Lake City, Utah and publishes electronic information providing
turnkey reference services to a wide variety of industries and organizations.
Among its principal product offerings are state tax law reference libraries
which keep subscribers current on tax law changes.
CDS began operations in May 1991 and currently employs 8 full-time employees.
At April 30, 1996, the most current fiscal year end, CDS had assets of
$157,246 with no significant liabilities. Revenues for the year were $450,477
generating pre-tax income of $7,790.
The transaction was completed through an exchange of stock. The Corporation
issued 726,612 shares of its common stock to Eric R. and Sherry Fredrickson,
the sole shareholders of CDS. In addition, Mr. Fredrickson entered into a
two-year employment
7
<PAGE>
contract. He also entered into a two-year non-compete contract for which he
received $50,000 at closing and will receive another $50,000 in 1997.
NOTE 5 - LEASING ACTIVITIES
During 1995, the Corporation entered into leasing activities which consist of
the leasing of fry cook units to be placed in various locations and operated
by the lessee. All of the Corporation's leases are classified as direct
financing leases. Under the direct financing method of accounting for leases,
the total net rentals receivable under the lease contracts are recorded as a
net investment in direct financing leases, and the unearned income on each
lease is recognized each month at a constant periodic rate of return on the
unrecovered investment.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Corporation has a strong liquid position with current assets at September
30, 1996 in excess of $2,900,000 with the only significant liability being a
mortgage on the former headquarters of the Corporation for approximately
$348,000 of which $113,345 is current.
RESULTS OF OPERATIONS
As described in Note 2 of Notes to Consolidated Financial Statements, the
Corporation completed the sale of Dixie Life on October 2, 1995. The September
30, 1995 Consolidated Income Statement has been restated to reflect Dixie Life
as a discontinued operation.
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED
TO RESTATED NINE MONTHS ENDED SEPTEMBER 30, 1995
For the nine months ended September 30, 1996, the Corporation had a net loss
from continuing operations of $1,103,144 ($.088 per share) compared to a net
loss from continuing operations of $920,764 ($.088 per share) for the
comparable period of 1995. The loss results from expenditures related to the
start-up nature of Text Retrieval Systems, Inc. ("TRS") which was acquired in
April 1996. Losses on TRS since acquisition total $634,892. Since TRS and
Compass Data Systems, Inc. ("CDS") (acquired August 17, 1996) assets are
largely intangible, the Corporation has recorded approximately $3,200,000 in
goodwill associated with these acquisitions. This goodwill is being amortized
over a 60-month period and to date has contributed $288,448 to the
Corporation's losses. Rental income represents income from the obligation of
Standard Life Insurance Company to pay $15,000 per month rent to Vanguard,
Inc., a wholly-owned subsidiary of the Corporation, through December 31, 1996,
the expiration date of
8
<PAGE>
an existing lease on the office building previously occupied by the
Corporation and Dixie Life. The obligation terminates upon earlier sale of the
building.
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED
TO RESTATED THREE MONTHS ENDED SEPTEMBER 30, 1995
For the three months ended September 30, 1996, the Corporation had a net loss
from continuing operations of $666,090 ($.048 per share) compared to a net
loss of $339,493 ($.032 per share) for the comparable period in 1995. This
increase in loss from continued operations results from the completion of
developmental expenses associated with the launch of the TRS human resource
(HR/Comply) product. These expenses are somewhat offset by a reduction in
interest expense of $88,000 resulting from the liquidation of notes payable at
the time of the sale of Dixie Life.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously reported in the Corporations Form 8-K current report dated
August 17, 1996, on September 16, 1996 a lawsuit was filed in United States
District Court for the Southern District of Mississippi, Jackson Division, by
certain plaintiffs against the Corporation; its Chairman and Chief Executive
Officer, S.L. Reed; and E.R. Ellenbecker, an individual not affiliated with
the Corporation. On October 30, 1996 Ethika filed its Answer to this lawsuit.
A counter claim was made, and additional parties were added to the lawsuit by
Ethika.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Shareholders of the Corporation held on September 26,
1996, the shareholders approved the amendment to Article III, Section 6 of the
Corporation's Bylaws reducing the minimum and maximum number of Directors of
the Corporation to not less than five nor more than fifteen by the following
vote: For = 9,907,411; Against = 34, 716; and Withheld = 6,384.
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(27) Financial Data Schedule
(b) Reports on Form 8-K
9
<PAGE>
The Corporation filed the following Form 8-K Current Reports during the third
quarter of 1996:
DATE OF REPORT ITEM REPORTED SUBJECT
August 17, 1996 Item 2. Acquisition or Additional information
Disposition of Assets relating to the acqui-
(Previously reported in sition of CDS
Form 10-Q for quarter
ended June 30, 1996)
Item 5. Other Events Disclosure of lawsuit
filed against Ethika
Corporation and others.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Ethika Corporation
--------------------------------
(Registrant)
/s/G. Thomas Reed
--------------------------------
Date: November 18, 1996 G. Thomas Reed
President and
Chief Operating Officer
/s/David E. Williams
--------------------------------
Date: November 18, 1996 David E. Williams
Senior Vice President Finance
and Chief Financial Officer
10
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000029322
<NAME> ETHIKA CORPORATION
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 2,375,393
<SECURITIES> 0
<RECEIVABLES> 118,988
<ALLOWANCES> 0
<INVENTORY> 20,969
<CURRENT-ASSETS> 2,919,692
<PP&E> 1,445,386
<DEPRECIATION> 884,987
<TOTAL-ASSETS> 6,686,289
<CURRENT-LIABILITIES> 569,143
<BONDS> 0
0
0
<COMMON> 13,825,385
<OTHER-SE> (6,241,223)
<TOTAL-LIABILITY-AND-EQUITY> 6,686,289
<SALES> 202,816
<TOTAL-REVENUES> 341,591
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,942,850
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 28,564
<INCOME-PRETAX> (1,103,144)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,103,144)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,103,144)
<EPS-PRIMARY> (0.088)
<EPS-DILUTED> (0.088)
</TABLE>
