SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For Six Months Ended June 30, 1996
ETHIKA CORPORATION
(Formerly Dixie National Corporation)
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(Exact name of registrant as specified in its character)
Mississippi 0-3296 64-0440887
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(State of other (Commission (IRS employer
jurisdiction of file number) identification
incorporation) number)
107 The Executive Center
Hilton Head Island, South Carolina, 29928
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(Address of principal executive offices)
Registrant's telephone number, including area code:
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(803) 785-7850
NONE
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Former name, former address, and former fiscal year, if changed since last
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 AUGUST 19, 1996
COMMON STOCK, $1.00 PAR VALUE 13,824,273
<PAGE>
<PAGE>
ETHIKA CORPORATION
INDEX
PAGE
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 1996 and
December 31, 1995 ..................................................3
Consolidated Income Statements for the Three and Six
Months ended June 30, 1996 and 1995 ................................4
Consolidated Statements of Cash Flows for the Six
Months ended June 30, 1996 and 1995 ................................5
Notes to Consolidated Financial Statements .......................6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .......................8-9
PART II: OTHER INFORMATION
Item 5. Other Information ............................................10
Item 6. Exhibits and Reports on Form 8-K .............................10
SIGNATURES ................................................................10
2
<PAGE>
ETHIKA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS ( Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $2,849,933 $1,377,869
Accounts receivable - miscellaneous 21,840 14,027
Federal income tax receivable 302,000 302,000
Leases receivable - current portion (note 4) 99,088 98,097
Investment in marketable securities 2,227,904
Inventory 22,628
----------- -----------
Total Current Assets 3,295,489 4,019,897
Plant, Property, and Equipment
Plant, property, and equipment (at cost) 1,386,227 1,225,445
Accumulated depreciation (846,752) (814,510)
----------- -----------
Total Plant, Property, and Equipment (net) 539,475 410,935
Non-Current Assets
Leases receivable - non-current portion (note 4) 331,990 373,175
Investment in TRS (note 3) 137,946
Goodwill Net - TRS (note 3) 2,765,414 61,970
Option - TRS (note 3) 100,000
----------- -----------
Total Non-current Assets 3,097,404 673,091
----------- -----------
Total Assets $6,932,368 $5,103,923
=========== ===========
LIABILITIES AND STOCKHOLDERS EQUITY
Current Liabilities
Accounts payable and accrued expenses $290,258 $42,578
Notes payable 893 41,667
Mortgage note payable - current portion 110,558 107,862
----------- -----------
Total Current Liabilities 401,709 192,107
Non-current Liabilities
Mortgage note payable - non-current portion 263,872 320,973
Deferred taxes 127,483 127,483
----------- -----------
Total Non-Current Liabilities 391,355 448,456
----------- -----------
Total Liabilities 793,064 640,563
----------- -----------
Stockholders Equity
Common stock 13,098,773 10,598,773
Discount on common stock (1,504,972) (996,222)
Treasury stock 31,656 31,656
Retained earnings (deficit) (5,453,385) (5,138,079)
----------- -----------
Total Stockholders Equity 6,139,304 4,463,360
----------- -----------
Total Liabilities and Stockholders Equity $6,932,368 $5,103,923
=========== ===========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
3
<PAGE>
ETHIKA CORPORATION AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENT AND CHANGES IN RETAINED EARNINGS (DEFICIT)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1996 AND 1995 (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
-------------------- --------------------
(Note 2) (Note 2)
-------- --------
<S> <C> <C> <C> <C>
REVENUES
Rental income $47,125 $93,775
Software sales $38,452 38,452
-------- --------
Total Revenue 85,577 132,227
EXPENSES
Wages, benefits, and related costs 265,020 326,448
Materials 17,325 17,335
Depreciation 9,150 18,300
Amortization 139,140 139,140
Interest expense 8,423 147,684 19,422 293,460
General and administrative expenses 367,261 43,531 545,147 351,368
---------- ---------- ---------- ----------
Total Operating Expenses 806,319 191,215 1,065,792 644,828
---------- ---------- ---------- ----------
OPERATING INCOME (LOSS) (720,742) (191,215) (933,565) (644,828)
NON-OPERATING INCOME (LOSS)
Interest income - investments 31,577 9,398 55,757 63,557
Lease income - Fry Guy, Inc. (note 4) 14,480 33,612
TRS loss (note 3) (265,643)
Gain on disposal of marketable securities 672,785
----------- ----------- ----------- -----------
Total Non-operating Income (loss) 46,057 9,398 496,511 63,557
----------- ----------- ----------- -----------
Income (loss) from continuing (674,685) (181,817) (437,054) (581,271)
operations before income taxes
Income taxes
Income (loss) from continuing operations (674,685) (181,817) (437,054) (581,271)
Income (loss) from operation of (610,592) (836,723)
discontinued subsidiary(note 2)
Estimated (loss) on disposal of Dixie Life
(note 2) 505,738 (3,677,000)
----------- ----------- ----------- -----------
Net income (loss) (674,685) (286,671) (437,054) (5,094,994)
Retained earnings (deficit) at (4,900,448) (3,096,830) (5,138,079) 1,711,493
beginning of period ----------- ----------- ----------- -----------
Retained earnings (deficit) at end of (5,575,133) (3,383,501) (5,575,133) (3,383,501)
period =========== =========== =========== ===========
Earnings per share:
Income (loss) from continuing operations ($.051) ($.017) ($.033) ($.055)
======= ======= ======= =======
Income (loss) from discontinued operations 0 ($.058) 0 (.08)
======= ======= ======= =======
Net income (loss) ($.051) ($.027) ($.033) ($.485)
======= ======= ======= =======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
4
<PAGE>
ETHIKA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
Six Months Ended
June 30,
1996 1995
----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities
Net income (loss) from continuing operations ($437,054) ($581,271)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciations 14,850
Amortization 139,140
Increase in accounts payable (86,219) 32,529
Decrease in lease and accounts receivable 32,381
Decrease in notes payable (70,782) 3,390
Increase in inventory (31,228)
----------- -----------
Total adjustments to net income (loss) 29,370 3,151
----------- -----------
Net cash provided by operating activities (407,684) (578,120)
Cash flows from investing activities:
Proceeds from sale of marketable securities 2,227,904
Decrease in investment activities (265,643)
Increase in Fry Guy, Inc. leases (531,567)
Increase (decrease) in fixed assets (26,568) 18,023
----------- -----------
Net cash provided (used) by investing activities 1,934,153 (546,312)
Cash flows from financing activities:
Payments on debts (54,405) 3,151
----------- -----------
Net cash provided (used) by investing activities (54,405) 3,151
----------- -----------
Net cash provided (used) by discontinued operations (2,156,308)
----------- -----------
Net increase (decrease) in cash and cash equivalents 1,472,064 (3,277,589)
Cash and cash equivalents - beginning of period 1,377,869 4,655,458
----------- -----------
Cash and cash equivalents - end of period $2,849,933 $1,377,869
=========== ===========
</TABLE>
Non-cash transaction:
Purchase of TRS for 2,500,000 shares of common stock (note 3)
5
<PAGE>
ETHIKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 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 six months ended June 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 June 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 be issued will be determined based upon
certain performance criteria to be measured for the twelve months ending June
30, 1997.
6
<PAGE>
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 six months ended June 30, 1996 include $139,140
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 - 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.
7
<PAGE>
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 June 30,
1996 in excess of $3,200,000 with the only significant liability being a
mortgage on the former headquarters of the Corporation for approximately
$375,000 of which $110,558 is current.
On April 2, 1996 the Corporation issued 2,500,000 shares of its common stock
to complete the 100% acquisition of TRS (see Note 3 of Notes to Consolidated
Financial Statements). The Corporation anticipates funding TRS' future
developmental and marketing expenditures from existing resources and TRS'
revenues. The Corporation's future business plan contemplates the acquisition,
ownership, and operation of companies primarily engaged in applied technology.
The Corporation proposes to finance its acquisitions with current funds,
issuance of its common stock, and, to the extent feasible and appropriate,
borrowings and public or private financing.
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 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.
The Corporation is reporting its acquisition of CDS in this Form 10-Q
Quarterly Report in lieu of filing a separate Form 8-K report for the
acquisition. Consistent with the provisions of Form 8-K, the Corporation will
file a Form 8-K as soon as practicable but no later than November 1, 1996 to
provide financial statements of CDS as required for an acquired business.
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 June 30,
1995 Consolidated Income Statement has been restated to reflect Dixie Life as
a discontinued operation.
8
<PAGE>
SIX MONTHS ENDED JUNE 30, 1996 COMPARED
TO RESTATED SIX MONTHS ENDED JUNE 30, 1995
For the six months ended June 30, 1996, the Corporation had a net loss from
continuing operations of $437,054 ($.033 per share) compared to a net loss
from continuing operations of $581,271 ($.055 per share) for the comparable
period of 1995. This decrease in loss resulted primarily from gain on sale of
the remaining Alanco Environmental Resources, Inc. stock ($672,785) offset by
the Corporation's 35% equity share of the TRS loss for the three months ended
March 31, 1996 ($265,643) combined with a $121,881 loss on TRS operations
since acquisition. The $274,038 decrease in interest expense results from the
liquidation of notes payable at the time of the sale of Dixie Life. 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 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 JUNE 30, 1996 COMPARED
TO RESTATED THREE MONTHS ENDED JUNE 30, 1995
For the three months ended June 30, 1996, the Corporation had a net loss from
continuing operations of $674,685 ($.051 per share) compared to a net loss of
$181,817 ($.017 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 $139,261 resulting from the liquidation of notes payable at the time of the
sale of Dixie Life.
9
<PAGE>
PART II. OTHER INFORMATION
ITEM 5 - OTHER INFORMATION
On August 13, 1996 Dixie National Corporation changed its name to Ethika
Corporation. For many years Dixie National Corporation's former principal
subsidiary, Dixie Life, was a regional insurance company based in Jackson,
Mississippi. With the sale of Dixie Life in October 1995, the Corporation's
headquarters relocated to South Carolina, and its business focus shifted to
applied technology with a view to nationwide markets. The regional connotation
of the name "Dixie" and the insurance business it was associated with no
longer applied. Accordingly, the name change was approved by the Board of
Directors pursuant to Mississippi law.
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(27) Financial Data Schedule
(b) Reports on Form 8-K
The Corporation filed the following Form 8-K Current Reports during the second
quarter of 1996:
<TABLE>
<CAPTION>
Date of Report Item Reported Subject
----------------- --------------- ---------
<S> <C> <C>
June 25, 1996 Item 2. Acquisition or Financial statements of Text
Disposition of Assets (Previously Retrieval Systems, Inc., as a
reported in Form 10-K for year business acquired by the
ended December 31, 1995) Corporation
Item 7. Financial Statements and
Exhibits
</TABLE>
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: August 21, 1996 G. Thomas Reed
President and
Chief Operating Officer
/s/DAVID E. WILLIAMS
--------------------
Date: August 21, 1996 David E. Williams
Senior Vice President Finance
and Chief Financial Officer
10
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000029322
<NAME> DIXIE NATIONAL CORPORATION
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 2,849,933
<SECURITIES> 0
<RECEIVABLES> 21,840
<ALLOWANCES> 0
<INVENTORY> 22,628
<CURRENT-ASSETS> 3,295,489
<PP&E> 1,386,227
<DEPRECIATION> 846,752
<TOTAL-ASSETS> 6,932,368
<CURRENT-LIABILITIES> 401,709
<BONDS> 263,872
0
0
<COMMON> 13,098,773
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 5,453,385
<SALES> 0
<TOTAL-REVENUES> 132,227
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,065,792
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 158,562
<INCOME-PRETAX> (437,054)
<INCOME-TAX> 0
<INCOME-CONTINUING> (437,054)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (437,054)
<EPS-PRIMARY> (.033)
<EPS-DILUTED> (.033)
</TABLE>
