SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For Three Months Ended March 31, 1997 Commission File Number 0-3296
ETHIKA 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 May 13, 199
Common Stock, $1.00 par value 14,031,585
<PAGE>
ETHIKA CORPORATION
INDEX
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated balance sheets - March 31, 1997 and
December 31, 1996 ...................................
Consolidated statements of operations for the three
months ended March 31, 1997 and 1996 ................
Consolidated statements of cash flows for the three
months ended March 31, 1997 and 1996 ................
Notes to consolidated financial statements ..........
Item 2.Management's Discussion and Analysis of Financial
Condition and Results of Operations ...........
PART II. OTHER INFORMATION
None
SIGNATURES .....................................................................
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<TABLE>
<CAPTION>
Ethika Corporation and Subsidiaries
Consolidated Balance Sheet March 31, 1997 and December 31, 1996
(UNAUDITED)
March 31 December 31
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ............................. $ 1,377,359 $ 1,906,085
Accounts receivable, net of allowance for
doubtful accounts of $7,116 and $8,258 ............. 87,062 86,235
Federal income tax refund receivable .................. 51,714 135,817
Leases receivable ..................................... 123,081 105,705
Investment securities- Trading
Inventory ............................................. 23,390 21,672
------------ ------------
Total Current Assets .................................... 1,662,606 2,255,514
Property and equipment , net of accumulated depreciation 498,738 499,892
Leases receivable ...................................... 234,896 277,430
Intangible and other assets, net of accumulated
amortization of $693,812 and $567,233............... 858,883 884,212
------------ ------------
Total Assets ............................................ $ 3,255,123 $ 3,917,048
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities:
Accounts payable and accrued expenses ................. $ 262,928 $ 527,762
Current portion of notes payable ...................... 116,098 116,201
Deferred revenue ...................................... 305,874 243,399
------------ ------------
Total Current Liabilities ............................... 684,900 887,362
Notes payable ........................................... 176,592 205,092
Deferred income taxes ................................... 45,500 45,500
------------ ------------
Total Liabilities ....................................... 906,992 1,137,954
------------ ------------
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<CAPTION>
Ethika Corporation and Subsidiaries
Consolidated Balance Sheet March 31, 1997 and December 31, 1996
(UNAUDITED)(continued)
March 31 December 31
1997 1996
------------ ------------
<S> <C> <C>
Stockholders' Equity
Common Stock, $1 par value authorized 50,000,000
shares; issued 14,031,585 shares and 13,851,585;
outstanding 14,004,273 shares and 13,824,273 shares;
March 31, 1997 and December 31, 1996 include
include 2,500,000 contingently returnable shares ..... 11,504,273 11,324,273
Discount on Common Stock ................................ (1,202,459) (1,123,709)
Accumulated Deficit ..................................... (7,953,683) (7,421,470)
------------ ------------
Total Stockholders' Equity .............................. 2,348,131 2,779,094
------------ ------------
Contingencies ........................................... -- --
------------ ------------
Total Liabilities and Stockholders' Equity .............. $ 3,255,123 $ 3,917,048
============ ============
The Accompanying notes are an integral part of these Consolidated Financial
Statements
</TABLE>
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<TABLE>
<CAPTION>
Ethika Corporation and Subsidiaries
Consolidated Statement of Operations and Changes in Retained Deficit for the
Three Months Ended March 31, 1997 and 1996 (UNAUDITED)
March 31, March 31
1997 1996
----------- -----------
<S> <C> <C>
Software sales .............................................. $ 128,241
Costs and expenses
Cost of Sales ............................................. 126,387
Selling ,general and administrative and product development 434,195 $ 237,698
Depreciation and Amortization ............................. 128,836 9,150
----------- -----------
Loss from operations ........................................ (561,177) (246,848)
----------- -----------
Other income ( expense)
Rental Income ............................................. 46,650
Interest income ........................................... 36,488 43,310
Gain (Loss) from investment securities .................... 671,160
Interest expense .......................................... (7,525) (10,998)
Equity in net loss of affiliate ........................... -- (265,643)
----------- -----------
28,963 484,479
----------- -----------
Income /(Loss) from operations .............................. (532,214) 237,631
----------- -----------
Income taxes ................................................ -- --
----------- -----------
Income /(Loss) from operations .............................. (532,214) 237,631
Retained deficit at beginning of period ................... (7,421,470) (5,138,079)
Retained deficit at end of period ......................... ($7,953,683) ($4,900,448)
=========== ===========
Earnings per share primary and fully diluted:
Primary and fully diluted net income/(Loss) per share ....... $ (.046) $ .022
=========== ===========
The Accompanying notes are an integral part of these Consolidated Financial
Statements
</TABLE>
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<TABLE>
<CAPTION>
Ethika Corporation and Subsidiaries
Consolidated Statement of Cash Flows for the Three Months
Ended March 31, 1997 and 1996 (UNAUDITED) March 31, March 31,
1997 1996
----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) from operations ............................ ($ 532,214) $ 237,631
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and Amortization ................................ 128,836 9,150
Changes in balance sheet accounts:
(Increase) decrease in lease, accounts, and other receivables 83,276 15,680
(Increase) decrease in income taxes
(Increase) in inventory ..................................... (1,718)
Decrease in accrued investment income
Increase ( decrease) in accounts payable and other liabilities (293,437) 9,159
Increase ( decrease) in deferred revenue ..................... 62,475
Sales of investment securities - trading ..................... 0 0
----------- -----------
Net cash provided by (used from) operating activities ........ (552,782) 271,620
----------- -----------
Cash flows from investing activities:
Purchases of equipment ....................................... (1,102) (382)
Payments received from leases ................................ 25,158
Others
Proceeds from investments sold or matured .................... 2,227,904
Costs of investments acquired ................................ (368,316)
Temporary investments, net
Proceeds from sales of equipment and other assets
Net cash (used from) provided by investing activities ........ 24,056 1,859,206
Cash flows from financing activities:
Net borrowing (payments) on debt
Purchase of treasury stock
Net cash used from financing activities
Net increase (decrease) in cash and cash equivalents ......... (528,726) 2,130,826
Cash and cash equivalents - beginning of period .............. 1,906,085 1,377,869
----------- -----------
Cash and cash equivalents - end of period .................... $ 1,377,359 $ 3,508,695
=========== ===========
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<CAPTION>
Ethika Corporation and Subsidiaries
Consolidated Statement of Cash Flows for the Three Months
Ended March 31, 1997 and 1996 (UNAUDITED) (continued)
March 31, March 31,
1997 1996
----------- -----------
<S> <C> <C>
Supplemental Cash Flow Information:
Cash payments for income taxes
Cash payments for interest ................................... $ 7,525 $ 10,998
=========== ===========
Supplemental Schedule of Non-Cash
Investing and Financing Activities:
Common stock issued for equity securities
of nonaffiliated company ..................................... 180,000
=======
The Accompanying notes are an integral part of these Consolidated Financial
Statements
</TABLE>
<PAGE>
ETHIKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 1997
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements of Ethika
Corporation and subsidiaries ("Corporation") have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with instruction 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 three months ended March 31, 1997 are not necessarily
indications of the results that may be expected for the year ending December 31,
1997. 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, 1996.
Nature of operations: The Corporation operates as an applied technology company
through two of its wholly-owned subsidiaries, Text Retrieval Systems, Inc. (TRS)
and Compass Data Systems (CDS). See business combination information in Note 2.
TRS and CDS are engaged in publishing electronic libraries that link related
data sources for convenient access by personal computers. Certain products of
TRS and CDS are sold nationally, while others are specific to states such as
Florida, Missouri, and Kansas.
Principles of Consolidation: The consolidated financial statements include the
financial statements of the Corporation and its wholly-owned subsidiaries. All
significant inter-company accounts and transactions have been eliminated.
Revenue Recognition: The Corporation recognizes revenue for software sales
ratably over the period of each product's subscription life. The Corporation's
various products are updated annually, quarterly and monthly based on content
availability and/or specific customer agreements. Revenue associated with
certain sales of TRS' primary product are not recognized until cash is collected
due to the customers' right of return and limited history of returns for the
product.
Intangible assets: Intangible assets consist primarily of assets acquired
through the acquisitions of TRS, CDS, and CodeManager. See Business Combination
information in Note 2. Acquired goodwill and software products are amortized
over three years. Non-compete agreements are amortized over the life of the
related agreement (2-3 years). The Corporation regularly reviews its ability to
realize future economic benefit from software products and goodwill based upon
the expected future cash flows of the related subsidiary or product.
Use of estimates: The preparation of financial statements in accordance with
generally accepted accounting principles requires the use of certain estimates.
Actual results may differ from those estimates.
Earnings Per Share: Primary and fully diluted earnings per share are based on
the weighted average number of common shares of 11,444,273 and 10,597,661
outstanding for the months ended March 31, 1997 and 1996 respectively. Earnings
per share calculations include contingently returnable shares only if their
impact is dilutive. Previously reported earnings per share of $.034 have been
restated to $.022 in the accompanying financial statements due to an error in
the prior calculations.
<PAGE>
Note 2 - Business Combinations
On April 2, 1996 the Corporation completed the acquisition of Text Retrieval
Systems, Inc. ("TRS"), a privately-held corporation based in Ponte Vedra Beach,
Florida. The transaction has been accounted for as a purchase and accordingly
the results of operations of TRS since April 2, 1996 have been included in the
Corporation's Results of Operations. TRS publishes electronic reference
libraries that link related data sources for convenient access by personal
computers. The Corporation had previously acquired a 35% initial ownership
interest in TRS through the issuance of 100,000 shares of its stock to the TRS
shareholders and the extension of a line of credit during 1995. The completion
of the purchase transaction included cash paid through prior advances to TRS and
the issuance of 2,500,000 shares of contingently returnable common stock. The
shares are returnable to the Corporation if certain 1997 earning targets are not
achieved. Management originally believed that it was probable that the
established targets would be met in total; accordingly, as of April 2, 1996, the
fair value of the 2,500,000 contingent returnable shares ($1,991,250) was
included in the purchase price resulting in a total estimated purchase price at
acquisition of $2,659,482. In the fourth quarter of 1996, Management determined
that the earnings targets would not be met in total and accordingly, recorded an
adjustment to the purchase price reducing intangible assets by the remaining
unamortized balance related to the contingent shares of $1,792,125. The
Corporation has amended the agreement with TRS whereby the earnings targets have
been revised and extended through December 31, 1997. The Corporation will adjust
intangible assets as the contingencies are resolved. If the earnings targets are
not totally met, the former shareholders will return all or part of the
contingent shares to the Corporation.
During the first quarter of 1996, the Corporation accounted for its initial
investment in TRS by the equity method under which the Corporation's share of
the net loss of the affiliate was recognized in the Corporation's operations and
included as an adjustment to the investment balance. The loss recorded by the
Corporation was $265,643 for the quarter ended March 31, 1996.
Effective August 17, 1996, the Corporation purchased 100% of the outstanding
common stock of CDS, a privately-held corporation based in Salt Lake City, Utah
for a total purchase price of $500,000 which included the issuance of 726,612
shares of the Corporation's common stock with a fair market value of $400,000.
CDS publishes electronic information 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.
The transaction has been accounted for as a purchase, accordingly the results of
operations of CDS since August 17, 1996 have been included in the accompanying
statement of operations. Intangible assets of $460,765 are being amortized over
a three year period.
On January 31, 1997 Ethika purchased for 180,000 shares valued at $101,250 the
publishing, distribution, and future development rights of the CodeManager
Reference Library from American Practice Management and Consulting Concepts,
Inc.
Effective October 1, 1996, the Corporation revised estimates used in determining
the lives of intangible assets acquired through its acquisition of TRS and CDS
from five years to three years. Total amortization of $126,579 and $63,806 was
recorded during the three months ended March 31, 1997 and the year ended
December 31, 1996 respectively.
<PAGE>
Note 3 - Leasing Activities
During 1995, the Company 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 Company'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.
Note 4 - Contingencies
A lawsuit was filed in the United States District Court for the Southern
District of Mississippi, Jackson Division, styled EURAM B.V., Peeper, et al. vs.
Ethika by certain plaintiffs against Ethika and its Chairman, S.L. Reed, Jr.
This suit alleges breach of fiduciary duties, fraud, conspiracy to breach
fiduciary duty of loyalty and care, breach of contract, misrepresentation, and
conversion. These allegations arise from the transactions surrounding the
Corporation's issuance of 2,000,000 shares of its stock in exchange for 16%
interest in PMM, and the sale by the Corporation of $2,000,000 of its stock in
exchange for shares of Alanco stock valued at $2,000,000. On October 30,1996
Ethika filed answers to the suit and instituted a counterclaim against the
individuals named in the above suit and other defendants not named in the
original suit. The Corporation, on advice of outside legal counsel, believes the
plaintiffs' suit is without merit, and that its resolution will not have a
material effect on the Corporation, however, it is too early in the proceedings
to assure the outcome.
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations
Liquidity and Capital Resources
The Corporation accomplished the acquisitions of TRS, CDS, and CodeManager
through the issuance of its common stock. Management anticipates to continue
using its common stock to acquire additional companies. Management believes that
its current working capital and anticipated levels of internally generated funds
will be sufficient to fund its operating, product development, and capital
expenditure requirements. This belief is based on the Corporation's current and
planned level of operations.
Results of Operations
Three Months Ended March 31, 1997 Compared to
Restated Three Months Ended March 31, 1996
The three months ended March 31, 1997, generated a net loss from operations of
$532,214 ($.046 per share) compared to net income from operations of $237,631
($.022 per share) for the comparable period of 1996. This decrease resulted
primarily from the fact that during the three months ended March 31, 1996, the
Corporation had not yet completed the transition from a life insurance company
to an operating company focused on acquisitions of development stage or stage
one companies. Its income for the three months ended March 31, 1996 was
generated primarily from gain on sale of marketable securities of $671,160. The
remainder of 1996 was devoted to completing the development and sales
introduction of its H/R Comply product acquired with the TRS acquisition. See
Note 2 for further comment. As indicated in Note 2, the Corporation also
acquired CDS in August 1996. The Corporation recognizes revenue for its software
<PAGE>
sales ratably over the period of each products' subscription life thereby
generating currently earned revenue and deferred revenue each time a product is
sold. During the three months ended March 31, 1997, the Corporation had gross
shipments of $205,489 of which $150,990 has been recorded as deferred revenue
while $54,499 has been recognized as income for the period. In addition, the
Corporation has recognized $73,742 of previously deferred revenue during the
same time period. Operating expenses for the three months ended March 31, 1997
when compared to the same time period for 1996 reflect the build up of
operations necessary to support an ongoing business. In addition, the
Corporation has recorded amortization of approximately $126,000 during this
three months ended 3/31/97 resulting from the amortization of intangible assets
recorded at the time of each acquisition compared to no amortization during the
comparable time period in 1996.
<PAGE>
Part II. Other Information
Subsequent Event
The Corporation announced on May 15, 1997, that they have signed a letter of
intent with TSG Holdings, Inc., of Savannah, Ga., which could potentially lead
to the acquisition of TSG by Ethika. Successful completion of ongoing
negotiations and the approval of each company's Board of Directors will be
required before the agreement becomes final.
Item 6 - Exhibits and Reports on Form 8-K.
(a)......Exhibits
(27) Financial Data Schedule
(b)......None
<PAGE>
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: May 15, 1997 G. Thomas Reed
President and
Chief Operating Officer
/s/David E. Williams
--------------------
Date: May 15, 1997 David E. Williams
Vice President Finance
and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 1,377,359
<SECURITIES> 0
<RECEIVABLES> 94,178
<ALLOWANCES> 7,116
<INVENTORY> 23,390
<CURRENT-ASSETS> 1,662,606
<PP&E> 1,033,662
<DEPRECIATION> 534,924
<TOTAL-ASSETS> 3,255,123
<CURRENT-LIABILITIES> 684,900
<BONDS> 176,592
0
0
<COMMON> 11,504,273
<OTHER-SE> (9,156,142)
<TOTAL-LIABILITY-AND-EQUITY> 3,255,123
<SALES> 128,241
<TOTAL-REVENUES> 128,241
<CGS> 126,387
<TOTAL-COSTS> 563,031
<OTHER-EXPENSES> 7,525
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (532,214)
<INCOME-TAX> 0
<INCOME-CONTINUING> (532,214)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (532,214)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.05)
</TABLE>
