SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission file number
DECEMBER 31, 1996 0-3296
ETHIKA CORPORATION
(Exact Name Of Registrant As Specified In Its Charter)
MISSISSIPPI 64-0440887
(State or other jurisdiction (IRS employer
of 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
Securities registered pursuant to section 12(g) of the Act:
Common Capital Stock par value $1 per share
(Title Of Class)
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 BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. [ ]
AS OF MARCH 14, 1997, 14,031,585 COMMON SHARES WERE OUTSTANDING, AND THE
AGGREGATE MARKET VALUE OF THE COMMON SHARES (BASED UPON THE CLOSING AVERAGE OF
THE BID AND ASKED PRICES ON THE OVER-THE-COUNTER MARKET) OF ETHIKA CORPORATION
HELD BY NON-AFFILIATES WAS APPROXIMATELY $5,088,255.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
<PAGE>
PART I
ITEM 1 - BUSINESS
General
Ethika Corporation ("Ethika" or the "Corporation"), through its wholly-owned
subsidiaries, Text Retrieval Systems, Inc. ("TRS"), a Florida corporation
acquired on April 2, 1996 and Compass Data Systems, Inc. ("CDS") a Utah
corporation acquired on August 17, 1996, is primarily engaged in publishing
electronic reference libraries that link related data sources for convenient
access by personal computers. 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 its own funds, issuances of its common stock, and, to the
extent feasible and appropriate, borrowings and public or private financing. For
further information, see "Recent Developments" below. The term "Corporation" as
used herein includes the Corporation and its subsidiaries as the context
indicates.
Recent Developments
The discussion in this report includes forward-looking statements that involve
risks and uncertainties. The Corporation's actual results could differ
materially from those discussed herein. Factors that could cause or contribute
to such differences include, but are not limited to those discussed in this
section and elsewhere in this report.
Sale of Life Insurance Company
The Corporation was organized in 1966 as a Mississippi corporation under the
name "Dixie National Corporation." Until the sale on October 2, 1995 to Standard
Life Insurance Company of Indiana ("Standard") of its 99.3% owned subsidiary,
Dixie National Life Insurance Company ("Dixie Life"), a Mississippi corporation
organized in 1965, the Corporation was an insurance holding company primarily
engaged in the life insurance business. Prior to the sale of Dixie Life,
virtually all of the Corporation's consolidated revenues were represented by
premium income and net investment income generated in Dixie Life's insurance
operations. Dixie Life represented virtually all of the Corporation's principal
assets and operations. The sale of Dixie Life has been accounted for as a
discontinued operation. (For further information, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations" below).
Acquisition Of TRS
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
<PAGE>
achieved. Management originally believed 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, Management determined that 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.
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.
During 1995 and 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 losses
recorded by the Corporation were $265,643 and $48,687 for the quarter ended
March 31, 1996 and the year ended December 31, 1995, respectively.
Amortization expense of approximately $503,000 recorded during the year ended
December 31, 1996 relating to TRS intangible assets include a write-off of
$171,000 for one of the two products being developed by TRS at the time of
acquisition (a real estate library product). During the fourth quarter of 1996,
the Corporation elected to abandon this product because Management subsequently
determined the product had limited marketability.
Acquisition of CDS
On August 17, 1996 Ethika purchased 100% of Compass Data Systems ("CDS"), a
privately-held corporation based in Salt Lake City, Utah for a total purchase
price of $500,000. 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 Corporation's results. The transaction was completed through an
exchange of stock. The Corporation issued 726,612 shares of common stock with a
fair value of $400,000 to Eric R. Fredrickson and Sherry Fredrickson, the sole
shareholders of CDS. In addition, Mr. Fredrickson entered into a two-year
employment contract. He also entered into a three-year non-compete contract. CDS
began operation in May 1991 and currently employs eight full-time employees.
Acquisition of Publishing, Distribution, and Development Rights of CodeManager
On November 22, 1996 the Corporation entered into an agreement with the American
Medical Association ("AMA") to cooperatively publish and distribute a
newly-developed electronic reference library for medical service providers. The
new PC-based product, known as CodeManager, simplifies and speeds the coding
process of procedures and diagnoses for health insurance claim forms. The
<PAGE>
publishing, distribution, and future development rights of the CodeManager
Reference Library were purchased from American Practice Management, Inc. ("APM")
and Consulting Concepts, Inc. in a transaction closed on January 31, 1997 in
exchange for 180,000 shares of Ethika common stock having a fair market value of
approximately $101,250.
Acquisition And Write-Down Of PMM
As previously reported, the Corporation entered into an agreement with Universal
Management Services ("UMS"), a Nevada corporation, as of October 27, 1994 ("UMS
Agreement") which agreement was amended and restated effective as of March 24,
1995 ("Second Amended and Restated UMS Agreement"). The Agreement provided that
UMS had certain rights, since expired, to assist the Corporation in placing
shares of the Corporation's common stock. In connection with the Second Amended
and Restated UMS Agreement, on June 29, 1995, the Corporation issued 2,000,000
shares of its common stock in exchange for 16% of the outstanding common shares
of PMM, a privately-owned company, and 100,000 shares of its common stock for an
option to acquire the remaining 84% of the common shares of PMM for 10,400,000
additional shares of the Corporation's common stock. The 84% option was
relinquished by the Corporation in July 1995.
Due to the negative equity recorded on the PMM December 31, 1995 unaudited
financial statements, the Corporation has written its investment in PMM down to
zero. As reported in this Form 10-K Annual Report, this resulted in a charge to
December 31, 1995 earnings of $1,051,217. The Corporation is currently involved
in litigation to recover its investment in PMM. (See "Legal Proceedings" below).
Sale Of Investment In Alanco Stock
The UMS Agreement provided, among other things, that UMS would assist the
Corporation in locating potential investors for its common stock. On November
29, 1994, the Corporation received common stock of Alanco Environmental
Resources, Inc. ("Alanco") having a market value of $2,000,000 in consideration
for the sale, with UMS' assistance, of 2,000,000 shares of the Corporation's
common stock. This transaction has been previously reported and is more fully
discussed in the annual and quarterly reports and the Corporation's Proxy
Statement dated September 5, 1995.
Alanco is a publicly-traded company that files periodic reports under the
Securities Exchange Act of 1934. In December 1995 the Corporation sold 75,000 of
its shares of Alanco stock in the open market and realized a $10,020 profit. In
addition, during the year ended December 31, 1995, the Corporation recorded an
unrealized gain on its remaining Alanco stock of $347,859. During the first
quarter of 1996, the Corporation sold the remaining Alanco shares in open market
transactions resulting in the recognition of a gain of $671,160 for the year
ended December 31, 1996. (See "Legal Proceedings" below for additional
information).
Future Business Plans
The acquisitions of TRS, CDS, and CodeManager mark the entry of the Corporation
into the applied technology area which, in Management's opinion, offers strong
growth potential. The Corporation is also considering other lines of business,
but does not expect to reenter the life insurance business. The Corporation is
<PAGE>
exploring several potential business opportunities, principally in applied
technology, and is engaged in discussions concerning companies that the
Corporation may have an interest in acquiring. However, these discussions are
essentially in their preliminary stages and no agreements have been reached as
to any further acquisitions. The Corporation's business plan contemplates the
operation as well as the ownership of businesses it may acquire in the future.
Employees
At December 31, 1996, the Corporation had (in all locations) thirty-two
employees including Officers. (See "Recent Developments" above for acquisition
and divestiture information).
ITEM 2 - PROPERTIES
Vanguard, a wholly-owned subsidiary of the Corporation, continues to own the
previous home office of the Corporation, a two-story building located in
Jackson, Mississippi. Under the terms of the sale of Dixie Life, Standard is
obligated to pay $15,000 per month plus certain expenses to Vanguard on an
existing lease that expired December 31, 1996. Standard is currently in default
of this agreement by not paying rent and certain other charges due for the
months of October, November, and December, 1996.
ITEM 3 - LEGAL PROCEEDINGS
As previously reported, on September 16, 1996 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
with an aggregate market value of $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 believes , on the advice of outside legal counsel, that 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 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
<PAGE>
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Corporation's common stock is traded in the over-the-counter market and is
quoted on the NASDAQ Small Cap market system under the symbol ETKA. The
following table sets forth the reported high and low sales price as reported by
the National Quotation Bureau, Inc. for the quarters indicated. This information
does not include retail markups, markdowns, or commissions.
<TABLE>
<CAPTION>
1996 1995
----------------------------------------------------------------------
High Low High Low
------- ------ ------ -----
<S> <C> <C> <C> <C>
Quarter
First 1 1/8 1 1/32 13/16
Second 7/8 3/8 1 1/32 13/16
Third 11/16 3/8 1 1/2
Fourth 1 13/32 1 5/16 3/8
</TABLE>
No dividends were paid on the Corporation's common stock during the last two
years, and the Corporation does not intend to pay dividends in the foreseeable
future. The number of holders of record of common stock of the Corporation on
March 14, 1997 was 2,412.
The Corporation issued shares of common stock in connection with three
acquisition transactions in 1996. These include the issuance of: 726,612 shares
issued in August 1996 in consideration for CDS (363,306 shares to Eric
Fredrickson and 363,306 shares to Sherry Fredrickson); 180,000 shares issued in
February 1997 in consideration for the CodeManager Reference Library (135,000
shares to Consulting Concepts, Inc. and 45,000 shares to APM); and 2,500,000
shares issued in April 1996 in consideration for the completion of the
acquisition of TRS. The securities were issued in private transactions pursuant
to negotiated purchase agreements and in reliance upon exemptions from
registration pursuant to Regulation D and Section 4(2) of the Securities Act of
1933. See "Business - Recent Developments."
<PAGE>
ITEM 6 - SELECTED FINANCIAL DATA
Selected consolidated financial data for the Corporation and its subsidiaries is
set forth in the following table. (For additional information, see "Notes to
Consolidated Financial Statements").
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED
DECEMBER 31:
Net software sales ... $ 287,164
Loss from continuing
operations ............. 2,941,852 $ 1,439,976 $ 119,564 $ 117,910 $ 115,840
Other income (expense) . 658,461 (1,013,430) 29,929 -- --
Loss from discontinuing
operations ............. -- 4,570,683 2,465,144 839,228 (964,824)
------------ ------------ ------------ ------------ ------------
NET LOSS ............... $ (2,283,391) $ (6,849,572) $ (2,554,779) $ (957,138) $ 848,984
============ ============ ============ ============ ============
PER COMMON SHARE AMOUNTS
Primary and fully
diluted
Net income (loss) .. $ (.209) $ (.723) $ (.39) $ (.15) $ .13
============ ============ ============ ============
AT YEAR-END:
TOTAL ASSETS ......... $ 3,917,048 $ 5,103,923 $ 44,577,452 $ 56,255,734 $ 55,540,644
============ ============ ============ ============ ============
Total Debt ............. $ 321,293 $ 470,507 $ 6,103,839 $ 6,253,670 $ 7,003,517
============ ============ ============ ============ ============
</TABLE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following should be read in conjunction with the Selected Financial Data and
the Consolidated Financial Statements and notes thereto appearing elsewhere in
this report.
RESULTS OF OPERATIONS
During 1995 the Corporation sold its insurance company operations which was its
only business in prior years and, therefore, there are no comparative revenue
amounts.
The Corporation began its transition to an applied technology company during
1996 through the acquisition of TRS and CDS (See "Recent Developments" above).
TRS and CDS are engaged in publishing electronic reference libraries that link
related data sources for convenient access by personal computers.
<PAGE>
These companies enter into software subscription agreements with their customers
to provide periodic updates to the information contained in the various
products. Revenue is recognized ratably over the term beginning with the sale of
the product and ending on the subscription renewal date. Revenue recognized
during 1996 under this method was $287,164 giving rise also to deferred revenue
of approximately $243,399 which will be recognized during 1997. Approximately
48% of the 1996 revenues were derived from the HR/Comply product, a human
resource library marketed to Human Resource professionals throughout the country
by TRS. Selling, general, and administrative expenses increased by approximately
$1,010,261 resulting primarily from increased legal fees due to the litigation
as discussed in Item 3 - Legal Proceedings, acquisition search and related
costs, and developmental costs associated with completing and marketing the
HR/Comply product. Amortization expense increased by approximately $571,836 due
to the amortization of intangible assets acquired through the Corporation's
acquisition program. Included in the amortization expense is a write-off of
$171,000 for one of the two products being developed by TRS at the time of
acquisition that will no longer be marketed. Other income and expense items
generated $658,461 in income compared to a $1,013,430 loss in 1995. This is
primarily due to the increase in rental income on the former corporate
headquarters located in Jackson, Mississippi; interest income increase of
approximately $70,000 due to more cash investments; a decrease in interest
expense of $396,080 due to the lower average debt level; the gain on the sale of
the Alanco stock in 1996 of $671,000; the write-off of the Corporation's equity
interest in PMM of $1,051,000; and the unrealized gain in Alanco stock of
$358,000 in 1995.
There were no provisions or benefits from income taxes in 1996 due to taxable
net operating loss carry-forwards generated by current operations. The
realization of future tax benefits from these items is uncertain at this time.
On October 2, 1995, the Corporation completed the sale of Dixie Life, which was
99.3% owned by the Corporation, to Standard. The sale resulted in a loss of
$4,174,535 ($.441 per share). In accordance with Accounting Principles Board
Opinion No. 30 (APB 30) which calls for reporting the operations of discontinued
operations as a single net amount in the statement of operations, the
Corporation's prior year's financial statements have been restated to reflect
discontinued operations. The Company incurred a net loss of $ 6,849,572 in 1995
compared to a net loss of $2,554,779 in 1994. On a per-share basis the net loss
for 1995 was $.72 compared to a net loss of $.39 in 1994.
Liquidity And Capital Resources
The Corporation accomplished the acquisitions of TRS and CDS through the
issuance of its common stock. Management anticipates to continue using its
common stock to acquire additional companies in the technology field. 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. During 1996 the Corporation generated
approximately $2,900,000 of cash flow from the sale of its marketable
securities. This was a non-recurring transaction. At December 31, 1996, the
Corporation had approximately $1,906,000 in cash.
<PAGE>
Recent Accounting Pronouncements
In March 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 - Earnings Per Share, which the
Corporation is required to adopt next year. Basic earnings per share, as defined
by the new standard, will represent only the weighted-average shares outstanding
and will exclude common share equivalents from the calculation. Diluted earnings
per share, as defined by the new standard, would include common share
equivalents. The Corporation does not expect that this standard will
significantly affect the reporting of the results of operations.
Limited Operating History, New Business Strategy and Potential Changes to
Business Strategies
The Corporation has had a limited operating history since the sale of its life
insurance subsidiary. The Corporation reported a net loss of $2,283,391 and an
accumulated deficit of $7,421,470 for its fiscal year ended December 31, 1996.
No assurance can be given that the Corporation will be able to achieve or
sustain profitable operations.
The Corporation's current business strategy is to pursue the acquisition of new
business opportunities, initially focusing on businesses utilizing applied
technology. The Corporation began implementing this new strategy in early 1996
based on Management's analysis of the potential markets, products, opportunities
and difficulties that face the Corporation. There can be no assurance that
underlying assumptions accurately reflect trends in the industry or market and
industry and customer acceptance of the target products. Competitive forces on
marketing, distribution, and price of the Corporation's products, coupled with a
need to generate new and innovative developments on a continual basis, make
estimates of customer acceptance, sales, revenues and costs extremely difficult
and unpredictable. There is no assurance that factors may not arise, presently
known and unknown, that could dramatically alter or diminish the Corporation's
market opportunities or the value of its products.
The Corporation continues to focus on acquiring companies and products in areas
complementary to its current business, but no assurance can be given that it can
identify and acquire such companies and products on terms acceptable to the
Corporation or that, once acquired, such businesses and products will
successfully contribute to the growth of the Corporation. The Corporation may,
from time to time, undertake acquisitions or transactions in businesses and
industries different from those currently engaged in by the Corporation. The
effectiveness of the Corporation's strategies will not be measurable for some
period of time.
Product Development and Technological Change
The Corporation must continually update the content of its products and adapt
its products to emerging and changing personal computer systems. The Corporation
presently delivers its software products in CD-ROM format for use on personal
computers. No assurance can be given that CD-ROM technology will not be replaced
by other information distribution and access technologies, such as the Internet,
or that the Corporation could adapt its products to any such alternative
technologies on a timely basis. Furthermore, the Corporation may choose to
invest significant resources to explore the feasibility of adopting alternative
technologies.
<PAGE>
From time to time, operating system and text retrieval system developers will
announce substantially modified versions of their systems. Following such
proposed announcements, the Corporation may be required to expend substantial
financial and personnel resources to achieve compatibility with the
Corporation's products, the costs of which will increase as the Corporation
offers a greater number of products. Should modifications of computer system
requirements occur without the Corporation having the opportunity to develop
products compatible with such modifications, the resulting decline in demand for
the Corporation's products could have a material adverse effect on the
Corporation's results of operations and financial condition.
The electronic information distribution market is characterized by continuously
evolving standards and technology. The Corporation's ability to anticipate
industry standards, to continue to apply advances in electronic information
distribution technology and to develop new complementary products and services
will be a significant factor in the Corporation's ability to grow and remain
competitive. The Corporation's business and results of operations could be
materially and adversely affected if new technologies were introduced or
alternative technology developed to displace widespread use of the current
systems. There can be no assurance that the Corporation will be able to respond
in a timely manner to technological changes or that the ability of competitors
to successfully incorporate evolving standards and technologies into new
products will not render the Corporation's products noncompetitive. The failure
by the Corporation to adapt to or incorporate new standards or technology could
have a material adverse effect on the Corporation's business and results of
operations.
Dependence on Relationship with Folio Corp.
The software products currently distributed by the Corporation, and certain
products which the Corporation is negotiating to acquire, utilize text search
software developed by Folio Corp. ("Folio"). The Corporation relies on its
relationship with Folio, which includes licensing of Folio technology,
collaborative product development and product support. Folio is not
contractually obligated to continue such collaborative development or support
activities and could discontinue such activities at any time. In addition, Folio
is not contractually obligated to renew its licenses with the Corporation. Folio
is collaborating with other vendors of products that compete with the
Corporation's products, and Folio may elect not to renew its licenses with the
Corporation in the future. There can be no assurance that Folio will continue to
cooperate with the Corporation, and the inability of the Corporation to maintain
and further develop its relationship with Folio would have a material adverse
effect on the Corporation's results of operations.
Early State of Development of Industry; Unpredictable Market Acceptance
While the Corporation believes that the market and demand for electronic
information retrieval systems will continue to grow, there can be no assurance
as to the extent of any such growth. In addition, even if there is continued
growth in the use of such systems, there can be no assurance that an increasing
number of customers will elect to use products such as the Corporation's, to
fulfill their needs, in lieu of obtaining and using alternative systems and
equipment to fulfill such needs. The Corporation's estimates of future
performance are based on Management's current analysis of the potential markets,
products, opportunities and difficulties that face the Corporation. There can be
no assurance that underlying assumptions accurately reflect trends in the
industry or market and industry and consumer reactions to the products.
<PAGE>
Competition
The Corporation competes in the marketplace primarily with other companies
offering software products on federal and state tax regulations, legal resource
materials and related matters, and with larger publishers of traditional print
compilations of such materials. Existing competitors may continue to broaden
their product lines and potential competitors, including large software
manufacturers and publishers, may enter or increase their focus on the market,
resulting in greater competition for the Corporation. New or existing
competitors may also utilize new technologies, such as the Internet, to develop
alternative systems for delivering these types of information. There can be no
assurance that any of the Corporation's products will compete effectively
against other products in general or legal, tax and related information products
in particular. The Corporation's competitors include many companies, most of
which have substantially greater financial, development, marketing and personnel
resources than those of the Corporation.
Dependence on Key Personnel; Integration of New Management
The Corporation's future success depends to a significant extent on its senior
management and other key employees, including key development personnel. The
loss of the services of any of these individuals or group of individuals could
have a material adverse effect on the Corporation's results of operations. The
Corporation also believes that its future success will depend in large part on
its ability to attract and retain additional key employees. Competition for such
personnel in the computer industry is intense, and there can be no assurance
that the Corporation will be successful in attracting and retaining such
personnel.
Intellectual Property and Proprietary Rights
The Corporation relies primarily on a combination of copyright and trademark
laws, trade secrets, confidentiality procedures and contractual provisions to
protect its proprietary rights. The Corporation currently has no registered
trademarks, copyrights, patents or patent applications pending. The Corporation
seeks to protect its software, documentation and other written materials under
trade secret and copyright laws, which afford only limited protection.
The Corporation seeks to protect its brand names under trademark and unfair
competition laws. Despite the Corporation's efforts to protect its proprietary
rights, unauthorized parties may attempt to copy aspects of the Corporation's
products or to obtain and use information that the Corporation regards as
proprietary. Policing unauthorized use of the Corporation's products is
difficult, and while the Corporation is unable to determine the extent to which
piracy of its software products exists, software piracy can be expected to be a
persistent problem. There can be no assurance that the Corporation's means of
protecting its proprietary rights will be adequate or that the Corporation's
competitors will not independently develop similar technology.
Potential Volatility of Trading in the Corporation's Common Stock
Trading volumes of the Corporation's common stock have been relatively low.
Factors such as variations in the Corporation's revenue, earnings and cash flow
and announcements of technological innovations or price reductions by the
Corporation, its competitors, Folio, or providers of alternative products could
cause the market price of the Corporation's common stock to fluctuate
<PAGE>
substantially. In addition, the stock markets recently have experienced
significant price and volume fluctuations that particularly have affected
technology-based companies and resulted in changes in the market prices of the
stocks of many companies that have not been directly related to the operating
performance of those companies.
NASDAQ Qualification Standards; "Penny Stock" Regulations
The Corporation's securities are currently traded on the NASDAQ "Small-Cap
Market" system. Under the rules of the National Association of Securities
Dealers, Inc. ("NASD"), in order to maintain listing in the system, the
Corporation must, among other things, have at least $2,000,000 in assets,
$1,000,000 in capital, a minimum bid price for its common stock of $1.00 per
share, and at least two market makers. The Corporation's common stock is
currently trading below $1.00 per share, but the Corporation is entitled to
continue its listing pursuant to a provision providing exceptions for companies
with a market float in excess of $1,000,000 and at least $2,000,000 in capital
and surplus. The NASD has commenced the elimination of this exception, which
will require that the Corporation's share price be at least $1.00 for the
Corporation to continue its listing on NASDAQ. This amendment will permit the
Corporation to maintain the standards for NASDAQ Small-Cap Market listing with
respect to its common stock only if the minimum bid price of the Corporation's
common stock rises to, and remains at or above, $1.00. No assurance can be given
that this will be achieved and sustained. If the Corporation is unable to
continue to satisfy the listing maintenance criteria, its listed securities will
be subject to delisting. Trading, if any, in the listed securities would
thereafter cease to be quoted in the NASDAQ system, and would be conducted in
the over-the-counter market with inter-dealer bid and ask price quotes published
in what are commonly referred to as the "pink sheets."
In addition, if the Corporation fails to maintain NASDAQ Small-Cap Market
listing for its securities, and no other exclusion from the definition of a
"penny stock" under the Securities Exchange Act of 1934 (the "Exchange Act") is
available, then any broker engaging in a transaction in the Corporation's
securities would be required to provide any customer with a risk disclosure
document, disclosure of market quotations, if any, disclosure of the
compensation of the broker-dealer and its salesperson in the transaction and
monthly account statements showing the market values of the Corporation's
securities held in the customer's accounts. The bid and offer quotation and
compensation information must be provided prior to effecting the transaction and
must be contained on the customer's confirmation. If brokers become subject to
the "penny stock" rules when engaging in transactions in the Corporation's
securities, they would become less willing to engage in such transactions.
<PAGE>
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
Report of independent accountants
Report of independent accountants
Consolidated balance sheet as of December 31, 1996 and 1995
Consolidated statement of operations for the three years ended
December 31, 1996, 1995, and 1994
Consolidated statement of cash flows for the three years ended
December 31, 1996, 1995, and 1994
Consolidated statement of changes in stockholders' equity for the three
years ended December 31, 1996, 1995, and 1994
Notes to Consolidated Financial Statements
<PAGE>
Report of Independent Accountants
To the Board of Directors and Shareholders
of Ethika Corporation
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of Ethika
Corporation and its subsidiaries at December 31, 1996, and the results of their
operations and their cash flows for the year ended December 31, 1996, in
conformity with generally accepted accounting principles. 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 audits. We conducted our audit of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
/s/Price Waterhouse, LLP
- ------------------------
PRICE WATERHOUSE, LLP
Atlanta, Georgia
March 27, 1997
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To The Shareholders
Ethika Corporation (formerly Dixie National Corporation)
Hilton Head Island, SC
We have audited the accompanying consolidated balance sheet of Ethika
Corporation (formerly Dixie National Corporation) and subsidiaries as of
December 31, 1995 and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the two years in the period
ended December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to report on these financial
statements based on our audits.
We conducted our audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements, as restated, referred to
above present fairly, in all material respects, the financial position of Ethika
Corporation and subsidiaries as of December 31, 1995 and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
/s/Horne CPA Group
- ------------------
HORNE CPA GROUP
Jackson, Mississippi
March 7, 1996, except as to
the restatement as described in
Note 1 which is as of March 27, 1997.
<PAGE>
<TABLE>
<CAPTION>
Ethika Corporation and Subsidiaries
Consolidated Balance Sheet December 31, 1996 and 1995
1996 1995
------------ ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents ............................... $ 1,906,085 $ 1,377,869
Accounts receivable, net of allowance for doubtful
accounts of $8,258 and $0 ............................. 86,235 14,027
Federal income tax refund receivable .................... 135,817 302,000
Leases receivable ....................................... 105,705 98,097
Investment securities- Trading .......................... 2,227,904
Inventory ............................................... 21,672 --
------------ ------------
Total Current Assets ...................................... 2,255,514 4,019,897
Property and equipment, net of accumulated depreciation ... 499,892 410,935
Leases receivable ........................................ 277,430 373,175
Intangible and other assets, net of accumulated
amortization of $567,233 and $0 ....................... 884,212 299,916
------------ ------------
Total Assets .............................................. $ 3,917,048 $ 5,103,923
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities:
Accounts payable and accrued expenses ................... $ 527,762 $ 42,578
Current portion of notes payable ........................ 116,201 107,862
Deferred revenue ........................................ 243,399 --
------------ ------------
Total Current Liabilities ................................. 887,362 150,440
Notes payable ............................................. 205,092 362,640
Deferred income taxes ..................................... 45,500 127,483
------------ ------------
Total Liabilities ......................................... 1,137,954 640,563
------------ ------------
<PAGE>
<CAPTION>
Ethika Corporation and Subsidiaries
Consolidated Balance Sheet December 31, 1996 and 1995
(continued)
1996 1995
------------ ------------
<S> <C> <C>
Stockholders' Equity
Common Stock, $1 par value authorized 50,000,000 shares;
issued 13,851,585 shares and 10,624,973; outstanding .. 11,324,273 10,597,661
13,824,273 shares and 10,597,661 shares; December 31, 1996
include 2,500,000 contingently returnable shares
Discount on Common Stock .................................. (1,123,709) (996,222)
Accumulated Deficit ....................................... (7,421,470) (5,138,079)
------------ ------------
Total Stockholders' Equity ................................ 2,779,094 4,463,360
------------ ------------
Contingencies
------------ ------------
Total Liabilities and Stockholders' Equity ................ $ 3,917,048 $ 5,103,923
============ ============
The Accompanying notes are an integral part of these Consolidated Financial Statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Ethika Corporation and Subsidiaries
Consolidated Statement of Operations
For the years ended December 31, 1996, 1995 and 1994
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Software sales .............................................. $ 287,164
Costs and expenses
Cost of Sales ............................................. 193,869
Selling ,general and administrative and product development 2,394,455 $ 1,384,194
Depreciation and Amortization ............................. 640,692 55,782 $ 119,564
----------- ----------- -----------
Loss from operations ........................................ (2,941,852) (1,439,976) (119,564)
----------- ----------- -----------
Other income ( expense)
Rental Income ............................................. 138,775 46,400
Interest income ........................................... 174,945 101,565
Gain (Loss) on Disposal of Fixed Assets ................... (23,415) 16,835
Gain (Loss) from investment securities .................... 671,160 (693,339)
Interest expense .......................................... (37,361) (436,204)
Equity in net loss of affiliate ........................... (265,643) (48,687) --
----------- -----------
658,461 (1,013,430) --
Loss from continuing operations ............................. (2,283,391) (2,453,406) (119,564)
Income tax benefit .......................................... -- 174,517 29,929
----------- ----------- -----------
Loss from continuing operations ............................. (2,283,391) (2,278,889) (89,635)
Discontinued operations:
Loss from operations of Dixie Life Insurance Company ..... 0 (396,148) (1,268,333)
Loss on disposal of Dixie Life Insurance Company .......... 0 (4,174,535) (1,196,811)
----------- ----------- -----------
Net loss .................................................... ($2,283,391) ($6,849,572) ($2,554,779)
=========== =========== ===========
Earnings per share primary and fully diluted:
Loss from continuing operations ............................. ($ 0.209) $ (0.240) ($ 0.011)
=========== =========== ===========
Loss from discontinued operations ........................... $ (0.440) ($ 0.151)
=========== ===========
Primary and fully diluted net loss per share ................ ($ 0.209) $ (0.720) ($ 0.390)
=========== =========== ===========
The Accompanying notes are an integral part of these Consolidated Financial Statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Ethika Corporation and Subsidiaries
Consolidated Statement of Cash Flows
For the years ended December 31, 1996, 1995 and 1994
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss ......................................................... ($2,283,391) ($6,849,572) ($2,554,779)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and Amortization .................................... 640,692 55,782 1,540,507
Net loss in earnings of affiliate ................................ 265,643
Loss on disposal of fixed assets ................................. 23,415
Realized and unrealized gain (loss) on investment securities ..... (672,785) 755,919
Provision for deferred taxes ..................................... (81,983)
Net loss on disposal of discontinued operations .................. 4,174,535 1,196,811
Changes in balance sheet accounts:
(Increase) decrease in accounts receivable ...................... (33,178) (137,826) 1,623,993
(Increase) decrease in income taxes ............................. 166,183 123,884 (748,597)
(Increase) in inventory ......................................... (584)
Decrease in accrued investment income ............................ 412,705
Increase ( decrease) in accounts payable and other liabilities ... 142,533 (872,488) 1,967,449
Increase ( decrease) in deferred revenue ......................... 188,792
Deferred policy acquisition costs ................................ (307,364) (1,285,902)
Value of insurance purchased, net ................................ 699,285
Sales of investment securities - trading ......................... 2,900,689
----------- ----------- -----------
Net cash provided by (used from) operating activities ............ 1,256,026 (1,945,140) 1,739,482
----------- ----------- -----------
Cash flows from investing activities:
Purchases of equipment ........................................... (45,640) 0 (96,046)
Payments received from leases .................................... 88,137
Payments for acquisitions ........................................ (621,098)
Proceeds from investments sold or matured ........................ 4,858,753 5,541,253
Costs of investments acquired .................................... (2,314,683) (9,411,308)
Temporary investments, net ....................................... 4,192,867 (1,819,899)
Proceeds from sales of equipment and other assets ................ 410,771
Proceeds from sale of discontinued operations, net ............... 1,350,640
----------- ----------- -----------
Net cash (used from) provided by investing activities ............ (578,601) 8,498,348 (5,786,000)
----------- ----------- -----------
<PAGE>
<CAPTION>
Ethika Corporation and Subsidiaries
Consolidated Statement of Cash Flows (continued)
For the years ended December 31, 1996, 1995 and 1994
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from financing activities:
Net borrowing (payments) on debt ................................. (149,209) (5,633,336) (149,831)
Purchase of treasury stock ....................................... (1,112)
----------- ----------- -----------
Net cash used from financing activities .......................... (149,209) (5,634,448) (149,831)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents ............. 528,216 918,760 (4,196,349)
Cash and cash equivalents - beginning of period .................. 1,377,869 459,109 4,655,458
=========== =========== ===========
Cash and cash equivalents - end of period ........................ $ 1,906,085 $ 1,377,869 $ 459,109
=========== =========== ===========
Supplemental Cash Flow Information:
Cash payments for income taxes ................................... $ 0 $ 129,429 $ 718,668
=========== =========== ===========
Cash payments for interest ....................................... $ 39,866 $ 492,797 $ 505,318
=========== =========== ===========
Supplemental Schedule of Non-Cash
Investing and Financing Activities:
Notes issued in exchange for debentures .......................... $ 485,000
===========
Common stock issued for equity securities of nonaffiliated company $ 2,000,000
===========
The Accompanying notes are an integral part of these Consolidated Financial Statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Ethika Corporation
Statement of Changes in Shareholders' Equity
For the years ending December 31, 1996, 1995 and 1994
Common Discount on Unrealized Total
Stock Common Holding Retained Shareholders'
Shares Amount Stock Losses Earnings Equity
------ ------ ----- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 ... 6,394,973 $ 6,394,973 $ 4,266,272 $ 10,661,245
Net loss ....................... (2,554,779) (2,554,779)
Unrealized holding losses on ... ($ 925,011) (925,011)
investments available for sale
Common stock issued ............ 2,000,000 2,000,000 2,000,000
----------- ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1994 ... 8,394,973 8,394,973 (925,011) 1,711,493 9,181,455
Net loss ....................... (6,849,572) (6,849,572)
Common stock issued ............ 2,202,688 2,202,688 2,202,688
Recovery of holding losses in
investments available for sale 925,011 925,011
Discount on common Stock ....... ($ 996,222) (996,222)
----------- ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1995 ... 10,597,661 10,597,661 (996,222) 0 (5,138,079) 4,463,360
Net loss ....................... (2,283,391) (2,283,391)
Acquisitions ................... 726,612 726,612 (127,487) 599,125
Balance at December 31, 1996 ... 11,324,273 $ 11,324,273 $ (1,123,709) $ 0 $ (7,421,470) $ 2,779,094
=========== ============ ============ ============ ============ ============
The accompanying notes are an integral part of the consolidated financial statements
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ETHIKA CORPORATION
DECEMBER 31, 1996
NOTE 1--BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of operations: Ethika corporation (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 4. 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.
Basis of Presentation: As of October 2, 1995, the Corporation sold its life
insurance subsidiary, Dixie Life Insurance Company (Dixie Life). The operations
of this segment have been presented as discontinued operations in the
accompanying financial statements.
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.
Cash and Cash Equivalents: Cash and cash equivalents include cash in banks and
money-market investments which carry no withdrawal restrictions.
Investments: At December 31, 1996, the Corporation had no investments in
marketable securities. At December 31, 1995, marketable securities were
classified as trading, which, under the provisions of Statement of Financial
Accounting Standards No. 115 Accounting for Certain Investments in Debt and
Equity Securities, were reported at market value with unrealized market gains or
losses being reflected in operations.
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.
Property and Equipment: Property and equipment are stated at cost less
accumulated depreciation. Depreciation is computed using the straight-line
method over the estimated useful lives of these assets which are thirty years
for the building; three years for computer hardware and software; and five to
seven years for furniture and fixtures.
Inventory: Inventory consists primarily of software product manuals and
promotional materials. Inventory is valued based on an average cost method.
Intangible assets: Intangible assets consist primarily of assets acquired
through the acquisitions of TRS and CDS. 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.
<PAGE>
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.
Income Taxes: Deferred taxes are provided on a liability method whereby deferred
tax assets are recognized for deductible temporary differences and operating
loss and tax credit carry-forwards and deferred tax liabilities are recognized
for taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their income tax
bases. Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for changes in tax laws and rates on the date of
enactment.
Earnings Per Share: Primary and fully diluted earnings per share are based on
the weighted average number of common shares of 10,900,000; 9,471,000; and
6,551,000 outstanding for the years ended December 31, 1996, 1995, and 1994
respectively. Earnings per share calculations include contingently returnable
shares only if their impact is dilutive. Previously reported earnings per share
of ($.65) have been restated to ($0.72) in the accompanying financial statements
due to an error in the prior calculations.
Reclassifications: Certain amounts in the prior years' statements have been
reclassified to conform with the current year financial statements.
NOTE 2--PROPERTY AND EQUIPMENT
A summary of property and equipment at December 31 follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Land ..................................... $ 140,436 $ 140,436
Building ................................. 654,602 654,602
Furniture, Equipment and Vehicles ........ 82,358 380,341
Computer Hardware and Software ........... 155,164 50,066
----------- -----------
1,032,560 1,225,445
Less: Accumulated depreciation .......... (532,668) (814,510)
----------- -----------
$ 499,892 $ 410,935
=========== ===========
</TABLE>
Certain of the assets above are being held for disposal. These assets consist
primarily of the Corporation's former home office in Jackson, Miss., which has a
net book value of approximately $381,000. The Corporation has operating lease
agreements for office space, and certain office equipment. Ethika's corporate
office space is leased from a member of the Board of Directors at the rate of
approximately $1,400 per month. For the year ended December 31, 1996 payments on
all operating leases were $107,000.
<PAGE>
NOTE 3 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
A summary of accounts payable and accrued expenses at December 31 follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Accrued professional fees .................. $247,088
Trade accounts ............................. 150,253 $ 42,578
Non-compete ................................ 50,000
Other ...................................... 47,805
Accrued payroll and related
withholdings ............................... 32,616 --
-------- --------
$527,762 $ 42,578
======== ========
</TABLE>
NOTE 4 - NOTES PAYABLE AND OTHER DEBT
The Company has the following notes payable at December 31:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Note payable to a bank bearing interest at prime
plus 3/4% (at December 31, 1996 and 1995, the
rate was 9.25%), payable in monthly installments
of $11,846; secured by the land and building $311,952 $428,835
Other -- 41,667
-------- --------
$311,952 $470,502
======== ========
</TABLE>
Aggregate maturities of notes payable at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $116,201
1998 114,000
1999 81,751
--------
$311,952
========
</TABLE>
NOTE 5 - 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
<PAGE>
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, 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 1995 and 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 losses
recorded by the Corporation were $265,643 and $48,687 for the quarter ended
March 31, 1996 and the year ended December 31, 1995, respectively.
Amortization expense of approximately $567,000 related to the TRS acquisition
includes a write-off of $171,000 for one of the two products being developed by
TRS at the time of acquisition (a real estate library product). During the
fourth quarter of 1996, the Corporation elected to abandon the product because
Management subsequently determined it had limited marketability.
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. Amortization of $63,806 was recorded during 1996.
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.
<PAGE>
The information below summarizes the unaudited proforma results of the
Corporation assuming that the acquisitions of TRS and CDS had taken place at
January 1, 1995:
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------
1996 1995
Unaudited Unaudited
--------- ---------
<S> <C> <C>
Revenues from continuing operations .......... $ 511,804 $ 368,195
Loss from continuing operations .............. $(3,679,257) $(1,710,673)
Loss per share from continuing operations .... $ (.325) $ (.151)
</TABLE>
NOTE 6 - INCOME TAXES
The Corporation files a consolidated federal income tax return and state income
returns in various states as required by the applicable state income tax laws.
Net deferred tax liabilities (assets) from continuing operations consist of the
following components as of December 31:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Deferred tax liabilities:
Investment securities ...................... $ 118,300
Depreciation ............................... $ 45,500 9,183
--------- ---------
45,500 127,483
--------- ---------
Deferred tax assets:
Amortization of non-compete ................ 5,432
Deferred revenue ........................... 82,756
Unrealized loss on equity investment ....... 357,410 357,410
Allowance for bad debts .................... 2,808
Net operating loss carry-forward ........... 524,744 100,715
Other ...................................... -- 16,556
--------- ---------
973,150 474,681
Valuation allowance ............................ (973,150) (474,681)
--------- ---------
Deferred tax asset
Net deferred tax liability ..................... $ 45,500 $ 127,483
========= =========
</TABLE>
The Corporation recorded a valuation allowance of $474,681 as of December 31,
1995 and increased the allowance by $498,469 during 1996 due to the uncertainty
of the Corporation's ability to realize future benefits of net operating loss
carry-forwards or other future tax deductions.
<PAGE>
The (provision) for benefit from income taxes for the years ended December 31 is
summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Current ............... $ (81,983) $ 302,000 $(381,900)
Deferred .............. 81,983 (127,483) 411,849
--------- --------- ---------
$ -- $ 174,517 $ 29,929
========= ========= =========
</TABLE>
The Corporation has net operating loss carry-forwards at December 31, 1996 of
approximately $1,543,000 which expire in 2010 and 2011.
The Corporation's effective income tax (provision) benefit from continuing
operations differs from amounts applying the statutory federal income tax rate
of 34% as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Expected tax benefit .................... $ 776,527 $ 2,388,200 $ 878,800
Non-deductible goodwill ................. (184,383)
Alternative Minimum Tax ................. 78,000 97,000
Loss on sale of life insurance subsidiary (1,904,700) (583,085)
Valuation allowance ..................... (498,469) (474, 681)
Other ................................... (93,675) 87,698 (362,786)
----------- ----------- -----------
Total income tax benefit .............. $ -- $ 174,517 $ 29,929
=========== =========== ===========
</TABLE>
NOTE 7 - DISCONTINUED OPERATIONS
On October 2, 1995, the Corporation completed the sale of Dixie Life, which was
99.3% owned by the Corporation, to Standard Life Insurance Company of Indiana
("Standard"). Dixie Life represented virtually all of the Corporation's assets
and operations. The selling price of the Corporation's interest in Dixie Life to
Standard was $7,389,086, of which $3,646,468 was in cash. The Corporation used
$1,720,000 of the cash proceeds to repay Subordinated Convertible Notes and to
purchase from Dixie Life lease receivables of $503,258. Standard canceled a
$3,688,746 term loan due from the Corporation held by a subsidiary of Standard.
The Corporation also received accounts receivable of $53,872, all of which were
written off as uncollectible at December 31, 1995.
<PAGE>
In addition, Standard was obligated 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. Standard is currently in default of
this agreement by not paying rent and certain other charges due for the months
of October, November, and December, 1996. The sale resulted in a loss of
$4,174,536 ($.44 per share). The sale of Dixie Life constitutes discontinuance
of the life insurance business by the Corporation, and, as such has been
accounted for as discontinued operations in the accompanying financial
statements. Accordingly, the financial statements for the year ended December
31, 1995 and 1994 have been restated for this transaction.
NOTE 8 - STOCK OPTIONS AND STOCK-BASED COMPENSATION
On May 26, 1995, the Corporation created the 1995 Stock Option Plan (the Plan)
with a maximum amount of 500,000 common stock shares reserved for options
eligible to be granted under the Plan during its ten-year life. The Corporation
granted various stock options to Employees and Directors during 1996 and 1995.
As of December 31, 1996, there are 230,000 remaining common stock shares
reserved for granting and there are 250,000 options outstanding from the Plan.
Employees vest in stock options granted at the rate of 20% each year on a
cumulative basis commencing one year after the date of grant.
As permitted by SFAS 123, "Accounting for Stock-Based Compensation", the
Corporation has elected not to record compensation cost for stock options in the
accompanying statement of operations. The compensation cost for the
Corporation's stock options have been determined based on the fair value at the
grant dates consistent with the methodology prescribed by SFAS 123. The
Corporation's net income and income per share would have been reduced to the pro
forma amounts indicated below if these amounts had been recorded in the
financial statements:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C> <C>
Net loss As reported $(2,283,391) $(6,849,572)
Proforma $(2,337,292) $(6,917,653)
Loss per share As reported $(0.210) $(0.723)
Proforma $(0.214) $(0.730)
</TABLE>
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 used for grants in 1996 and 1995:
<TABLE>
<CAPTION>
<S> <C>
Dividend yields 0%
Expected volatility 137%
Risk-free interest rate 6.26%
Expected life of option 4 years
</TABLE>
The fair value of options granted during 1996 and 1995 was $53,901 and $68,081
respectively.
<PAGE>
The following table summarized the changes in the number of options included
under the Plan:
<TABLE>
<CAPTION>
Exercise Weighted-Average
Shares Price Range Exercise Price
------ ----------- --------------
<S> <C> <C> <C>
Outstanding at December 31, 1994 0
Granted 140,000 $.50 - $.91 $.80
-------
Outstanding at December 31, 1995 140,000 $.50 - $.91
Granted 130,000 $.59 - $.68 $.62
Canceled (20,000) $.91 $.91
-------
Outstanding at December 31, 1996 250,000 $.50 - $.91 $.70
=======
</TABLE>
As of December 31, 1996 the total number of exercisable stock options was
40,000.
NOTE 9 - 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.
The composition of the net investment in direct financing leases at December 31
as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Total minimum lease payments to be received .......... $454,929 $595,170
Unearned lease income ................................ 71,794 123,898
-------- --------
Net investment in direct financing leases ... $383,135 $471,272
======== ========
</TABLE>
The minimum future lease payments receivable under the direct financing
leases are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $148,239
1998 148,239
1999 137,514
2000 20,937
--------
Total minimum future
lease payments $454,929
========
</TABLE>
<PAGE>
NOTE 10 - 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 (See Note 12 for further information), 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 (See Note 11 for additional information). 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.
NOTE 11 - SALE OF COMMON STOCK
The Corporation entered into an agreement with Universal Management Services, a
Nevada corporation (UMS), as of October 27, 1994 (UMS Agreement). The UMS
Agreement provided that UMS would use its best efforts to assist the Corporation
in locating potential investors for its common stock. On November 29, 1994 the
Corporation sold 2,000,000 shares of its common stock for which it received
shares of Alanco Environmental Resources, Inc. ("Alanco") common stock (November
transaction), with an aggregate market value of $2,000,000. Under the terms of
the UMS Agreement as amended (See Note 12), any market appreciation prior to
closing of the sale of Dixie Life to Standard could not be realized because the
purchasers of the Corporation's common stock had the right to repurchase the
Alanco shares for cash equal to the $2,000,000 fair value of such shares on
November 29, 1994. The purchasers had the obligation to cover any market
depreciation, as defined which might have occurred prior to closing of the sale
of Dixie Life to Standard. Therefore, the Alanco shares were carried at cost
until October 2, 1995, the closing date of the Dixie Life sale to Standard. At
December 31, 1995, market value of the Alanco shares based on the average of the
closing bid and asked price was $2,227,904.
In December 1995 the Corporation sold 75,000 shares of Alanco stock on the open
market generating a $10,020 profit. The Corporation also recorded on its
December 31, 1995 Financial Statements an unrealized gain on its remaining
Alanco stock of $347,859. During the first quarter of 1996, the Corporation sold
the remaining Alanco shares resulting in the recognition of a $672,785 gain.
NOTE 12 - INVESTMENT IN PHOENIX MEDICAL MANAGEMENT, INC. ("PMM")
On April 20, 1995, the Corporation and UMS entered into an amended and restated
agreement effective as of March 24, 1995 ("Second Amended and Restated UMS
Agreement") which provided that UMS had certain rights, since expired, to assist
the Corporation in placing shares of the Corporation's common stock. In
connection with the Second Amended and Restated UMS Agreement, on June 29, 1995,
the Corporation issued 2,000,000 shares of its common stock in exchange for 16%
of the outstanding common shares of PMM, a privately-owned company, and 100,000
shares of its common stock for an option to acquire the remaining 84% of the
common shares of PMM for 10,400,000 additional shares of the Corporation's
common stock. The 84% option was relinquished by the Corporation in July 1995.
<PAGE>
As a result of the unaudited stockholders deficit of PMM as of December 31, 1995
and other factors, the Corporation wrote off its entire remaining investment in
PMM which resulted in a loss of $1,051,217 during the year ended December 31,
1995.
NOTE 13 - SUBSEQUENT EVENTS
The publishing, distribution, and future development rights of the CodeManager
Reference Library were purchased from American Practice Management, Inc. ("APM")
and Consulting Concepts, Inc. on January 31, 1997 in exchange for 180,000 shares
of Ethika common stock having a fair market value of approximately $101,250 at
January 31, 1997.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors of the Corporation are:
<TABLE>
<CAPTION>
Director
Name Age Since
---- --- -----
<S> <C> <C>
Cohen, Marcia C. 47 1995
Neal, Robert B. 59 1970
Pegram, Joseph D. 57 1991
Reed, S.L., Jr. 61 1980
Rogers, Herbert R., III 54 1992
Spuria, Anthony J. 60 1996
Stubblefield, William D. 52 1996
</TABLE>
Each director holds office until the next annual meeting of shareholders or
until a successor shall be duly elected and qualified. The executive officers of
the Corporation are:
<TABLE>
<CAPTION>
Executive Officer
Name Age Since
---- --- -----
<S> <C> <C>
S. L. Reed, Jr. 61 1995
Chairman
Chief Executive Officer
G. Thomas Reed 47 1995
President
Chief Operating Officer
David E. Williams 47 1996
Secretary, Vice President
Finance, and Chief Financial
Officer
</TABLE>
<PAGE>
The Corporation's officers serve at the pleasure of the Board of Directors.
BUSINESS EXPERIENCE
The principal occupations and business experience for the last five years or
more of the directors and executive officers of the Corporation are as follows:
Marcia C. Cohen - Senior Vice President, Corporate Development of Montgomery
General Hospital, Olney, Maryland. Formerly co-owner and Executive Vice
President of Imaging and Surgery Centers of America, Boston, Massachusetts which
was sold in 1992. Ms. Cohen was retired thereafter until 1994 when she joined
Montgomery General Hospital. Ms. Cohen serves as a member of the Board of
Trustees of Baltimore Medical Systems, Inc. She is Chairwoman of the Personnel
and Compensation Committee, serves as a member of the Executive Committee and
the Nominating and Stockholder Relations Committee.
Robert B. Neal - Chief Executive Officer of the Corporation from September 1970
until February 1995 and President from September 1970 until October 1995. Mr.
Neal was Chairman of the Board and President of Dixie Life until October 1995,
and since then has served as Vice Chairman of Dixie Life. He is a member of the
Audit Committee.
Joseph D. Pegram - Attorney in Oxford, Mississippi. Mr. Pegram is Chairman of
the Audit and Compliance Committee and a member of the Nominating and
Stockholder Relations Committee.
G. Thomas Reed - President and Chief Operating Officer of the Corporation since
October 1995. Previously had a management consultant practice, was a Private
Banking Manager for First Union National Bank, and Administrative Vice President
and Chief Operating Officer of Compudata Services, Inc., a software development
and service company. No relation to the Chairman of the Corporation.
S.L. Reed, Jr. - From January 1995, Chairman of the Board of Directors and Chief
Executive Officer of the Corporation. President of Reed Enterprises, Inc. (an
aquaculture and investment company) of Belzoni, Mississippi; Director of Delta
Industries, Inc., Producers Feed Co., and HillFisher Farms, Inc. He serves as
Chairman of the Executive Committee.
Herbert G. Rogers, III - President of Rogers Agency, Inc., Rogers LP-Gas
Company, Rogers Investments, Inc., Mississippi Realty, Inc. and Roell Realty
Corp. of New Albany, Mississippi; Director of the Nashoba Bank and Chairman of
the Board of the Gentry Furniture Corporation. He serves as Chairman of the
Personnel and Compensation Committee and as a member of the Finance and Business
Strategy Committee.
Anthony J. Spuria - Chief Executive Officer since 1987 of A la Cart, Inc., a
Charlotte, NC based producer of meal delivery systems for the healthcare
industry. In 1989 Mr. Spuria founded Advanced Foam Products, Inc., headquartered
in Ponte Vedra Beach, Florida which sub-licenses a patented technology for the
production and sale of fire-retardant polyurethane seating foams for the
aviation and other transport industries. He began his career as an industrial
engineer at Raytheon Company in the Electronics Systems Division and thereafter
at Sylvania in Data Systems Operations. Mr. Spuria served as a cost analyst at
RCA in the Aerospace Systems Division and as Senior Vice President of Commercial
Aviation with Fairchild Industries. Mr. Spuria is a member of the Audit and
Compliance Committee and the Finance and Business Strategy Committee.
<PAGE>
William D. Stubblefield - Past Chairman and CEO of Medical Graphics Corporation,
St. Paul, Minnesota. Served two years as a faculty member at the School of
Business and Industry, Florida A&M University. Mr. Stubblefield has been
actively involved with Volunteers in Medicine and IMAGES of Hilton Head Island.
Mr. Stubblefield is a member of the Executive Committee, the Finance and
Business Strategy Committee, and the Personnel and Compensation Committee.
David E. Williams - Vice President Finance, Secretary, and Chief Financial
Officer of the Corporation since April 1, 1996. Previously engaged as a sole
practitioner of a Certified Public Accounting practice. Prior to that, Mr.
Williams served as Chief Financial Officer of Immunomedics, Inc. and Psychiatric
Bio Sciences, Inc. He also served as Group Operations Controller for Johnson &
Johnson and Pfizer Pharmaceutical Corporation. He was Senior Auditor at Price
Waterhouse. He is a Certified Public Accountant as well as a Certified
Management Accountant and holds an MBA in Finance from Seton Hall University. He
is a member of the American Institute of Certified Public Accountants, the New
Jersey State Society of Certified Public Accounts, the South Carolina State
Society of Certified Public Accountants, and the Institute of Management
Accountants.
In 1992 the Corporation was the subject of an investigation by the Securities
and Exchange Commission (SEC), which was resolved by means of a settlement.
Pursuant to the settlement, on March 9, 1994, the United States District Court
for the District of Columbia entered final judgments of permanent injunction
against the Corporation and Robert B. Neal, a Director and former President of
the Corporation. The judgments were entered on the basis of a complaint filed by
the SEC. The Corporation and Mr. Neal each consented to the entry of final
judgments of permanent injunction without admitting or denying the allegations
contained in the SEC's complaint. The final judgments to which the Corporation
and Mr. Neal consented enjoin them from violating or aiding and abetting future
violations of sections of the Securities Act of 1933 and the Securities Exchange
Act of 1934 and certain rules thereunder.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Corporation's
Executive Officers and Directors and persons who own more than 10% of its common
stock to file reports of ownership and changes in ownership with the SEC. Such
persons are required by SEC regulations to furnish the Corporation with copies
of all Section 16(a) forms filed by such person.
Based solely upon the Corporation's review of such forms furnished to the
Corporation and written representations from certain reporting persons, the
Corporation believes that all filing requirements applicable to the
Corporation's Executive Officers, Directors, and more than 10% stockholders were
in compliance.
<PAGE>
ITEM 11 - EXECUTIVE COMPENSATION
Summary Compensation Table
The following Summary Compensation Table sets forth for each of the last three
years ended December 31, 1996, information concerning the total compensation
paid or awarded to the Corporation's Chief Executive Officers for services
rendered in all capacities to the Corporation and its subsidiaries. The total
compensation of none of the Corporation's Officers exceeded $100,000 in 1996.
<TABLE>
<CAPTION>
Long Term
Compensation/
Number of
Annual Securities
Name and Compensation Underlying All Other
Principal Position Year Salary Bonus Options Compensation
------------------ ---- ------ ----- ------- ------------
<S> <C> <C> <C> <C> <C>
S.L. Reed, Jr.
Chairman and CEO 1996 $ 36,000 $0 50,000 $0
1995 $ 25,346 $0 50,000 $0
1994 (1) $ 0 $0 $0
(1) Commenced employment January 1995
</TABLE>
Option Grants in Last Fiscal Year
The following table sets forth information concerning options to purchase shares
of common stock which were granted during 1996 to the individuals named in the
Summary Compensation Table.
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation
for Option Term
Individual Grants 10 Years
--------------------------------------------------------------------------------------------
Number of % of Total
Securities Options Granted
Underlying to Employees in Exercise Expiration
Name Options Granted Fiscal Year Price Date 5% 10%
---- --------------- ----------- ----- ---- -- ---
<S> <C> <C> <C> <C> <C> <C>
S.L. Reed, Jr. 50,000 (1) 71.4 $0.59 06/30/02 $39,532 $76,515
(1) The options begin vesting on July 10, 1997 at the rate of 20% per year for
five years. The options are subject to acceleration if employee is
terminated without cause.
</TABLE>
<PAGE>
Fiscal Year End Option Value Table
The following table sets forth information as of December 31, 1996 concerning
the unexercised options held by Officers named in the Summary Compensation
Table, none of whom exercised options in 1996. Options are "in-the-money" when
the fair market value of the underlying common stock exceeds the exercise price
of the option. The closing price of the Corporation's common stock on December
31, 1996 was $0.56 per share.
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised In-the-Money
Name Unexercised Options at December 31, 1996 Options at December 31, 1996
---- ---------------------------------------- ----------------------------
Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C>
S.L. Reed, Jr. 10,000 90,000 None None
</TABLE>
COMPENSATION OF DIRECTORS
Directors who are not employees of the Corporation are paid a monthly base fee
of $400 and receive $250 per day per meeting attended. As a group, the six
non-employee Directors of the Corporation were paid $46,650 during the year
1996. As Chief Executive Officer of the Corporation, S.L. Reed, Jr. received no
additional compensation for his services as Chairman of the Board or Chairman of
the Executive Committee.
At a meeting held on November 14, 1996, the Corporation's Board of Directors
approved granting two new non-employee Directors (Spuria and Stubblefield)
options to purchase 5,000 shares each of the Corporation's common stock at $.68,
the average bid and ask price as quoted by NASDAQ on November 14, 1996. These
options were exercisable immediately upon granting and expire on May 25, 2005.
If a person ceases being a Director of the Corporation, his/her option will be
canceled thirty days thereafter.
<PAGE>
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth pertinent information as to the beneficial
ownership of the Corporation's common stock as of March 14, 1997, of persons
known by the Company to be holders of 5% or more of such common stock.
Information as to the number of shares beneficially owned has been furnished by
the persons named in the table.
<TABLE>
<CAPTION>
Name and Address Shares
of Beneficial Beneficially Percent
Owner Owned of Class
----- ----- --------
<S> <C> <C>
Constance Gamble Grewell 2,064,770(1) 14.7%
100 Executive Way
Ponte Vedra Beach, FL 32080
Eric and Sherry Fredrickson 726,612(2) 5.2%
1512 Braintree Court
Salt Lake City, UT 84124
S. L. Reed, Jr. 706,286(3)(4) 5.0%
107 The Executive Center
Hilton Head Island, SC 29928
(1) Constance Gamble Grewell acquired her shares in the acquisition of TRS
by the Corporation. She was the owner of 616 shares of TRS outstanding
common stock. The stock issued pursuant to this transaction may not be
sold or transferred until two years after the issue date.
(2) Eric and Sherry Fredrickson acquired their shares in the acquisition of
CDS by the Corporation. They were the sole owners of CDS' outstanding
common stock. The stock issued pursuant to this transaction may not be
sold or transferred until two years after the issue date.
(3) Includes shares issuable upon exercise of stock options. (See "Security
Ownership of Management").
(4) Includes shares held in name of spouse, minor child, or other relatives
or persons as to some of which shares the owner has shared voting or
investment power, but to which beneficial ownership is disclaimed. Also
includes 10,000 shares of options currently exercisable. (See "Security
Ownership of Management").
</TABLE>
(b) SECURITY OWNERSHIP OF MANAGEMENT
<PAGE>
The following table sets forth information as to the beneficial ownership of the
Corporation's common stock as of March 14, 1997 by each Director, each Executive
Officer named in the Summary Compensation Table, and by all Directors and
Executive Officers as a group.
<TABLE>
<CAPTION>
Shares
Name of Beneficially Percent
Beneficial Owner Owned of Class
---------------- ----- --------
<S> <C> <C>
Marcia C. Cohen 5,000(2) *
Robert B. Neal 411,072(1)(2) 3.0%
Joe D. Pegram 28,043(2) *
S. L. Reed, Jr. 706,286(1)(2) 5.0%
Herbert G. Rogers, III 107,128(1)(2) *
Anthony J. Spuria 157,991(2)(3) 1.1%
William D. Stubblefield 5,000(2) *
Directors and
Executive Officers as
a group (9 persons) 1,570,517 11.2%
* Less than 1%
(1) Includes shares held in the name of spouse, minor child or other
relatives or persons, as to some of which shares the owner named has
shared voting or investment power, but as to which beneficial ownership
is disclaimed, as follows: Robert B. Neal - 1,368 shares; S. L. Reed,
Jr. - 582,422 shares; and Herbert G. Rogers, III - 27,479 shares.
(2) Includes shares issuable upon exercise of stock options: All
Non-Employee Directors have been issued options to purchase 5,000
shares of Ethika stock. G. Thomas Reed, President, has been granted
options to purchase 50,000 shares of Ethika stock. David E. Williams,
Senior Vice President, has been granted options to purchase 10,000
shares of Ethika stock. S.L. Reed, Jr., Chairman of the Board and Chief
Executive Officer, was granted options to purchase 100,000 shares of
Ethika stock, 10,000 of such options are currently exercisable and
included above.
(3) Mr. Spuria acquired 130,391 shares of his stock in the acquisition of
TRS by the Corporation. He was an owner of 43 shares of TRS outstanding
common stock.
</TABLE>
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Corporation's Subordinated Convertible Notes which were due May 1, 1995 were
extended in connection with the sale of Dixie Life. The Corporation satisfied
the Subordinated Convertible Notes upon the sale of Dixie Life.
Robert B. Neal, a Director of the Corporation, held $100,000 of the Notes.
<PAGE>
On July 10, 1996 S.L. Reed, Jr., Chief Executive Officer of the Corporation, was
granted options to purchase an additional 50,000 shares of the Corporation's
common stock at $.59 per share, exercisable at the rate of 20% per year
beginning on July 10,1997 until June 30, 2002.
On April 2, 1996 the Corporation completed the acquisition of 100% of the
outstanding stock of Text Retrieval Systems, Inc. ("TRS"). The Corporation had
previously acquired a 35% initial ownership interest in TRS in October 1995 as
part of a financing agreement entered into with the prior owners of TRS. Under
the terms of its 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 contingently returnable shares of its stock. (See "Recent
Developments" above for further information).
Constance G. Grewell, who owns 2,064,770 shares, or 14.7% of the Corporation's
outstanding common stock, was the principal shareholder of the outstanding stock
of TRS at the time of its acquisition by the Corporation. Mrs. Grewell acquired
her shares of common stock of the Corporation in the TRS transaction. Also,
Anthony J. Spuria was a minority stockholder in TRS and received 130,391 shares
of common stock of the Corporation in the transaction. On April 2, 1996 the high
and low sales price for the Corporation's common stock, as reported by NASDAQ
was $.72. (See "Recent Developments" above for additional information).
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. The transaction was completed through an exchange of
stock. The Corporation issued 363,306 shares of its common stock to Eric R.
Fredrickson and 363,306 shares of its common stock to Sherry Fredrickson, the
sole shareholders of CDS. Immediately following the closing, the combined shares
owned by the Fredrickson's constituted 5.4% of the total outstanding shares of
common stock of the Corporation. In addition, Mr. Fredrickson entered into a
two-year employment contract and a two-year non-compete contract.
<PAGE>
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
The following documents are filed as part of this report under Part II, Item 8:
Financial Statements
Reference is made to the Index to Financial Statements included in Item 8 of
Part II hereof, where such documents are listed.
(a) Exhibits as Required by Item 601 of Regulation S-K:
<TABLE>
<CAPTION>
Exhibit
Number Description Incorporation by Reference to
------ ----------- -----------------------------
<S> <C> <C>
(2)(a) Restated Agreement dated as of October Registrant's Quarterly Report on
27, 1994 between Dixie National Form 10-Q for the nine months
Corporation and Universal Management ended September 30, 1994.
Services
(2)(a)(1) Seconded Amended and Restated Registrant's Quarterly Report on
Agreement dated as of March 24, 1995 Form 10-Q for the three months
between Dixie National Corporation and ended March 31, 1995.
Universal Management Services
(2)(b) Second restated stock purchase Proxy Statement relating to the
1995, effective as of April 18, 1995, Annual Meeting of Shareholders on
among Standard Life Insurance Co. September 19, 1995.
of Indiana, Dixie Life Insurance Co.,
and Dixie National Corporation.
(2)(c) Accounts receivable financing agreement
dated as of February 26, 1996 between
Dixie National Corporation and Text
Retrieval Systems, Inc. including
amended restated option agreement.
(2)(d) Acquisition of Compass Data Systems, Inc.
(2)(e) Asset Purchase Agreement between Ethika
Corporation and American Practice Management,
Inc. and Consulting Concepts, Inc.
(3)(a)(1) Articles of Incorporation as Registrant's Annual Report on
amended and restated Form 10-K for the year ended
December 31, 1985. Exhibit
(3a)
(3)(a)(2) Articles of Amendment to the Registrant's Annual Report of
Articles of Incorporation of Form 10-K for the year ended
Dixie National Corporation dated December 31, 1994. Exhibit
May 23, 1986. (3)(a)(2).
<PAGE>
(3)(a)(3) Articles of Amendment to the Registrant's Annual Report on
Articles of Incorporation of Form 10-K for the year ended
Dixie National Corporation dated December 31, 1994. Exhibit
January 24, 1995 (3)(a)(2).
(3)(b) Bylaws, as amended Registrant's Annual Report on
Form 10-K for the year ended
December 31, 1990. Exhibit
(3(b).
(3)(b)(1) Amendment to Article III of Bylaws
effective January 24, 1996
(3)(b)(2) Amendment to Article IV of Bylaws
effective March 24, 1996
(3)(b)(3) Amended Bylaws at Article III
effective September 26, 1996
(4)(a)(1) Form of Dixie National Corporation Registrant's Current Report on
Subordinated Convertible Callable Form 8-K dated April 30, 1993.
Fixed Interest Rate Note Due May
1, 1995
(10)(a)* Incentive Stock Option Plan Registrant's Annual Report on
of 1982 Form 10-K for the year ended
December 31, 1990. Exhibit
(10)(b)* Incentive Stock Option Plan Proxy Statement relating to
of 1988 the Annual Meeting of
Stockholders held on April 1,1988.
(10)(c)* 1995 Stock Option Plan Proxy Statement relating to the
Annual Meeting of Stockholders
held on September 19, 1995.
(21) Subsidiaries of the Registrant
(27) Financial Data Schedule
*Management contract or compensatory plan.
</TABLE>
Registrant agrees to file with the Securities and Exchange Commission, upon
request, copies of any instrument defining the rights of the holders of its
consolidated long-term debt.
Schedules other than those referred to above are omitted for the reason that
they are not required, are not applicable, or the required information is shown
in the financial statements or notes thereto, or is incorporated by reference.
<PAGE>
(b) Reports on Form 8-K
The Corporation filed the following reports on Form 8-K during the last quarter
of the year ended December 31, 1996:
<TABLE>
<CAPTION>
Date of Current Report
(or Amendment) Items Reported
-------------- --------------
<S> <C>
November 1, 1996 Acquisition of 100% of outstanding stock of
Compass Data Systems, Inc.
</TABLE>
(c) Exhibits required by Item 601 of Regulation S-K
The exhibits listed in Item 14(a)3 of this report, and not incorporated
by reference, follow "SIGNATURES." See "Exhibit Index."
(d) Financial statement schedules required by Regulation S-X
The financial statement schedules required by Regulation S-X, filed
herewith, are identified in the Index to Financial Statements and
Financial Statement Schedules on page 13.
<PAGE>
EXHIBIT (2)(d)
ACQUISITION OF 100%
OF OUTSTANDING STOCK
OF COMPASS DATA SYSTEMS, INC.
SHARE EXCHANGE AGREEMENT
THIS SHARE EXCHANGE AGREEMENT (this "Agreement") is made and entered
into this ____ day of ______, 1996 by and between ETHIKA CORPORATION (formerly
known as Dixie National Corporation), a corporation organized and existing under
the laws of the State of Mississippi ("Purchaser"), ERIC R. FREDRICKSON, an
individual resident of Salt Lake County, Utah ("E. Fredrickson"), and SHERRY
FREDRICKSON, an individual resident of Salt Lake County, Utah ("S. Fredrickson")
(E. Fredrickson and S. Fredrickson may be referred to hereinafter from time to
time collectively as "Sellers" and individually as a "Seller").
R E C I T A L S:
A. Sellers are the owners of all of the issued and outstanding capital
stock of Compass Data Systems, Inc., a corporation organized and existing under
the laws of the State of Utah (the "Company"), which owns and operates a
business which develops, owns, sells or licenses Folio infobase software
products and other related assets.
B. Sellers desire to sell to Purchaser, and Purchaser desires to
acquire from Sellers, Sellers' stock in the Company in exchange for certain
shares of Purchaser to be issued to Sellers upon the terms and subject to the
conditions contained herein.
NOW THEREFORE, for and in consideration of the mutual covenants and
agreements contained herein, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
ARTICLE I
Exchange of Shares
1.01 Basic Transaction. In reliance upon the representations,
warranties, covenants and agreements of the parties set forth in this Agreement
and upon the terms and subject to the conditions contained in this Agreement, at
the Closing (as defined in Section 1.02), Sellers shall grant, convey and
transfer to Purchaser 2,000 shares of the $1.00 par value common stock of the
Company, representing all of the issued and outstanding shares of the common
capital stock of the Company (the "Compass Shares"), and Purchaser shall issue
and deliver to Sellers, in the amounts shown on Schedule 1.01 attached hereto,
726,612 shares of the One Dollar ($1.00) par value common stock of Purchaser
(the "Ethika Shares"). In addition, at the Closing, E. Fredrickson will enter
into an employment agreement substantially in the form of Exhibit A attached
hereto.
<PAGE>
1.02 Closing. Upon the terms and subject to the conditions of this
Agreement, including without limitation the conditions to closing set forth in
Articles II and III hereof, the transactions described and provided for in this
Agreement shall be consummated at a closing (the "Closing") at the offices of
Seller at 5:00 p.m. on or prior to August 12, 1996 (the "Closing Date") or at
such other date, time and place as the parties hereto shall mutually agree.
1.03 Documents. On the Closing Date, Purchaser and Sellers shall
execute and deliver all appropriate documents and instruments necessary to
effect the transactions contemplated hereby.
1.04 Reorganization. This Agreement is intended to be a B
reorganization under Section 3.68(a)(i)(B) of the Internal Revenue Code of 1986,
as amended.
ARTICLE II
Conditions to Obligations of Purchaser
The obligation of Purchaser to exchange the Ethika Shares for the
Compass Shares shall be subject to the satisfaction at or prior to the Closing
Date of each of the following conditions:
2.01 Due Diligence Review. Prior to execution of this Agreement,
Purchaser has had the opportunity to conduct only limited examination of the
assets, liabilities, business and affairs of the Company. Commencing on the date
hereof, Purchaser shall diligently pursue its review of the books, records,
business and affairs of the Company, which review shall be completed no later
than July 31, 1996. As provided in Section 7.03, Seller shall make available to
Purchaser any and all information which Purchaser may reasonably request in
order to complete its review.
2.02 Accuracy of Representations and Warranties and Compliance with
Obligations. The representations and warranties of Sellers contained in this
Agreement shall have been true and correct at and as of the date hereof in all
material respects, and they shall be true and correct at and as of the Closing
Date in all material respects with the same force and effect as though made at
and as of that time. Sellers shall have performed and complied with all of their
obligations required by this Agreement to be performed or complied with at or
prior to the Closing Date. Each of Sellers shall have delivered to Purchaser a
certificate, dated as of the Closing Date and signed by such Seller, certifying
that such representations and warranties are true and correct and that all such
obligations have been performed and complied with.
2.03 Opinion of Counsel. Purchaser shall have received an opinion or
opinions, dated the Closing Date, from counsel for Sellers in form and substance
acceptable to Purchaser.
2.04 Receipt of Necessary Consents. All necessary consents or approvals
of third parties to any of the transactions contemplated hereby, the absence of
which would materially affect Purchaser's rights hereunder, if any, shall have
been obtained and shown by written evidence reasonably satisfactory to
Purchaser.
<PAGE>
2.05 No Adverse Litigation. There shall not be pending or threatened
any action or proceeding by or before any court or other governmental body which
shall seek to restrain, prohibit or invalidate the exchange of the Compass
Shares for the Ethika Shares as provided herein or any other transaction
contemplated hereby, or which might affect the right of Purchaser to own the
Compass Shares, to operate the Company, or to issue the Ethika Shares to Sellers
and which, in the judgment of Purchaser, makes it inadvisable to proceed with
the transactions contemplated herein.
2.06 Closing Documents. Sellers shall have delivered to Purchaser all
certificates evidencing the Compass Shares free and clear of any and liens and
encumbrances whatsoever, duly endorsed for transfer or with stock powers
transferring title to the Compass Shares, in form and substance acceptable to
Purchaser, and E. Fredrickson shall have executed the Employment Agreement,
together with any and all other documents deemed reasonably necessary by
Purchaser to consummate the transactions contemplated herein or to otherwise
effect the intent of this Agreement.
2.07 Material Adverse Change. There shall have been no material adverse
change in the Company, its assets, liabilities, business, financial condition or
prospects prior to the Closing.
2.08 Securities Compliance. The parties hereto shall have executed and
delivered any and all documents and taken all such actions as may be reasonably
necessary to comply with federal and applicable state securities laws.
ARTICLE III
Conditions to Obligations of Sellers
The obligation of Sellers to exchange the Compass Shares for the Ethika
Shares shall be subject to the satisfaction at or prior to the Closing Date of
each of the following conditions:
3.01 Accuracy of Representations and Warranties and Compliance with
Obligations. The representations and warranties of Purchaser contained in this
Agreement shall have been true and correct at and as of the date hereof in all
material respects, and they shall be true and correct at and as of the Closing
Date in all material respects with the same force and effect as though made at
and as of that time. Purchaser shall have performed and complied with all of its
obligations required by this Agreement to be performed or complied with at or
prior to the Closing Date. Purchaser shall have delivered to Sellers a
certificate, dated as of the Closing Date and signed by its Vice President,
certifying that such representations and warranties are true and correct and
that all such obligations have been performed and complied with.
3.02 Opinion of Counsel. Sellers shall have received an opinion or
opinions, dated the Closing Date, from counsel for Purchaser in form and
substance acceptable to Sellers.
3.03 Receipt of Necessary Consents. All necessary consents or approvals
of third parties to any of the transactions contemplated hereby, the absence of
which would materially affect Seller's rights hereunder, if any, shall have been
obtained and shown by written evidence reasonably satisfactory to Seller.
<PAGE>
3.04 No Adverse Litigation. There shall not be pending or threatened
any action or proceeding by or before any court or other governmental body which
shall seek to restrain, prohibit or invalidate the exchange of the Ethika Shares
for the Compass Shares as provided herein or any other transaction contemplated
hereby or which, in the judgment of Sellers, makes it inadvisable to proceed
with the transactions contemplated herein.
3.05 Closing Documents. Purchaser shall have executed and delivered to
Sellers certificates representing the Ethika Shares in the amounts shown on
Schedule 1.01, free and clear of all liens and encumbrances whatsoever, each
such certificate bearing a legend as provided in Section 5.30, Purchaser shall
have executed and delivered to E. Fredrickson the Employment Agreement, together
with any and all such other documents deemed reasonably necessary by Sellers to
consummate the transactions contemplated herein or to otherwise effect the
intent of this Agreement.
3.06 Material Adverse Change. There shall have been no material adverse
change in the financial condition, business or prospects of Purchaser prior to
the Closing.
ARTICLE IV
Additional Agreements
4.01 Further Assurances. At and after the Closing, the parties hereto
shall execute, acknowledge and deliver all such further documents, deeds,
assignments, transfers, conveyances, powers of attorney and assurances, and
shall take and perform any and all such further actions, as may be reasonably
necessary or appropriate by either party to exchange the Compass Shares for the
Ethika Shares and to otherwise effect the transactions contemplated by this
Agreement.
4.02 Audit. The parties hereto acknowledge and agree that under rules
promulgated by the Securities and Exchange Commission (the "Commission"),
Purchaser will be required to make filings with respect to the transactions
contemplated herein which are required to include financial statements of the
Company which are audited by an independent certified public accounting firm in
accordance with generally accepted accounting principles, consistently applied.
At the time of execution of this Agreement, no such audited financial statements
have been prepared for the Company. The parties agree that such an audit will be
commenced immediately upon the execution of this Agreement, at the sole expense
of Purchaser, with an independent public accounting firm selected by Purchaser.
Seller shall make available to Purchaser and such firm any and all books and
records which they may reasonably require in order to promptly and efficiently
complete and conduct such audit, shall personally be available to, and shall
make other members of management of the Company available to, answer questions
and provide information which may be necessary in order to complete such audit,
and shall otherwise provide their full, prompt and efficient cooperation so that
such audit may be completed as soon as reasonably possible.
4.03 Registration of Ethika Shares.
(a) Notice of Registration. If, at any time or from time to
time, Purchaser shall determine to register any of its securities for its own
account or for the account of any other person other than (i) a registration
relating solely to employee benefit plans, (ii) a registration relating solely
to a Commission Rule 145 transaction, or (iii) a registration on any form (such
as Form S-4) that does not permit secondary sales, Purchaser will:
<PAGE>
(i) Promptly give to each Seller written notice thereof; and
(ii) Include in such registration (and any related
qualification under blue sky laws or other compliance), and in any underwriting
involved therein, all the Ethika Shares specified in a written request or
requests, made within thirty (30) days after receipt of such written notice from
Purchaser, by any Seller, but only to the extent that such inclusion will not
diminish the number of securities included by Purchaser or such other person
(subject, however, to the rights of the Sellers as set forth in Section
4.03(b)).
(b) Underwriting. If the registration of which Purchaser gives
notice is for a registered public offering involving an underwriting, Purchaser
shall so advise the Sellers as a part of the written notice given pursuant to
Section 4.03(a)(i). In such event the right of any Seller to registration
pursuant to this Section 4.03 shall be conditioned upon such Seller's
participation in such underwriting and the inclusion of the Ethika Shares in the
underwriting to the extent provided herein. Any Seller proposing to distribute
its securities through such underwriting shall (together with Purchaser and the
other holders distributing their securities through such underwriting) enter
into an underwriting agreement in customary form with the managing underwriter
selected for such underwriting by Purchaser. Notwithstanding any other provision
of this Section 4.03, if the managing underwriter determines that marketing
factors require a limitation of the number of shares to be underwritten, the
managing underwriter may limit the Ethika Shares to be included in such
registration. Purchaser shall so advise such Sellers and the other holders
distributing their securities through such underwriting pursuant to piggyback
registration rights similar to this Section 4.03, and the number of shares of
the Ethika Shares and other securities that may be included in the registration
and underwriting (other than shares issuable by Purchaser) shall be allocated
among such Sellers and other holders in proportion, as nearly as practicable, to
the respective amounts of the Ethika Shares which such Sellers and other holders
originally proposed to distribute pursuant to such underwriting. If any Seller
or other holder disapproves of the terms of any such underwriting, he may elect
to withdraw therefrom by written notice to Purchaser and the managing
underwriter. Any securities excluded or withdrawn from such underwriting shall
be withdrawn from such registration, and, if Section 4.03(i) applies to such
registration, shall not be transferred in a public distribution prior to one
hundred eighty (180) days after the effective date of the registration statement
relating thereto.
(c) Right to Terminate Registration. Purchaser shall have the
right to terminate or withdraw any registration initiated by it under this
Section 4.03 prior to the effectiveness of such registration whether or not any
Seller has elected to include securities in such registration.
(d) Registration Procedures. In the case of each registration
effected by Purchaser pursuant to this Section 4.03, Purchaser will keep each
Seller advised in writing as to the initiation of each registration and as to
the completion thereof. At its expense, Purchaser will use its best efforts to:
(i) Keep such registration effective for a period of ninety
(90) days or until the Seller or Sellers have completed the distribution
described in the registration statement relating thereto, whichever first
occurs; provided, however, that (A) such 90-day period shall be extended for a
period of time equal to the period the Seller refrains from selling any
securities included in such registration at the request of an underwriter of
<PAGE>
common stock (or other securities) of Purchaser; and (B) in the case of any
registration of the Ethika Shares on Form S-3 which are intended to be offered
on a continuous or delayed basis, such 90-day period shall be extended, if
necessary, to keep the registration statement effective until all such Ethika
Shares are sold, provided that Rule 415, or any successor rule under the
Securities Act of 1933 (the "Securities Act"), permits an offering on a
continuous or delayed basis, and provided further that applicable rules under
the Securities Act governing the obligation to file a post-effective amendment
permit, in lieu of filing a post-effective amendment that (1) includes any
prospectus required by Section 10(a)(3) of the Securities Act or (2) reflects
facts or events representing a material or fundamental change in the information
set forth in the registration statement, the incorporation by reference of
information required to be included in (A) and (B) above to be contained in
periodic reports filed pursuant to Section 13 or 15(d) of the Exchange Act of
1934 (the "Exchange Act") in the registration statement;
(ii) Prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement;
(iii) Furnish such number of prospectuses and other documents
incident thereto, including any amendment of or supplement to the prospectus, as
a Seller from time to time may reasonably request;
(iv) Cause all such Ethika Shares registered pursuant
hereunder to be listed on each securities exchange on which similar securities
issued by Purchaser are then listed; and
(v) Provide a transfer agent and registrar for all Ethika
Shares registered pursuant to such registration statement and a CUSIP number for
all such Ethika Shares, in each case not later than the effective date of such
registration.
(e) Expenses of Registration. All expenses incurred in
connection with any registration pursuant to this Section 4.03, including,
without limitation, all registration, qualification and filing fees, printing
expenses, escrow fees, fees and disbursements of counsel for Purchaser and blue
sky fees and expenses (the "Registration Expenses") shall be borne by Purchaser.
Sellers shall be required to pay any and all expenses directly relating to their
participation in such registration, including but not limited to Sellers' own
counsel fees and expenses and all selling expenses, including all underwriting
discounts, selling commissions, and stock and transfer taxes directly relating
to Ethika Shares sold by them pursuant to such registration.
(f) Indemnification.
(i) Purchaser will indemnify each Seller, with respect to any
registration, qualification or compliance effected pursuant to this Section 4.03
(the "Purchaser Indemnitees"), against all expenses, claims, losses, damages or
liabilities (or actions in respect thereof), including any of the foregoing
incurred in settlement of any litigation, commenced or threatened, arising out
of or based on any untrue statement (or alleged untrue statement) of a material
fact contained in any registration statement, prospectus, offering circular or
<PAGE>
other document, or any amendment or supplement thereto, incident to any such
registration, qualification or compliance; or based on any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances in which
they were made, not misleading; or based on any violation (or alleged violation)
by Purchaser of any provision of the Securities Act, or any rule or regulation
promulgated under the Securities Act, applicable to Purchaser in connection with
any such registration, qualification or compliance; provided, that Purchaser
will not be liable in any such case to the extent that any such expense, claim,
loss, damage, liability or action arises out of or is based on any untrue
statement or omission or alleged untrue statement or omission, made in reliance
upon and in conformity with information furnished to Purchaser by such Purchaser
Indemnitee.
(ii) Each Seller will, if the Ethika Shares held by such
Seller are included in the securities as to which such registration,
qualification or compliance is being effected, indemnify Purchaser, each of its
directors and officers, each underwriter, if any, of Purchaser's securities
covered by such a registration statement, and each person who controls Purchaser
or such underwriter within the meaning of Section 15 of the Securities Act (the
"Seller Indemnitees"), against all expenses, claims, losses, damages and
liabilities (or actions in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained in
any such registration statement, prospectus, offering circular or other document
or any amendment or supplement thereto; or based on any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, provided that such
untrue statement (or alleged untrue statement) or omission (or alleged omission)
is made in such registration statement, prospectus, offering circular or other
document in reliance upon and in conformity with information furnished to
Purchaser by such Seller.
(g) Information by Seller; Copies of Prospectus. It shall be a
condition precedent to the obligations of Purchaser to take any action pursuant
to this Section 4.03 with respect to the Ethika Shares of any Sellers that such
Sellers of the Ethika Shares included in any registration shall furnish to
Purchaser such information regarding such Sellers, the Ethika Shares held by
them and the distribution proposed by such Sellers as Purchaser may request in
writing and as shall be required in connection with any registration,
qualification or compliance referred to in this Section 4.03. In connection with
any such registration, Purchaser shall furnish to such Seller or Sellers such
numbers of copies as it or they may reasonably request, in order to facilitate
the disposition of the Ethika Shares owned by them, of any prospectus or
preliminary prospectus prepared in conformity with the Securities Act.
(h) Transfer of Registration Rights. The right to cause
Purchaser to register securities granted Sellers under this Section 4.03 may be
assigned only with the prior written consent of Purchaser.
(i) Market Standoff Agreement. In connection with the public
offering of Purchaser's securities and upon the request of Purchaser or the
underwriters managing any underwritten offering of Purchaser's securities, each
Seller agrees not to directly or indirectly sell, offer to sell, contract to
sell (including without limitation, any short sale), loan, grant any option for
the purchase of, or otherwise dispose of or transfer any Ethika Shares (other
than those included in the registration) without the prior written consent of
Purchaser or such underwriters, as the case may be, for such period of time (not
<PAGE>
to exceed one hundred eighty (180) days) from the effective date of such
registration as may be requested by Purchaser or such managing underwriters. In
order to enforce the foregoing covenant, Purchaser may impose stop-transfer
instructions with respect to the Ethika Shares of each Seller (and the shares or
securities of every other person subject to the foregoing restriction) until the
end of such period.
(j) Notice to Purchaser of Proposed Sale and Right of
Purchaser to Suspend Use of Registration Statement. If any Seller shall propose
to sell any Ethika Shares pursuant to a Registration Statement hereunder, it
shall notify Purchaser of its intent to do so at least three (3) full business
days prior to such sale. Such notice shall be deemed to constitute a
representation that any information previously supplied by such Seller
(including without limitation the information referred to in Section 4.03(g)
hereof) is accurate as of the date of such notice. At any time within such three
(3) business-day period, Purchaser may refuse to permit the Seller to resell any
Ethika Shares pursuant to the Registration Statement; provided, however, that in
order to exercise this right, Purchaser must deliver a certificate in writing to
the Seller to the effect that a delay in such sale is necessary because a sale
pursuant to such Registration Statement in its then-current form would not be in
the best interests of Purchaser and its shareholders. In no event shall such
delay exceed thirty (30) calendar days, and provided further, however, that in
no event shall Purchaser be permitted to exercise this right more than twice in
any single calendar year.
(k) Termination of Registration Rights. No Seller shall be
entitled to exercise any right provided in this Section 4.03 after the date such
Seller beneficially owns less than 1% of the Company's outstanding capital stock
and is able to sell all of the Ethika Shares held by such Seller in a
three-month period pursuant to Rule 144, or a successor rule.
4.04 Payment to E. Fredrickson. In consideration of the covenants
contained in Sections 10.01 and 10.02, Purchaser shall pay to E. Fredrickson
Fifty Thousand Dollars ($50,000) per year for a period of two (2) years from the
Closing Date for a total of One Hundred Thousand Dollars ($100,000) payable in
two installments of $50,000 each, one payable at Closing and one payable on
January 1, 1997.
ARTICLE V
Representations and Warranties of Sellers
In order to induce Purchaser to enter into this Agreement and to
consummate the transactions contemplated hereunder, Sellers jointly and
severally make the following representations and warranties:
5.01 Capacity and Consents. Each Seller has full right, power and legal
capacity and authority to enter into and perform Seller's obligations under this
Agreement and to consummate the transactions contemplated hereby, and has
obtained all requisite consents or approvals applicable to Seller to do so. This
Agreement and each of the other documents to be executed pursuant hereto have
been or will be duly executed and delivered by Sellers and constitute the valid
and binding obligations of Sellers enforceable in accordance with its terms.
<PAGE>
5.02 Title to Compass Shares. Each of Sellers has, and at the time of
Closing such Seller will have, good and marketable title to the Compass Shares
as set forth on Schedule 5.02, free and clear of all liens, encumbrances,
security interests, equities, preemptive rights, community property rights and
adverse claims whatsoever; and, upon delivery of such shares of the Compass
Shares and payment therefor pursuant to this Agreement, good and marketable
title to such shares of the Compass Shares, free and clear of all liens,
encumbrances, security interests, equities, preemptive rights, community
property rights and adverse claims whatsoever, will be transferred to Purchaser.
5.03 Organization. The Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of Utah and has full
corporate power and authority to conduct its business as it is now being
conducted and to own, operate or lease the properties and assets it currently
purports to own, operate or hold. The Company is duly qualified or licensed to
do business and is in good standing in each jurisdiction where the character of
its business or the nature of its properties makes such qualification or
licensing necessary. The Company does not own, directly or indirectly, any
interest or investment in any corporation, association, joint venture,
partnership or other business organization, firm or enterprise of any character
whatsoever.
5.04 Capitalization. The authorized capital stock of the Company
consists of 500,000 shares of $1.00 par value common stock, of which 2,000
shares are issued and outstanding as of the date hereof and are owned of record
and beneficially by Sellers as set forth on Schedule 5.02. All of such
outstanding shares are validly issued, fully paid and non-assessable and were
issued in compliance with applicable law. Other than as set forth on Schedule
5.04, there are no outstanding options, warrants, convertible securities, calls,
rights, commitments, preemptive rights or agreements, instruments or
understandings of any character, to which the Company is a party or by which the
Company is bound, obligating the Company to issue, deliver or sell, or cause to
be issued, delivered or sold, additional shares of capital stock of the Company
or any securities or obligations convertible into or exchangeable for such
shares or to grant, extend or enter into any such option, warrant, convertible
security, call, right, commitment, preemptive right or agreement. There are no
outstanding obligations of the Company to purchase or otherwise acquire any
capital stock of the Company. The Company has never redeemed any of its
outstanding shares of capital stock.
5.05 No Violation. Except as set forth on Schedule 5.05, the execution
and delivery of this Agreement by Sellers does not, and the consummation by the
Company and Sellers of the agreements and transactions contemplated by this
Agreement will not, (a) conflict with, or result in any violation of or default
or loss of any benefit under, any provision of the articles of incorporation or
bylaws of the Company; (b) violate any permit, concession, grant, franchise,
law, rule or regulation, or any judgment, decree or order of any court,
administrative agency or commission or other governmental authority or
instrumentality ("Governmental Entity") to which the Company is a party or to
which the Company or any of its property is subject; or (c) conflict with, or
result in a breach or violation of, or accelerate the performance required by,
the terms of any agreement, contract, indenture or other instrument to which the
Company is a party or to which any of its property is subject, or constitute a
default or loss of any right thereunder or an event which, with the lapse of
<PAGE>
time or notice or both, might result in a default or loss of any right
thereunder or the creation of any lien, charge or encumbrance upon any of the
assets or properties of the Company. Sellers shall use their best efforts to
cause the Company to take all such actions as shall be necessary so that, at
Closing, all of the conflicts, violations or other matters described on Schedule
5.05 shall have been cured, waived or removed.
5.06 Approvals. Except as set forth on Schedule 5.06, the execution and
delivery of this Agreement and the consummation of the agreements and
transactions contemplated by this Agreement will not, to the best of Sellers'
knowledge after reasonable investigation, require the consent, approval, order
or authorization of any Governmental Entity or regulatory authority or any other
person under any permit, license, agreement, indenture or other instrument to
which the Company is a party or to which any of its properties are subject, and,
to the best of Sellers' knowledge after reasonable investigation, no
declaration, filing or registration with any Governmental Entity or regulatory
authority is required or advisable by the Company in connection with the
execution and delivery of this Agreement and the consummation of such agreements
and transactions. Sellers shall use their best efforts to cause all of the
consents, approvals or other matters described on Schedule 5.06 to be obtained,
waived or otherwise satisfied prior to Closing.
5.07 Corporate Action, Charter and Bylaws. Sellers have heretofore
delivered to Purchaser true and complete copies of the incorporation and
organizational documents of the Company as in effect on the date hereof. Sellers
have heretofore delivered to Purchaser true and complete copies of the minute
books and stock records of the Company. Such minute books and stock records
correctly reflect all corporate actions taken at all meetings of, or by written
consents of, directors of the Company (including committees thereof) including
but not limited to actions taken at such meetings relating to the organization
of the Company and the issuance of shares of capital stock of the Company.
5.08 Financial Statements. Attached hereto as Schedule 5.08 are the
following financial statements (collectively the "Financial Statements"):
unaudited balance sheets and statements of income, changes in stockholders'
equity, and cash flow as of and for the fiscal years ended April 30, 1995 and
April 30, 1996, and for the month and year to date ended July 31, 1996. The
Financial Statements (including the notes thereto) have been prepared in
accordance with generally accepted accounting principles applied on a consistent
basis throughout the periods covered thereby, present fairly the financial
condition of the Company for such periods, are correct and complete, and are
consistent with the books and records of the Company (which books and records
are correct and complete). Since the date of the Financial Statements, there has
not been any material adverse change in the business, financial condition,
operations, results of operations, or future prospects of the Company.
5.09 Litigation. Except as set forth on Schedule 5.09, the Company is
not subject, and during the two years immediately preceding the date hereof, the
Company was not subject, to any judicial, governmental or administrative order,
judgment, injunction or decree, other than those of general application. No
suits, actions, audits or proceedings of any character whatsoever are pending,
or to the knowledge of any Seller, threatened against or affecting the Company
or any of its properties, assets or businesses, nor has the Company received any
other claims or demands of any nature whatsoever.
<PAGE>
5.10 Compliance with Laws; Environmental Matters.
(a) The business of the Company is not currently conducted in
violation of any law or any ordinance or regulation of any Governmental Entity.
Except as set forth on Schedule 5.10, the Company has not during the past two
years conducted its business in violation of any law or any ordinance or
regulation of any Governmental Entity. No investigation or review by any
Governmental Entity (including without limitation any audit or similar review by
any federal, state or local taxing authority) with respect to the Company is
pending or, to the knowledge of any Seller, threatened, nor has any Governmental
Entity indicated to any Seller or, to the knowledge of any Seller, an intention
to conduct the same.
(b) The Company has all licenses, permits and certifications
(federal, state, foreign and local) required by law to conduct its business in
the cities, states and countries in which it conducts its business, and such
licenses, permits and certifications are in full force and effect. During the
past five years, the Company has not had any such licenses, permits or
certifications suspended or revoked, other than as described on Schedule 5.10.
No proceeding is pending or, to the knowledge of any Seller, threatened, seeking
the revocation or limitation of any of such licenses, permits and
certifications.
(c) Specifically, without limiting the representations
contained in Section 5.10(a) hereof, the Company and its properties are in
compliance with all applicable published rules and regulations (and applicable
standards and requirements) of the Environmental Protection Agency ("EPA") and
of all similar national, state and local agencies in which the Company owns
assets or conducts business. There is no suit, claim, action or proceeding now
pending before any court, governmental agency or board or, to the knowledge of
any Seller, threatened by any person or entity for noncompliance by the Company
(or by any other person with respect to any of its properties) with any
environmental law, rule or regulation. The Company does not have, and its
properties are not subject to, any liability, contingent or otherwise, arising
out of or resulting from the release, discharge, spillage, storage, burying or
other disposal, whether on its own premises or through other persons, of any
pollutant, toxic or hazardous material or waste of any kind. There are no
citations, fines or penalties heretofore assessed against the Company or with
respect to any of its properties under any national, state or local law that
remain unpaid, nor has the Company received any notices or any other
communications expressly addressed to it from the EPA, the Occupational Safety
and Health Administration or any other national, state or local agency or other
Governmental Entity with respect to any violations or alleged violations of any
national, state or local law or regulation.
5.11 Real Property. The Company owns no real property. The Company
leases the real property subject to the leases or subleases described in
Schedule 5.11 hereto. Each such lease or sublease is legal, valid, binding and
enforceable and is in full force and effect; no party to the leases or subleases
is in breach or default and no event has occurred which, with notice or lapse of
time would constitute a breach of default, or permit termination, modification
or acceleration thereunder. There are no disputes, oral agreements or
forbearance programs in effect; the Company has not assigned, transferred,
conveyed, mortgaged, deeded, entrusted, or encumbered the leasehold or
subleasehold estate. All facilities leased or subleased have received all
<PAGE>
approvals of governmental authorities (including licenses and permits) required
in connection therewith and have been operated and maintained in accordance with
all applicable laws, rules and regulations; and the real property and facilities
leased or subleased are adequate and suitable for the operations of the Company
conducted therein.
5.12 Intellectual Property.
(a) Subject to the rights and licenses granted by the Licenses
and the Marketing Agreements (as defined in Sections 5.14(a) and 5.14(b),
respectively), the Company is the sole and exclusive owner of all right, title
and interest in, and has good, valid and marketable title to, the software
programs developed, authored and/or licensed by the Company prior to the Closing
including without limitation those software programs listed on Schedule 5.12
(the "Software Programs") and the Documentation (as defined in Section 5.13),
free and clear of all mortgages, pledges, liens, security interests, conditional
sales agreements, encumbrances or charges of any kind. Subject to the rights and
licenses granted by the Licenses and the Marketing Agreements, the Company is
the sole and exclusive owner of all right, title and interest in, and has good
valid and marketable title to, all patents, trade secrets, copyrights, trade
dress, and any and all other proprietary rights (including registrations,
licenses and applications pertaining thereto) (the "Intellectual Property"),
free and clear of all mortgages, pledges, liens, security interests, conditional
sales agreements, encumbrances or charges of any kind. Schedule 5.12 contains a
complete list of all registered trademarks and service marks, all reserved trade
names, all registered copyrights and all filed patent applications and issued
patents used in, or otherwise necessary for the conduct of, the business of the
Company as heretofore conducted.
(b) Schedule 5.12 sets forth the form and placement of the
proprietary legends and copyright notices displayed in or on the Software
Programs. In no instance has the eligibility of the Software Programs for
protection under applicable copyright law been forfeited to the public domain by
omission of any required notice or any other action.
(c) The Company has taken reasonable security measures to
protect the confidentiality of its trade secrets, including, without limitation,
technical data, know-how, research, product plans and services, customer lists,
software, inventions, processes, formulas, technology, designs, engineering
specifications, testing, processes, marketing, finances and other business
information and other proprietary information. All personnel, including
employees, agents, consultants, and contractors, who have conceived, developed
and/or authored, in whole or in part, any of the Software Programs,
Documentation, and/or Intellectual Property have executed nondisclosure
agreements and either (1) have been party to a written agreement with the
Company that has accorded the Company full, effective, exclusive and original
ownership of all the Software Programs, Documentation and Intellectual Property,
or (2) have executed appropriate instruments of assignment in favor of the
Company as assignee that have conveyed to the Company full, effective, and
exclusive ownership of all the Software Programs, Documentation and Intellectual
Property. The source code and Documentation (except end-user manuals) relating
to the Software Programs (i) have at all times been maintained in strict
confidence, (ii) have been disclosed by the Company only to employees having a
"need to know" the contents thereof in connection with the performance of their
duties to the Company and (iii) have not been disclosed to any third party.
<PAGE>
(d) Schedule 5.12 contains a complete list of software
libraries, compilers and other third-party software used in the development of
the Software Programs. Schedule 5.12 lists all license agreements for the use of
all such software and, if any such software is not licensed, the basis of the
use of such software by the Company. All use of each of such Software Programs
by the Company has been in full compliance with the respective license agreement
or other right of use listed on Schedule 5.12.
(e) The Software Programs will perform in accordance with the
warranties set forth in the standard end-user agreements listed on Schedule
5.12.
(f) Neither the Software Programs nor the Documentation
infringe, nor will they infringe, any copyright or trade secret of any person or
entity, and, to the knowledge of any of Sellers, no part of the Software
Programs nor the use thereof for their intended purposes infringes or will
infringe any patent or other exclusionary right of any third party. No claims
have been asserted by any person or entity as to the use of any of the
Intellectual Property. To the knowledge of Sellers, there is no material
unauthorized use, infringement or misappropriation of any of the Software
Programs, Documentation or Intellectual Property by any third party, including
any employee or former employee of the Company. The Company has not been sued or
charged as a defendant in any claim, suit, action or proceeding which involves a
claim of infringement of any patents, trademarks, service marks, copyrights or
violation of any trade secret or other proprietary right of any third party and
which has not been finally terminated without continuing obligation by the
Company prior to the date hereof, nor do Sellers have any knowledge of any such
potential charge or claim, and there is not any infringement liability with
respect to, or infringement or violation by, the Company of any patent,
trademark, service mark, copyright, trade secret or other proprietary right of
another. The Company has not entered into any agreement to indemnify any other
person against any charge of infringement of any Software Programs,
Documentation or Intellectual Property.
(g) The Company has observed all material provisions of, and
performed all of their material obligations under, the Licenses, including, but
not limited to, the performance of its product maintenance obligations. The
Company has not, to the best of Sellers' knowledge after reasonable
investigation, taken any action that could cause, or failed to take any action,
the failure of which could cause, (i) the unprotected disclosure of any trade
secret or source code of any of the Software Programs, (ii) the release from an
escrow or other similar arrangement of any source code or trade secret of any of
the Software Programs, or (iii) any other adverse effect to the protection of
the Software Programs under trade secret, copyright, patent or other
intellectual property laws.
(h) No portion of the Software Products contains or will
contain any "back door," "time bomb," "Trojan horse," "worm," "drop dead
device," "virus" or other software routines or hardware components designed to
permit unauthorized access; to disable or erase software, hardware, or data; or
to perform any other such actions.
<PAGE>
5.13 Adequacy of Documentation. The documentation of the Software
Programs includes without limitation the source code for each of the Software
Programs, as well as any pertinent commentary or explanation that may be
necessary to render such materials understandable and usable by a trained
computer programmer, any programs (including compilers), "workbenches," tools
and higher level (or "proprietary") language necessary for the development,
maintenance and implementation of the Software Programs and any and all other
materials relating to the Software Programs including without limitation all
notes, flow charts, and programmer's or user's manuals (the "Documentation").
5.14 Software Contracts.
(a) Schedule 5.14 sets forth a complete list of all licenses
and sublicenses of the Software Programs and of all customer trial agreements
for the Software Programs granted by the Company to other parties (the
"Licenses"). All contracts identified in Schedule 5.14 constitute only end-user
agreements, each of which grants the end user thereunder principally the
nonexclusive right and license to use an identified Software Program and related
user documentation, for internal purposes only, at the sites specified in each
agreement.
(b) Schedule 5.14 sets forth a complete list of all contracts,
agreements, licenses, or other commitments or arrangements in effect with
respect to the marketing, remarketing, distribution, licensing or promotion of
(i) the Software Programs or any Documentation or the Intellectual Property by
any independent salesperson, distributor, sublicensor or other remarketer or
sales organization or (ii) of any third party's software products by the Company
(the "Marketing Agreements").
(c) Other than the Licenses and the Marketing Agreements, the
Company has not granted, transferred or assigned any right or interest in the
Software Programs, the Documentation or the Intellectual Property to any person
or entity.
5.15 Title to Tangible Property. Other than the Software Programs, the
Intellectual Property and the Documentation, all of the property, both tangible
and intangible, owned by the Company is shown and described on Schedule 5.15
(the "Other Assets") (the Software Programs, the Intellectual Property, the
Documentation and the Other Assets may be collectively referred to herein as the
"Assets"). Except as disclosed on Schedule 5.15, the Company owns the Other
Assets free and clear of any and all liens and encumbrances whatsoever. The
Other Assets are in good operating condition and repair and are suitable for the
purposes for which they are presently used. The Assets are sufficient in all
respects for the conduct of the business of the Company as presently conducted.
5.16 Inventory. The inventory of the Company shown and described on
Schedule 5.16 consists of raw materials and supplies, manufactured and purchased
parts, goods in process, and finished goods, all of which is merchantable and
fit for the purpose for which it was procured or manufactured, and none of which
is obsolete, damaged, or defective.
5.17 Notes and Accounts Receivable. All notes and accounts receivable
of the Company are shown and described on Schedule 5.17, are reflected properly
on its books and records, are valid receivables subject to no setoffs or
counterclaims, are current and collectible, and will be collected in accordance
with their terms at their recorded amounts, subject only to the reserve for bad
debts set forth on the Financial Statements (rather than in any notes thereto)
or as set forth on Schedule 5.17.
<PAGE>
5.18 Contracts. Attached hereto as Schedule 5.18 is a complete list of
all (a) employment contracts of the Company which may not be immediately
terminated without penalty (or any augmentation or acceleration of benefits);
(b) leases, sales contracts and other agreements with respect to any personal
property of the Company; (c) contracts or commitments for capital expenditures
or acquisitions in excess of $5,000 for one project or set of related projects;
(d) agreements, contracts, indentures or other instruments relating to the
borrowing of money, or the guarantee of any obligation for the borrowing of
money; (e) contracts or agreements providing for any covenant not to compete by
or otherwise restricting in any way its engaging in any business activity; (f)
contracts or agreements relating to franchisees, consultancies, professional
retentions, agencies, sales or distributorship arrangements relating to their
products or activities; (g) contracts relating to the disposal of any pollutant,
toxic or hazardous material or waste generated by or relating to the Company or
any of its properties; (h) contracts, agreements, arrangements, understandings
or commitments between the Company and any employee, officer, director or Seller
of the Company; (i) contracts between the Company and any of its customers; and
(j) contracts, agreements, arrangements or commitments, other than the
foregoing, which are material to the business, Assets, earnings, properties,
operations or condition, financial or otherwise, of the Company. True and
complete copies of all the instruments listed in Schedule 5.18 have been
furnished to Purchaser. All such agreements, arrangements or commitments are
valid and subsisting and the Company has duly performed its obligations
thereunder in all material respects to the extent such obligations have accrued,
and no breach or default thereunder by the Company or, to the knowledge of any
of Sellers, any other party thereto has occurred that impairs the ability of the
Company to enforce any material rights thereunder.
Except as set forth in Schedule 5.18, to the knowledge of any
of Sellers, no customers or suppliers of the Company with which the Company has
an ongoing relationship intend to cease purchasing from, selling to, renting
from, or dealing with the Company, and, to the knowledge of any Sellers, no
customer or supplier with which the Company has an ongoing relationship intends
to alter in any respect the amount of such purchases, sales, rentals or the
extent of dealings with the Company or to alter in any respect such purchases,
sales, rentals or dealings in the event of the consummation of the transactions
contemplated hereby.
5.19 Employee and Labor Matters and Plans.
(a) Neither the Company nor any corporation, trade, business
or entity under common control with the Company, within the meaning of Section
414(b), (c) or (m) of the Internal Revenue Code of 1986, as amended (the "Code")
or Section 4001 of ERISA, sponsors, maintains or contributes to, or has
sponsored, maintained or contributed to within six years prior to the Closing
Date:
(i) any "employee benefit plan" as such term is defined in
Section 3(3) of ERISA; or
(ii) any personnel policy, stock option plan, collective
bargaining agreement, bonus plan or arrangement, incentive award plan or
arrangement, vacation policy, severance pay plan, policy or agreement, deferred
compensation agreement or arrangement, executive compensation or supplemental
income arrangement, consulting agreement, employment agreement or any other
employee benefit plan, agreement, arrangement, program, practice or
understanding.
<PAGE>
(b) There are no labor disputes or disruptions to which the
Company is a party. The Company is not a party to or bound by any contract,
agreement or understanding with any labor union. The Company has not received
and has no reasonable basis from which to expect to receive notice from any
union or employees setting forth demands for representation, elections or for
present or future changes in wages, terms of employment or working conditions.
(c) There are no claims, pending or threatened, by a current
or former employee of the Company that, individually or in the aggregate,
adversely affect or will adversely affect the business, prospects, results of
operations, financial condition or assets of the Company, including but not
limited to any claims of equity ownership in any such company or of an ownership
interest in any Software Program.
5.20 Insurance Policies. Schedule 5.20 contains a true and complete
description of all insurance policies of the Company covering or relating to the
Company and its business, Assets or any employees or other agents of the
Company. Each such policy is in full force and effect, and is in an amount, and
insures against such losses and risks, as is generally maintained for comparable
businesses and properties.
5.21 Undisclosed Liabilities. There are no liabilities of the Company,
including contingent liabilities, other than liabilities reflected in the
Schedules to this Agreement, including Schedule 5.21. There are no pending
claims for indemnification by any person against the Company under any law or
agreement or pursuant to their constituent incorporation and organization
documents and, no Seller has knowledge of any existing facts or circumstances
that will give rise to such a claim against the Company thereunder.
5.22 Brokerage Fees. None of the Company, any Seller or any of their
respective affiliates has retained any financial advisor, broker, agent or
finder or paid or agreed to pay any financial advisor, broker, agent or finder
on account of this Agreement or any transaction contemplated hereby.
5.23 Miscellaneous Other Information. Schedule 5.23 sets forth the
following information:
(a) the name and current annual salary and benefits of each
officer, employee and agent of the Company, and any employment agreement with
respect to each such person, and the name and compensation of each person to
whom the Company paid consulting fees; and
(b) the name of each bank in which the Company has an account
or safe deposit box, the number of any such accounts, the name in which the
account or box is held and the names of all persons authorized to draw thereon
or to have access thereto.
5.24 No Misleading Statements. This Agreement, the information and
schedules referred to herein and the information contained in the Financial
Statements that have been furnished to Purchaser in connection with the
transactions contemplated by this Agreement, when taken together, do not, and
will not as of the Closing, include any untrue statement of a material fact and
do not and will not omit to state any material fact necessary to make the
statements contained herein or therein, in light of the circumstances under
which they were made, not misleading.
<PAGE>
5.25 Product Liability. The Company has not given or made any
warranties to third parties with respect to any products rented or sold by it,
except for the warranties imposed by the provisions of the Licenses and
applicable commercial codes. There is no state of facts or the occurrence of any
event forming the basis of any present claim against the Company not fully
covered by insurance for product liability on account of any express or implied
warranty.
5.26 Taxes. Except as set forth on Schedule 5.26:
(a) All tax returns, declarations of estimated tax and tax
reports (collectively, "Tax Returns") relating to any income, franchise, sale
and use, unemployment compensation, excise, severance, property, gross proceeds,
payroll and withholding taxes, together with any interest, penalties, fines and
other similar amounts imposed by any Governmental Entity (collectively, "Taxes")
that are required to be filed with respect to periods ending on or before the
Closing for, by, on behalf of or with respect to the Company, including, but not
limited to, those relating to the income, business, operations, payroll or
property of the Company and those which include or should include the Company,
have been or will be timely filed with the appropriate foreign, national, state
and local authorities on or before the Closing, and all Taxes shown to be due
and payable for tax periods ending on or before the Closing on such Tax Returns
or related to such Tax Returns have been or will be satisfied in full on or
before the Closing;
(b) All such Tax Returns and the information and data
contained therein have been or will be properly and accurately compiled and
completed, fairly present or will fairly present the information purported to be
shown therein, and reflect or will reflect all liabilities for Taxes for the
periods covered by such Tax Returns;
(c) None of such Tax Returns are now under audit or
examination by any foreign, national, state or local authority and there are no
agreements, waivers or other arrangements providing for an extension of time
with respect to the assessment or collection of any Taxes or deficiency of any
nature against the Company or with respect to any such Tax Return, or any suits
or other actions, proceedings, investigations or claims now pending or
threatened against the Company with respect to any Taxes, or any matters under
discussion with any foreign, national, state or local authority relating to any
Taxes, or any claims for any additional Tax asserted by any such authority;
(d) All Taxes due and owing from the Company or assessed and
due and owing against the Company on or before the Closing have been or will be
timely paid in full on or before the Closing and the Company does not have any
unpaid liability for any Taxes for any period prior to the date hereof; and
(e) All withholding tax and tax deposit requirements imposed
on the Company for any and all periods ending on or before the Closing have been
or will be timely satisfied in full on or before the Closing.
<PAGE>
5.27 Acquisition Entirely for Own Account. Each Seller represents and
warrants that such Seller is acquiring the Ethika Shares solely for such
Seller's own account, for investment purposes only and not with a view toward
the resale or distribution of the Ethika Shares or any portion or component
thereof, and such Seller will not sell, offer to sell or otherwise dispose of or
distribute the Ethika Shares or any portion or component thereof in any
transaction other than a transaction complying with the registration
requirements of the Securities Act and applicable state securities or "Blue Sky"
laws, or pursuant to an exemption therefrom. Each Seller also represents that
the entire legal and beneficial interest of the Ethika Shares that such Seller
is acquiring is being acquired for, and will be held for, such Seller's account
only, and neither in whole nor in part for any other person or entity.
5.28 Information Concerning Purchaser. Each Seller represents and
warrants that such Seller has been provided with a copy of Purchaser's most
recent Form 10-K, Form 10-Q, preliminary proxy statement and annual report filed
with the Commission, a private placement memorandum dated August 14, 1996 and
such other information concerning Purchaser that such Seller deems necessary and
appropriate to enable such Seller to evaluate the financial risks inherent in
making an investment in the Ethika Shares. Each Seller further acknowledges that
such Seller has received satisfactory and complete information concerning the
business and financial condition of Purchaser in response to all inquiries in
respect thereof.
5.29 Economic Risk and Suitability. Each Seller represents and warrants
as follows:
(a) Each Seller realizes that such Seller's acquisition of the
Ethika Shares involves a high degree of risk and will be a highly speculative
investment and that such Seller is able, without impairing such Seller's
financial condition, to hold the Ethika Shares for an indefinite period of time
and to suffer a complete loss of such Seller's investment.
(b) Each Seller has carefully considered and has, to the
extent such Seller believes such discussions necessary, discussed with such
Seller's professional, legal, tax and financial advisors the suitability of an
investment in the Ethika Shares for the particular legal, tax and financial
situation of such Seller and that such Seller and/or such Seller's advisors have
determined that the Ethika Shares are a suitable investment for such Seller.
(c) Seller has such knowledge and experience in business and
financial matters as will enable such Seller to evaluate the merits and risks of
an investment in the Ethika Shares and to make an informed investment decision.
(d) Each Seller has carefully read this Agreement and
Purchaser has made available to such Seller or Seller's advisors all information
and documents requested by such Seller relating to an investment in the Ethika
Shares, and has provided answers, to such Seller's satisfaction, to all of
Seller's questions concerning Purchaser and the Ethika Shares to be acquired.
(e) Each Seller understands that neither Purchaser nor any of
its officers or directors has any obligation to register the Ethika Shares under
any federal or state securities laws except and to the extent specifically
provided in Section 4.03.
<PAGE>
(f) All information that each Seller has provided Purchaser
concerning such Seller's financial position is true, correct and complete as of
the date hereof, and if there should be any material change in such information,
such Seller will provide such information to Purchaser as soon as practicable
thereafter.
(g) Each Seller understands that Purchaser is relying on the
truth and accuracy of the declarations, representations, warranties and
agreements made by such Seller to Purchaser herein in transferring the Ethika
Shares to such Seller.
(i) Seller confirms that such Seller has received no
general solicitation or general advertisement and has attended no seminar or
meeting (whose attendees have been invited by any general solicitation or
general advertisement) and has received no advertisement, article, notice or
other communication published in any newspaper, magazine, or similar media or
broadcast or television or radio regarding the offering of the Ethika Shares.
5.30 Registration; Restrictions; Legend. The Ethika Shares that Sellers
are acquiring have not been registered under the Securities Act or under the
securities laws of any state, and such Ethika Shares must be held indefinitely
unless a transfer of them is subsequently registered under the Securities Act
and under applicable state securities laws or an exemption from such
registration is available. Each Seller agrees not to make any sale of any Ethika
Shares except either (i) in accordance with a duly filed and effective
registration statement under federal and applicable state law, in which case
Seller must comply with the requirement of delivering a current prospectus, or
(ii) in accordance with an exemption from such registration under the federal
securities laws and all applicable state securities laws. The Ethika Shares are
not transferable on the books of Purchaser unless the certificate submitted to
Purchaser's transfer agent evidencing such Ethika Shares is accompanied by a
separate certificate executed by a Seller or such Seller's officer, or other
person duly authorized by Seller, for purposes of establishing compliance with
this Agreement. Such certificate shall be in such form as shall be supplied by
Purchaser.
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE FEDERAL SECURITIES ACT OF 1933 NOR THE
APPLICABLE SECURITIES ACT OF ANY STATE BUT HAVE BEEN ISSUED IN
COMPLIANCE UPON EXEMPTIONS FROM REGISTRATION CONTAINED IN SAID
ACTS. NO SALE, OFFER TO SELL, OR OTHER TRANSFER OF THE
SECURITIES REPRESENTED BY THIS CERTIFICATE MAY BE MADE UNLESS
A REGISTRATION PROVISIONS OF SUCH ACTS IS THEN APPLICABLE AS
EVIDENCED BY A LEGAL OPINION OBTAINED BY THE STOCKHOLDER AND
APPROVED BY THE COMPANY PRIOR TO TRANSFER."
5.31 Accredited Investor. Sellers are "accredited investors" as defined
in Rule 501 of Regulation D promulgated pursuant to the Securities Act for they,
individually, or jointly with their spouse, have a net worth of $1,000,000 or
individually had income in excess of $200,000 in each of the two most recent
calendar years and reasonably expect an income and excess of $200,000 in the
current year.
<PAGE>
ARTICLE VI
Representations, Warranties and Covenants of Purchaser
Purchaser represents and warrants to the Seller as follows:
6.01 Organization, Etc.. Purchaser is a corporation duly organized,
validly existing and in good standing under the laws of the State of Mississippi
and has full corporate power and authority to conduct its business as it is now
being conducted and to own, operate or lease the properties and assets it
currently owns, operates or holds under lease.
6.02 Authorization. Purchaser has full corporate power and authority to
enter into this Agreement and to carry out its obligations hereunder. The
execution and delivery of this Agreement and the consummation of the agreements
and transactions contemplated hereby have been duly approved by the Board of
Directors of Purchaser, and no other corporate proceedings on its part are
necessary to authorize this Agreement and the transactions contemplated hereby,
and this Agreement constitutes the valid and binding obligation of Purchaser
enforceable in accordance with its terms.
6.03 Brokerage Fees. Purchaser has not retained any financial advisor,
broker, agent or finder or paid or agreed to pay any financial advisor, broker,
agent or finder on account of this Agreement or any transaction contemplated
hereby or any transaction of like nature that would be required to be paid by
the Seller.
6.04 No Violation. The execution and delivery of this Agreement by
Purchaser does not, and the consummation of the agreements and transactions
contemplated by this Agreement will not, (a) conflict with, or result in any
violation of or default or loss of any benefit under, any provision of
Purchaser's articles of incorporation or bylaws; (b) violate any permit,
concession, grant, franchise, law, rule or regulation, or any judgment, decree
or order of any Governmental Entity to which Purchaser is a party or to which
any of its property is subject; or (c) conflict with, or result in a breach or
violation of, or accelerate the performance required by, the terms of any
agreement, contract, indenture or other instrument to which Purchaser is a party
or to which any of its property is subject, or constitute a default or loss of
any right thereunder or an event which, with the lapse of time or notice or
both, might result in a default or loss of any right thereunder or the creation
of any lien, charge or encumbrance upon any of the assets or properties of
Purchaser.
6.05 Approvals. Except as set forth on Schedule 6.05, the execution and
delivery of this Agreement and the consummation of the agreements and
transactions contemplated by this Agreement will not, to the best of Purchaser's
knowledge after reasonable investigation, require the consent, approval, order
or authorization of any Governmental Entity or regulatory authority or any other
person under any permit, license, agreement, indenture or other instrument to
which Purchaser is a party or to which any of its properties are subject, and,
to the best of Purchaser's knowledge after reasonable investigation, no
declaration, filing or registration with any Governmental Entity or regulatory
authority is required or advisable by Purchaser in connection with the execution
and delivery of this Agreement and the consummation of such agreements and
transactions. Purchaser shall use its best efforts to cause all of the consents,
approvals or other matters described on Schedule 6.05 to be obtained, waived or
otherwise satisfied prior to Closing.
<PAGE>
6.06 Articles of Incorporation; Bylaws. Purchaser has heretofore
delivered to Sellers true and complete copies of its articles of incorporation
and bylaws as in effect on the date hereof.
6.07 Exchange Act Filings. Purchaser has made all of its required
filings under the Exchange Act for the current fiscal year and the prior fiscal
year and such filings contain no material representations of material facts or
omit to state material facts which, as of the date of such filings, were
necessary to make the statements contained therein, in light of the
circumstances under which they were made, not misleading. The financial
statements contained in such filings comply in all material respects with the
Exchange Act and the regulations promulgated thereunder.
6.08 Litigation. Except as set forth in Schedule 6.08, no suits,
actions, audits or proceedings of any character whatsoever are pending or to the
knowledge of Purchaser, threatened against or affecting Purchaser or any of its
properties, assets or businesses, nor has Purchaser received any other claims or
demands of any nature whatsoever, except as otherwise disclosed in its most
recent reports filed upon Form 10-K or Form 10-Q since January 1, 1996.
6.09 Common Stock. Purchaser's common stock is quoted and traded on the
NASDAQ "Small-cap Market" system under the rules of the National Association of
Securities Dealers, Inc. and, except as set forth on Schedule 6.09, Purchaser
meets all requirements for continued quotation and trading on such market and
has no knowledge of any reason why its common stock would not continue to be so
quoted and traded.
6.10 No Misleading Statements. This Agreement, the information and
schedules referred to herein and the information referred to in Section 5.28
that has been furnished to Sellers in connection with the transactions
contemplated by this Agreement, when taken together, do not, and will not as of
the Closing, include any untrue statement of a material fact and do not and will
not omit to state any material fact necessary to make the statements contained
herein or therein, in light of the circumstances under which they were made, not
misleading.
ARTICLE VII
Additional Covenants of Sellers
7.01 Best Efforts. Sellers will use their best efforts to cause to be
satisfied as soon as practicable and prior to the Closing Date all of the
conditions set forth in Article II to the obligations of Purchaser to exchange
the Ethika Shares for the Compass Shares..
7.02 Conduct of Business Pending the Closing. From and after the
execution and delivery of this Agreement and until the Closing Date, except as
otherwise provided by the prior written consent of Purchaser:
(a) Sellers will conduct the business of the Company in the
ordinary course and in the manner in which the same has heretofore been
conducted and will (i) preserve its business organization intact, (ii) keep
available the services of its officers, employees, agents and distributors, and
(iii) preserve its relationships with customers, suppliers and others.
(b) Sellers will maintain the Assets in customary repair,
order and condition, reasonable wear and use and damage by unavoidable casualty
excepted, and will maintain insurance of such types and in such amounts upon all
of the Assets and business of the Company as are in effect on the date of this
Agreement.
<PAGE>
(c) Sellers will not without Purchaser's prior written consent
(i) sell or transfer any of the Assets outside the ordinary course of business
or (ii) incur any material obligations or liabilities or enter into any material
transaction, contract, arrangement or agreement.
(d) Shall cause the Company not to declare or pay any dividend
on or make any other distribution in respect of any of its capital stock, split
or combine, or reclassify any of its capital stock or authorize the issuance of
any securities with respect thereto, purchase or redeem, or otherwise acquire
any shares of the capital stock.
(e) Seller shall not amend the Company's articles of
incorporation and shall cause the Company not to amend its bylaws or to enter
into any obligation or agreement which would be violated by the consummation of
this Agreement or the transactions contemplated herein or would cause a default
under this Agreement.
(f) Seller shall cause the Company not to incur any
indebtedness for borrowed money or guarantee any such indebtedness except in the
ordinary course of business or as otherwise agreed to in writing by Purchaser.
(g) Seller shall immediately notify Purchaser of any event or
condition which constitutes or is likely to result in a material adverse change
in the Assets or the financial condition or prospects of the Company or which
would cause any representation or warranty made by Sellers herein to be untrue,
or would cause Sellers to breach any covenant to be performed by it contained
herein.
7.03 Access to Sellers's Plants, Properties and Records. From and after
the execution and delivery of this Agreement, Sellers will afford to the
representatives of Purchaser access, during normal business hours and upon
reasonable notice, to the Company's premises sufficient to enable Purchaser to
inspect the Assets and obtain any information relating to the business of the
Company and its financial condition and prospects, and Sellers will furnish to
such representatives during such period any and all such information relating to
the foregoing investigation as Purchaser may reasonably request; provided,
however, that any furnishing of such information to Purchaser and any
investigation by Purchaser shall not affect the right of Purchaser to rely on
the representations and warranties made by Sellers in or pursuant to this
Agreement, and, provided further that Purchaser will hold in confidence all
documents and information concerning Sellers so furnished, and, if the sale of
the Assets pursuant hereto shall not be consummated, such confidence shall be
maintained.
7.04 No Other Discussions. Commencing on the date hereof and extending
through and including the earlier of the Closing Date or termination of this
Agreement pursuant to Section 11.01, Sellers will discontinue negotiations with
others and will not continue or enter into discussions or negotiate with or
entertain or accept the unsolicited offer of any other party concerning the
potential sale of all or any part of the Compass Shares or the Assets or the
merger, consolidation or other business combination of the Company with any
person other than Purchaser. Sellers will notify Purchaser of any offers or
inquiries with respect thereto and provide to Purchaser copies of any written
offers or proposals.
<PAGE>
ARTICLE VIII
Additional Covenants of Purchaser
8.01 Best Efforts. Purchaser will use its best efforts to cause to be
satisfied as soon as practicable and prior to the Closing Date all of the
conditions set forth in Article III to the obligations of Sellers to exchange
the Compass Shares for the Ethika Shares.
ARTICLE IX
Indemnification
9.01 Agreement by Sellers to Indemnify. Each of Sellers jointly and
severally (the "Seller Indemnifying Parties") shall indemnify and hold Purchaser
harmless in respect of the aggregate of all indemnifiable damages of Purchaser.
For this purpose, "indemnifiable damages" of Purchaser means the aggregate of
all expenses, losses, costs, deficiencies, liabilities and damages (including
related counsel fees and expenses) incurred or suffered by Purchaser (a)
resulting from any inaccurate representation or warranty made by Sellers in or
pursuant to Article V hereof, (b) resulting from any default in the performance
of any of the covenants or agreements made by Sellers in this Agreement, (c)
resulting from the failure of any of Sellers to pay, discharge or perform any
liability or obligation of Sellers which is not expressly assumed by Purchaser
pursuant to this Agreement or resulting from any dispute concerning any such
liability or obligation, or (d) the ownership of the Compass Shares or the
operation of the Assets or the business of the Company prior to the Closing
Date.
9.02 Agreement by Purchaser to Indemnify. Purchaser agrees to indemnify
and hold Sellers (the "Sellers Indemnified Parties") harmless in respect of the
aggregate of all indemnifiable damages of any of Sellers Indemnified Parties.
For this purpose, "indemnifiable damages" of any of Sellers Indemnified Parties
means the aggregate of all expenses, losses, costs, deficiencies, liabilities
and damages (including related counsel fees and expenses) incurred or suffered
by any of Sellers Indemnified Parties resulting from (a) any inaccurate
representation or warranty made by Purchaser in or pursuant to Article VI
hereof, (b) any default in the performance of any of the covenants or agreements
made by Purchaser in this Agreement, or (c) the ownership of the Compass Shares
or the operation of the Assets or the business of the Company after the Closing
Date.
9.03 Notice and Defense Procedures.
(a) Whenever any claim shall arise or any proceeding shall be
instituted involving any person in respect of which indemnity may be sought
pursuant to this Article IX, such person (the "Indemnified Party") shall
promptly notify (in no event later than ten business days after receipt of such
notice) the person against whom such indemnity may be sought (the "Indemnifying
Party") thereof in writing, including, when known, the facts constituting the
basis for such claim or proceeding and the amount or an estimate of the amount
of the indemnified liability arising therefrom (such notification being the
"Claims Notice"). In addition, each party hereto hereby agrees to provide to the
other party written notification and copies of communication from third parties
received or made by such parties relating to any matter subject to any
indemnification hereunder. The failure by an Indemnified Party to timely furnish
to the Indemnifying Party any notice or copy required to be furnished under this
Section 9.03(a) shall not relieve the Indemnifying Party from any responsibility
for the matters relating to such notice or copy, unless such failure adversely
prejudices the ability of the Indemnifying Party to defend such matter.
<PAGE>
(b) In connection with any claim giving rise to indemnity
hereunder arising out of any claim or legal proceeding by any person who is not
an Indemnified Party, the Indemnifying Party at its sole cost and expense may,
upon written notice to the Indemnified Party, elect to assume the defense of any
such claim or legal proceeding. If the Indemnifying Party has so elected to
assume the defense of any such claim or legal proceeding, such defense shall be
conducted by counsel chosen by the Indemnifying Party, provided that such
counsel is reasonably satisfactory to the Indemnified Party. The Indemnified
Party shall be entitled to participate in (but not control) the defense of any
such action, with its counsel and at its own expense. If the Indemnifying Party
has elected to assume the defense of any claim or legal proceeding as provided
herein, the Indemnified Party shall not be entitled to indemnification as to
fees and expenses of any counsel retained by the Indemnified Party after the
time at which the Indemnifying Party has so elected. The Indemnified Party shall
not settle or compromise any indemnified liability without the prior written
consent of the Indemnifying Party, which shall not be unreasonably withheld. In
the event that the Indemnifying Party shall so assume such defense, it shall not
compromise or settle any such claim, action, or suit unless (i) the Indemnified
Party gives its prior written consent, which shall not be unreasonably withheld,
or (ii) the terms of the compromise or settlement of such claim, action, or suit
provide that the Indemnified Party shall have no responsibility for the
discharge of any settlement amount and impose no other obligations or duties on
the Indemnified Party, and the compromise or settlement discharges all rights
against the Indemnified Party with respect to such claim, action, or suit and
the settlement will not affect the assets, rights, business or operations of the
Indemnified Party. If a firm offer is made to settle a pending or threatened
claim, action or proceeding for which the Indemnified Party may be entitled to
indemnification hereunder and the Indemnifying Party desires to accept and agree
to such offer, Indemnifying Party will give written notice to the Indemnified
Party to that effect. If the Indemnified Party fails to consent to such firm
offer within ten calendar days after its receipt of such notice, the
Indemnifying Party may continue to contest or defend such claim and, in such
event, the maximum liability of the Indemnifying Party as to such claim will not
exceed the amount of such settlement offer. The Indemnified Party will cooperate
with the defense of any such claim, action, or suit and will provide such
personnel, technical support, and access to information as may be reasonably
requested by the Indemnifying Party in connection with such defense.
9.04 Nature and Survival of Representations and Warranties. Except as
set forth herein, all representations and warranties made by the parties hereto
in this Agreement or pursuant hereto shall survive the Closing hereunder and any
investigation at any time made by or on behalf of Sellers or Purchaser until the
first anniversary of the Closing Date. The representations, warranties and
covenants contained in Sections 4.01, 4.02, 4.03, 4.04, 5.01, 5.02, 5.03, 5.04,
5.12, 5.15, 5.21, 6.01, 6.02 and this Article IX shall survive the Closing
indefinitely. The representations and warranties relating to liabilities of
Sellers for which Sellers are required to indemnify Purchaser pursuant to
Section 9.01(c) or (d) shall survive the Closing until the expiration of the
applicable statute of limitations with respect to each such liability. The
representations, warranties, and covenants contained in Article X of this
Agreement shall survive the Closing until the expiration of the Covenant Period
(the date upon which the survival of the respective representation, warranty,
covenant or agreement terminates shall be referred to as the "Termination
Date"). After the Termination Date, no Indemnified Party may commence any action
<PAGE>
against any Indemnifying Party in respect of the inaccuracy of any
representation or warranty contained in this Agreement. All statements contained
in any certificate or other instrument executed and delivered by Sellers or
Purchaser pursuant to this Agreement or in connection with the transactions
contemplated hereby shall be deemed representations and warranties by Sellers or
Purchaser, respectively, hereunder.
9.05 Limitations on Indemnification. Purchaser and Sellers shall not be
entitled to recover from the other party any indemnifiable damages in respect of
a breach of a representation or warranty of Sellers or Purchaser, respectively,
under this Agreement in excess of the fair market value of the Ethika Shares as
of the Closing Date. Section 9.05, the "fair market value" of the Ethika Shares
shall be based on the average daily closing share price of the Ethika Shares for
the four week period immediately prior to the Closing Date on the principal
securities market on which the Ethika Shares are traded in the United States.
ARTICLE X
Restrictive Covenants
10.01 Non-Competition.
(a) Definitions.
(i) Area. "Area" shall mean the United States of
America.
(ii) Competing Business. "Competing Business" shall
mean any business engaged in the Computer Software Industry.
(iii) Computer Software Industry. "Computer Software
Industry" shall mean any person, partnership, corporation, or other entity
engaged in the business of manufacturing, processing, programming, marketing, or
selling Folio infobase software products providing or providing access to, state
or federal laws, rules or regulations.
(iv) Covenant Period. "Covenant Period" shall mean
the period beginning on the Closing Date and ending three (3) years following
the Closing Date.
(b) Covenant Not to Compete. During the Covenant Period,
Sellers shall not directly or indirectly own, manage, operate, represent,
promote, consult for, control or participate in the ownership, operation,
acquisition or management of any Competing Business in the Area. A passive
investment, consisting of the purchase of not more than five percent (5%) of the
voting or equity interest, in a Competing Business alone shall not be considered
a breach of this Agreement.
10.02 Confidentiality. The parties hereto acknowledge and agree that
all Trade Secrets (as hereinafter defined), and all physical embodiments
thereof, are confidential to and shall be and remain the sole and exclusive
property of Purchaser. In addition, all Intellectual Property is the sole and
exclusive property of Purchaser. The parties further agree that, during the
Covenant Period and in the Area, (a) all Trade Secrets shall be held in the
strictest confidence; (b) they shall not, without the prior written consent of
Purchaser, disclose, reproduce, distribute or otherwise disseminate such Trade
Secrets, and shall protect such Trade Secrets from disclosure by others; and (c)
they shall make no use of such Trade Secrets without the prior written consent
<PAGE>
of Purchaser. "Trade Secrets" shall mean any and all data and information
relating to the Company, the Assets or the Business which (i) derive independent
economic value, actual or potential, from not being generally known to, and not
being readily ascertainable by proper means by other persons who can obtain
economic value from their disclosure or use; and (ii) are the subject of efforts
that are reasonable under the circumstances to maintain their secrecy, including
but not limited to technical or nontechnical data, formulas, compilations,
programs, devices, methods, techniques, drawings, financial data and plans,
pricing data, and lists of current or potential customers.
10.03 Acknowledgment of Harm; Remedies. Each of Sellers acknowledges
that his covenants pursuant to this Article X are of a special, unique, unusual
and extraordinary character, which give them particular value the loss of which
cannot be reasonably or adequately compensated in an action at law, and that, in
the event there is a breach hereof by any of Sellers, Purchaser will suffer
irreparable harm, the amount of which will be difficult or impossible to
ascertain. Accordingly, Purchaser shall be entitled to institute and prosecute
proceedings in any court of competent jurisdiction, either at law or in equity,
to obtain damages for any breach or to enforce specific performance of the
provisions or to enjoin any of Sellers from committing any act in breach of this
Article X. The remedies granted to Purchaser in this Article X are cumulative
and are in addition to remedies otherwise available to Purchaser at law or in
equity. If any of Sellers violate any of the restrictions contained in this
Agreement, the restrictive period shall not run in favor of such Seller from the
time of the commencement of any such violation until such time as such violation
shall be cured by such Seller to the satisfaction of Purchasers.
ARTICLE XI
Termination
11.01 Termination. Anything to the contrary herein notwithstanding,
this Agreement may be terminated and the transactions contemplated hereby may be
abandoned:
(a) by the mutual written consent of all of the parties hereto
at any time prior to the Closing Date;
(b) by Purchaser in its sole discretion if for any reason
Purchaser is unsatisfied following its due diligence review as provided in
Section 2.01;
(c) by either party if the Closing has not occurred on or
prior to the Closing Date;
(d) unless terminated pursuant to Sections (a), (b) or (c), by
any party in the event of the material breach by any other party of any
provision of this Agreement, which breach is not remedied by the breaching party
within 30 days after receipt or notice thereof from the terminating party; or
(e) unless terminated pursuant to Sections (a), (b) or (c), by
any party hereto if the Closing has not taken place by the ninetieth (90th) day
after the date of this Agreement.
<PAGE>
If this Agreement is terminated pursuant to clause (a), (b) or
(c) of this Section 11.01, no party shall have any liability for any costs,
expenses, loss of anticipated profit or any further obligation for breach of
warranty or otherwise to any other party to this Agreement. Any termination of
this Agreement other than pursuant to clauses (a), (b) or (c) of this Section
11.01 shall be without prejudice to any other rights or remedies of the
respective parties.
11.02 Risk of Loss. The risk of any loss to the Compass Shares, the
Company and the Assets and all liability with respect thereto shall be the sole
responsibility of Sellers until the completion of the Closing. If any material
part of the Assets shall be damaged or destroyed by casualty prior to the
completion of the Closing hereunder, Purchaser shall have the right and option:
(i) to terminate this Agreement, without liability
to any party thereto; or
(ii) to proceed with the Closing hereunder, in which
event such casualty shall not constitute a breach by Seller of any
representation, warranty or covenant in this Agreement, and Purchaser shall be
entitled to receive and retain the insurance proceeds arising from such
casualty, if any.
ARTICLE XII
Miscellaneous
12.01 Severability. If any term or provision of this Agreement or the
application thereof to any person or circumstance shall, to any extent, be held
invalid or unenforceable by a court of competent jurisdiction, the remainder of
this Agreement or the application of any such term or provision to persons or
circumstances other than those as to which it is held invalid or unenforceable,
shall not be affected thereby, and each term and provision of this Agreement
shall be valid and enforceable to the fullest extent permitted by law. If any of
the provisions contained in this Agreement shall for any reason be held to be
excessively broad as to duration, scope, activity or subject, such provision
shall be construed by limiting and reducing it, so as to be valid and
enforceable to the extent compatible with the applicable law or the
determination by a court of competent jurisdiction.
12.02 Brokers' Commission. Purchaser will indemnify and hold harmless
Sellers from the commission, fee or claim of any person, firm or corporation
employed or retained or claiming to be employed or retained by Purchaser to
bring about, or to represent it in, the transactions contemplated hereby.
Sellers will indemnify and hold harmless Purchaser from the commission, fee or
claim of any person, firm or corporation employed or retained or claiming to be
employed or retained by Sellers to bring about, or to represent them in, the
transactions contemplated hereby.
12.03 Amendment and Modification. The parties hereto may amend, modify
and supplement this Agreement in such manner as may be agreed upon by them in
writing.
12.04 Survival. The representations, warranties, covenants and
agreements of the parties contained in Articles IV, V, VI, IX, X and XII shall
survive the Closing and shall not terminate at the Closing.
<PAGE>
12.05 Binding Effect. This Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective successors, assigns,
heirs and legal representatives. This Agreement may not be assigned by Purchaser
except to another corporation controlled by or under common control with
Purchaser. In any such event, Purchaser shall remain directly liable for all
undertakings and obligations hereunder.
12.06 Entire Agreement. This Agreement and the exhibits and schedules
attached hereto contain the entire agreement of the parties hereto with respect
to the purchase of the Assets and the other transactions contemplated herein,
and supersede all prior understandings and agreements of the parties with
respect to the subject matter hereof. Any reference herein to this Agreement
shall be deemed to include the schedules and exhibits attached hereto.
12.07 Headings; Etc. The descriptive headings in this Agreement are
inserted for convenience only and do not constitute a part of this Agreement.
References to "Sections" and "subsections", unless otherwise stated, refer to
sections and subsections of this Agreement. Unless otherwise specified,
references to "Exhibits" and "Schedules" refer to exhibits and schedules which
are attached hereto and are hereby made a part hereof.
12.08 Execution in Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be deemed an original, and all of
which together will constitute one and the same instrument.
12.09 Schedules. To the extent any disclosure in a schedule puts
Purchaser on actual notice of the facts reflected therein, such disclosure shall
be deemed to be a disclosure in all other schedules under this Agreement as to
such facts. References on any schedule to any document, instrument, contract or
agreement shall not be deemed for any purpose of this Agreement to be a
disclosure of any term, provision or statement of fact of, or relating to, such
document, instrument, contract or agreement, (a) unless and until a copy of such
document, instrument, contract or agreement has been provided to Purchaser, and
(b) until the expiration of the Due Diligence Period.
12.10 Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of South Carolina applicable to
contracts made and to be performed herein.
<PAGE>
12.11 Notices. All notices required to be given in accordance with this
Agreement shall be deemed to have been received three days after being sent U.S.
Mail, certified or registered, return receipt requested, or, if sent by
telecopier, when successfully transmitted, or, if sent by any other means, when
delivered, to the following addresses:
If to Purchaser:
Ethika Corporation
107 Executive Center
Hilton Head Island, SC 29928
Attn: G. Thomas Reed, President and Chief Operating Officer
Telecopier No.: (803) 785-3315
If to Sellers:
Eric and Sherry Fredrickson
Compass Data Systems, Inc.
967 East Murray-Holladay Road
Salt Lake City, Utah 84117
Telecopier No.: (801) 262-4199
The parties hereto may change the above shown notice addresses by
giving notice in the manner acquired hereunder of such new address.
IN WITNESS WHEREOF, The parties hereto have caused this
Agreement to be duly executed and delivered as of the day and year first above
written.
PURCHASER:
ETHIKA CORPORATION
By: ________________________
Title: ________________________
SELLERS:
/s/Eric R. Fredrickson
----------------------
ERIC R. FREDRICKSON
/s/Sherry Frederickson
----------------------
SHERRY FREDRICKSON
<PAGE>
Schedule 6.05
Approvals
None
<PAGE>
Schedule 6.08
Litigation
See attached letter of Purchaser to its shareholders dated July 25, 1996.
<PAGE>
Schedule 6.09
Common Stock
Purchaser's securities are currently traded on the NASDAQ
"Small-Cap Market" system. Under the rules of the National Association of
Securities Dealers, Inc. ("NASD"), in order to maintain listing in the
system, Purchaser must, among other things, have at least $2,000,000 in
assets, $1,000,000 in capital, a minimum bid price for its common stock
of $1.00 per share, and at least two market makers. Purchaser's common
stock is currently trading below $1.00 per share, but Purchaser is
entitled to continue its listing pursuant to a provision providing
exceptions for companies with a market float in excess of $1,000,000 and
at least $2,000,000 in capital and surplus. The NASD has proposed the
elimination of this exception, which would then require that Purchaser's
share price be at least $1.00 for Purchaser to continue its listing on
NASDAQ. If enacted, this amendment would permit Purchaser to maintain the
standards for NASDAQ Small-Cap Market listing with respect to its Common
Stock only if the minimum bid price of Purchaser's common stock rises to,
and remains at or above, $1.00. No assurance can be given that this will
be achieved and sustained. If Purchaser is unable to continue to satisfy
the listing maintenance criteria, its listed securities will be subject
to delisting. Trading, if any, in the listed securities would thereafter
cease to be quoted in the NASDAQ system, and would be conducted in the
over-the-counter market with inter-dealer bid and ask price quotes
published in what are commonly referred to as the "pink sheets." As a
result, an investor could find it more difficult to dispose of, or to
obtain accurate quotations as to the price of, Purchaser's securities. If
Purchaser fails to maintain NASDAQ Small-Cap Market listing, the market
value of Purchaser's securities likely would decline and purchasers in
this offering likely would find it more difficult to dispose of, or to
obtain accurate quotations as to the price of, Purchaser's securities.
In addition, if Purchaser fails to maintain NASDAQ Small-Cap
Market listing for its securities, and no other exclusion from the
definition of a "penny stock" under the Securities Exchange Act of 1934
(the "Exchange Act") is available, then any broker engaging in a
transaction in Purchaser's securities would be required to provide any
customer with a risk disclosure document, disclosure of market
quotations, if any, disclosure of the compensation of the broker-dealer
and its salesperson in the transaction and monthly account statements
showing the market values of Purchaser's securities held in the
customer's accounts. The bid and offer quotation and compensation
information must be provided prior to effecting the transaction and must
be contained on the customer's confirmation. If brokers become subject to
the "penny stock" rules when engaging in transactions in Purchaser's
securities, they would become less willing to engage in such
transactions, thereby making it more difficult for purchasers in this
offering to dispose of their shares.
<PAGE>
Schedule 1.01
Ethika Stock
363,306 shares will be issued to each of Eric Fredrickson and Sherry
Fredrickson.
<PAGE>
EXHIBIT (2)(e)
ASSET PURCHASE AGREEMENT
BETWEEN ETHIKA CORPORATION AND
AMERICAN PRACTICE MANAGEMENT, INC.
AND CONSULTING CONCEPTS, INC.
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT (hereinafter is "Agreement") is
made and entered into this 24th day of September, 1996, by and between ETHIKA
CORPORATION, a Mississippi corporation ("Purchaser"), AMERICAN PRACTICE
MANAGEMENT, INC. a Delaware corporation ("APM"), and CONSULTING CONCEPTS, INC.,
a Utah corporation ("CCI") (APM and CCI may from time to time hereinafter be
referred to collectively as the "Sellers" or individually as a "Seller").
RECITALS:
A. CCI is the owner of certain Folio infobase software products and
other related assets.
B. APM has an exclusive license to use the software products pursuant
to a License Agreement, dated as of May 25, 1995 (the "License Agreement"),
between CCI and APM, and pursuant to said license, has exploited the commercial
benefits of the license and provided financial assistance in the commercial
development of such software products.
C. Sellers desire to sell to Purchaser, and Purchaser desires to
acquire from Sellers, the assets of Sellers described herein upon the terms and
subject to the conditions contained herein.
NOW THEREFORE, for and in consideration of the mutual covenants and
agreements contained herein, and for other good and valuable consideration,
parties hereto agree as follows:
ARTICLE I:
Purchase and Sale of the Assets
1.01 Purchase of Assets. On the terms and subject to the conditions
contained in this Agreement, on the Closing Date (as defined in Section 2.01),
Purchaser shall purchase from Sellers, and Sellers shall sell, convey, assign,
transfer and deliver to Purchaser, free and clear of all liens, security
interests and encumbrances whatsoever, by appropriate warranty bills of sale,
assignments and other instruments satisfactory to Purchaser, all of the
following assets, properties, rights, titles and interests, whether tangible or
intangible, and wherever located, of Sellers on the date hereof, with such
changes therein after the date hereof as shall be permitted pursuant to the
terms hereof (the "Assets"):
(a) The Folio infobase software products known as 1Source and
1Source HCFA, containing coding and health care reimbursement data
(including primarily CPT codes, ICD-9 codes, HCFA program regulations,
Medicare fee schedules, CHAMPUS fee schedules, Federal Register matters
related to RBRVS and RBRVS unit values (the "Program Data")), developed
for the American Medical Association (AMA) and/or the American Academy
of Ophthalmology (AAO) (collectively, the "Products").
<PAGE>
(b) All custom codes which Sellers have developed and as to
which they retain title and all modifications, enhancements, revisions
or versions of or to any of the foregoing and relating to the Products,
all prior releases of any of the foregoing applicable to any operating
environment.
(c) All lists and records pertaining to customer accounts
(whether past or current), suppliers, distributors, personnel and
agents and all other books, ledgers, files, documents correspondence
and business records relating specifically to the Products.
(d) All claims, deposits, warranties, guarantees, refunds,
causes of action, rights of recovery, rights of set-off and rights of
recoupment of every kind and nature relating to the Products.
(e) Except as set forth on Schedule 1.01 (e), all of the
following rights relating specifically to the Products:
(i) trademarks, service marks, trade dress, logos and
trade names and registrations and applications for
registration thereof;
(ii) copyrights and registrations and applications for
registration thereof;
(iii) maskworks and registrations and applications for
registrations thereof;
(iv) right, title and interest in all computer
software, data and documentation;
(v) trade secrets and confidential business
information (including ideas, formulas, compositions,
inventions (whether patentable or unpatentable and whether or
not reduced to practice), know-how, manufacturing and
production processes and techniques, research and development
information, software products in development, drawings, flow
charts, processes, ideas, specifications, designs, plans,
proposals, technical data, copy-rightable works, financial,
marketing, and business data, pricing and cost information,
business and marketing plans, and customer and supplier lists
and information);
(vi) other proprietary rights; and
(vii) copies and tangible embodiments of the foregoing
(in whatever form or medium and including without limitation
all copies of all or any part of the Products in object code,
source code or other format, and in all magnetic media);
(items (i) through (vii) may be referred to herein collectively the
"Intellectual Property") and all income, royalties, damages and
payments due at Closing or thereafter with respect to the Intellectual
Property and all other rights thereunder including, without limitation,
damages and payments for past, present or future infringements or
misappropriations thereof, the right to sue and recover for past,
present or future infringements or misappropriations thereof, all
rights to use all of the foregoing forever and all other rights in, to
and under the foregoing in all countries.
<PAGE>
(f) All permits, licenses (including, but not limited to, the
License Agreement), franchises, orders, registrations, certificates,
variances, approvals and similar rights obtained from governments and
governmental agencies relating to the Products and all data and records
pertaining thereto.
(g) All books, records, ledgers, files, documents,
correspondence, lists, studies and reports and other printed or written
materials relating specifically to the Products.
(h) All contracts and agreements relating to the Products,
whether oral or written, involving the license, use, sale, production
or protection the Products, including but not limited to those
contracts shown and described on Exhibit A (collectively, the "Assumed
Contracts").
(i) All Net Sales (as hereinafter defined) arising out of any
license, sale or other use of the Products occurring on or after June
1, 1996, and all receivables associated with such license, sale or use
of the Products, through the Closing Date, including but not limited to
those shown and described on Exhibit B.
(j) All inventory, including finished goods inventory,
work-in-process, and all raw materials relating to or used, licensed or
sold specifically in connection with the Products, including but not
limited to the inventory shown and described on Exhibit C.
1.02 Purchase Price. In consideration of the transfer, assignment and
conveyance of the Assets to Purchaser, Purchaser shall pay and deliver to
Sellers the following:
(a) At the Closing (as defined in Section 2.01), Purchaser
shall issue to Sellers 180,000 shares of its $1.00 par value common
stock (the "Shares") to the persons and in the amounts shown on Exhibit
D. The Shares will be issued in a transaction exempt from registration
under federal and applicable state law and will not be issued pursuant
to any registration statement filed with the Securities Exchange
Commission or any state agency or commission.
(b) Purchaser will pay to APM percentages of Net Sales as
follows (the "Percentage Amounts"):
(i) 5% of Net Sales up to $3,000,000 during the
period beginning June 1, 1996 and ending May 31, 1998 (the
"Initial Period"); plus
(ii) 7.5% of Net Sales between $3,000,001 and
$4,500,000 during the Initial Period; plus
(iii) 10% of Net Sales over $4,500,000 during the
Initial Period; plus ----
(iv) 5% of Net Sales up to $3,000,000 during the
period beginning June 1, 1998 and ending May 31, 1999 (the
"Third Year"); plus
(v) 7.5% of Net Sales between $3,000,001 and
$4,500,000 during the Third Year; plus ----
<PAGE>
(vi) 10% of Net Sales over $4,500,000 during the
ThirdYear.
With respect to such Percentage Amounts and the Percentage Amounts
payable pursuant to Section 5.04, payments will be made on a calendar
quarterly basis no later than thirty (30) days after the end of each
calendar quarter, beginning October 31, 1996 for the quarter ending
September 30, 1996; each payment of the Percentage Amounts shall be
accompanied by a report accounting to APM for the calculation of the
amounts paid; and APM will have the right to inspect the books and
records of Purchaser relating to the revenues and expenses associated
with the license, sale or other use of the Products applicable in
determining the Percentage Amounts due and payable to Sellers. As used
herein, "Net Sales" shall mean all revenues with respect to the sale,
license or other use of the Products collected during the applicable
period, less the applicable manufacturing expenses, selling costs
(including packaging and shipping costs), and royalties incurred which
may be properly allocated to such revenues in accordance with generally
accepted accounting principles. In computing Net Sales, no deduction
shall be made from revenues for employee wages, commissions or bonuses,
depreciation, amortization, general overhead or taxes. Notwithstanding
the foregoing, for any applicable period, "Net Sales" shall include all
revenues (less applicable expenses) from the sale, license or other use
of the Products (i) pursuant to a written agreement executed by
Purchaser and a customer during such period or (ii) which exceed $1,000
in the aggregate in any one transaction if such sales are actually
consummated or otherwise properly allocated to such period, in each
case, irrespective of whether the revenues are actually collected in a
different period; provided, however, that the foregoing shall not
obligate Purchaser to pay any Percentage Amounts for Net Sales unless
and until the revenues are actually collected.
(c) If APM does not give Purchaser notice within thirty
calendar days following receipt of the report accounting for Net Sales
during the prior calendar quarter, APM shall be deemed to have accepted
the report. If APM gives Purchaser timely notice of its objections to
the report, and if Purchaser and APM are unable, within fifteen
calendar days after receipt by Purchaser of the notice by APM of its
objections, to resolve the disputed exceptions, such disputed
exceptions will be referred to a firm of independent certified public
accountants ("Independent Accounting Firm") mutually acceptable to APM
and Purchaser. The Independent Accounting Firm shall, within sixty days
following its selection, deliver to APM and Purchaser a written report
determining such disputed exceptions, and its determinations will be
conclusive and binding upon Purchaser and APM. In the event the report
of the Independent Accounting Firm requires payment by Purchaser of an
amount in excess of 5% of the Percentage Amounts actually paid for the
applicable period, the fees and disbursements of the Independent
Accounting Firm shall be borne by Purchaser. Otherwise, the fees and
disbursements of the Independent Accounting Firm shall be borne by APM.
1.03 Allocation of Purchase Price. The purchase price shall be
allocated among each item or class of Assets in accordance with Exhibit E.
Purchaser and Sellers agree that they will prepare and file their federal and
any state or local income tax returns based upon such allocations.
<PAGE>
1.04 Assumption of Assumed Contracts; Exclusion of Excluded
Liabilities. On the Closing Date, Purchaser shall assume and agree to pay,
perform and discharge when due all of the obligations, debts and liabilities of
Sellers under the Assumed Contracts accruing and due and payable after the
Closing Date. Sellers shall pay all obligations, debts and liabilities accruing
on or prior to the Closing Date, whether or not due and payable on or prior to
the Closing Date. Except with respect to the Assumed Contracts, Purchaser shall
not assume or pay, perform or discharge, nor shall Purchaser be responsible,
directly or indirectly, for any other debts, obligations, contracts or
liabilities of the Sellers, including, without limitation, those arising from
the sale of the Products prior to the Closing Date, such as liabilities for
accounts payable, taxes, employee wages or commissions arising from the sale of
the Products prior to the Closing Date, all such debts, liabilities and
obligations of the Sellers being herein referred to as the "Excluded
Liabilities".
ARTICLE II
Closing
2.01 Time and Place of Closing. The closing of the transactions
contemplated herein ("the Closing") shall be held at 10:00 a.m. at the offices
of Hunter, Maclean, Exley & Dunn, P.C., 3rd Floor, 200 East St. Julian Street,
Savannah, Georgia, on the third business day after all conditions precedent set
forth in Articles III and IV have been satisfied, or at such other time and
place as the parties hereto may mutually agree (the "Closing Date"). If the
Closing is not held on or prior to the ninetieth (90th) day after the date of
this Agreement, this Agreement shall be null and void ab initio and no party
shall have any obligation to any other party hereunder.
ARTICLE III
Conditions to Obligations of Purchaser
The obligation of Purchaser to purchase the Assets shall be subject to
the satisfaction at or prior to the Closing Date of each of the following
conditions:
3.01 Due Diligence Review. Prior to execution of this Agreement,
Purchaser has had the opportunity to conduct only limited examination of the
assets, liabilities, business and affairs of Sellers as they relate to the
Assets and the license, sale or other commercial use of the Assets (the
"Business"). Commencing on the date hereof, Purchaser shall have thirty (30)
days to diligently pursue its review of the books, records, business and affairs
of Seller as they relate to the Assets and the Business. Seller shall make
available to Purchaser any and all information which Purchaser may reasonably
request in order to complete its review as provided in Section 8.03. During its
due diligence review, Purchaser shall have the right to terminate this Agreement
by giving written notice to Sellers thereof within thirty (30) days of the date
of this Agreement.
<PAGE>
3.02 Accuracy of Representations and Warranties and Compliance with
Obligations. The representations and warranties of Sellers contained in this
Agreement shall have been true and correct at and as of the date hereof in all
material respects, and they shall be true and correct at and as of the Closing
Date in all material respects with the same force and effect as though made at
and as of that time. Sellers shall have performed and complied with all of their
obligations required by this Agreement to be performed or complied with at or
prior to the Closing Date. Each of Sellers shall have delivered to Purchaser a
certificate, dated as of the Closing Date and signed by a duly authorized
officer of such Seller, certifying that such representations and warranties are
true and correct and that all such obligations have been performed and complied
with.
3.03 Corporate Authorization. Purchaser shall have received a
resolution of the Boards of Directors of APM and CCI approving this Agreement
and the transactions contemplated herein in form and in substance acceptable to
Purchaser.
3.04 Receipt of Necessary Consents. All necessary consents or approvals
of third parties to any of the transactions contemplated hereby, the absence of
which would materially affect Purchaser's rights hereunder, shall have been
obtained and shown by written evidence reasonably satisfactory to Purchaser.
3.05 No Adverse Litigation. There shall not be pending or threatened
any action or proceeding by or before any court or other governmental body which
shall seek to restrain, prohibit or invalidate the sale of the Assets to
Purchaser or any other transaction contemplated hereby, or which might adversely
affect the right of Purchaser to own the Assets or to operate the Business and
which, in the reasonable judgment of Purchaser, makes it inadvisable to proceed
with the purchase of the Assets.
3.06 Employment Arrangement with Low. Steven Low ("Low") shall have
entered into an employment arrangement with Purchaser acceptable to Purchaser
(the "Low Employment"), and as of the Closing Date the Low Employment will be in
full force and effect.
3.07 AMA Agreement. Purchaser shall have entered into a contract with
the AMA (the "AMA Contract") pursuant to which Purchaser is granted the right to
publish electronically the CPT code book upon such terms and subject to such
conditions as are reasonably acceptable to the Purchaser.
3.08 Closing Documents. The Sellers shall have executed and delivered a
bill of sale or conveyance satisfactory to Purchaser with appropriate warranties
conveying title to the Products and other Assets, an assignment in form
satisfactory to Purchaser of the Contracts, and any and all other documents
deemed reasonably necessary by Purchaser to consummate the transactions
contemplated herein or to otherwise effect the intent of this Agreement.
3.09 Material Adverse Change. There shall have been no material adverse
change in the Assets or the Business prior to the Closing.
3.10 Non-Competition Agreements. Lise D. Roberts, Douglas E. Pedersen,
and David S. Hefner, the shareholders of CCI (each a "Shareholder" and
collectively the "Shareholders"), shall have executed and delivered
non-competition agreements to Purchaser in form and substance acceptable to
Purchaser with covenants similar to those as are provided in Section 11.01
hereof (the "Non-competition Agreements").
<PAGE>
ARTICLE IV
Conditions to Obligation of the Sellers
The obligation of Sellers to sell the Assets shall be subject to the
satisfaction at or prior to the Closing Date of each of the following
conditions:
4.01 Accuracy of Representations and Warranties and Compliance with
Obligations. The representations and warranties of Purchaser contained in this
Agreement shall have been true and correct at and as of the date hereof in all
material respects, and they shall be true and correct at and as of the Closing
Date in all material respects with the same force and effect as though made at
and as of that time. Purchaser shall have performed and complied with all of its
obligations required by this Agreement to be performed or complied with at or
prior to the Closing Date. Purchaser shall have delivered to Sellers a
certificate, dated as of the Closing Date and signed by its Vice President,
certifying that such representations and warranties are true and correct and
that all such obligations have been performed and complied with.
4.02 Corporate Authorization. Sellers shall have received a resolution
of the Board of Directors of Purchaser approving this Agreement and the
transactions contemplated herein in form and substance acceptable to Sellers.
4.03 No Adverse Litigation. There shall not be pending or threatened
any action or proceeding by or before any court or other governmental body which
shall seek to restrain, prohibit or invalidate the sale of the Assets by Sellers
or any other transaction contemplated hereby or which, in the reasonable
judgment of the Sellers, makes it inadvisable to proceed with the sale of the
Assets.
4.04 Closing Documents. Purchaser shall have executed and delivered to
Sellers certificates representing the Shares in the amounts shown on Exhibit D,
free and clear of all liens and encumbrances, each such certificate bearing a
legend as provided in Section 6.16(b), together with any and all such other
documents deemed reasonably necessary by Sellers to consummate the transactions
contemplated herein or to otherwise effect the intent of this Agreement.
4.05 Material Adverse Change. There shall have been no material adverse
change in the financial condition, business or prospects of Purchaser prior to
the Closing.
ARTICLE V
Additional Agreements
5.01 Execution of Further Documents. At and after the Closing, upon the
reasonable request of Purchaser, Sellers shall execute, acknowledge and deliver
all such further acts, deeds, assignments, transfers, conveyances, powers of
attorney and assurances as may be required to convey, transfer to and vest the
Purchaser, and to protect its rights, title and interest in, the Assets and as
may be appropriate otherwise to carry out the transactions contemplated by this
Agreement.
5.02 Relationships with AMA and AAO. Prior to the Closing, Sellers will
not take any action that would reasonably be expected to adversely affect their
relationship or the relationship of Purchaser with the AMA and the AAO with
regard to the Products and the electronic publication of information owned by
them and will not promote or support any other person in selling software to the
AMA or the AAO that competes with the Products.
<PAGE>
5.03 Employees. Purchaser and its affiliates shall independently
evaluate for employment William Simms, and Ann Griffiths, but Purchaser shall be
under no obligation to employ or retain the services of any such persons.
5.04 Editorial Services. APM agrees to use its best efforts to provide
Editorial Services (as hereinafter defined) of Douglas E. Pedersen to Purchaser
with respect to the Assets for three (3) years after the Closing Date.
"Editorial Services" means providing on a regular basis, as reasonably requested
by Purchaser, counseling and recommendations as to changes or modifications in
the Products regarding events, regulations or other modifications that are
reasonably necessary to keep the Products up-to-date, any changes in content,
and the right to list Pedersen and/or APM in its labeling and marketing as the
"Editor" for its products. In consideration for the Editorial Services, and
provided that and to the extent that such Editorial Services are provided to
Purchaser in a satisfactory manner, Purchaser shall pay to APM, in addition to
the Percentage Amounts payable to APM pursuant to Section 1.02 (b), Percentage
Amounts as follows:
(i) 5% of Net Sales up to $3,000,000 during the
Initial Period; plus ----
(ii) 7.5% of Net Sales between $3,000,001 and
$4,500,000 during the Initial Period; plus
(iii) 10% of Net Sales over $4,500,000 during the
Initial Period; plus ----
(iv) 5% of the first $3,000,000 of Net Sales during
the Third Year; plus ----
(v) 7.5% of the Net Sales between $3,000,001 and
$4,500,000 during the Third Year; plus
(vi) 10% of Net Sales over $4,500,000 during the
Third Year.
After the Third Year, if Purchaser and Sellers agree that Pedersen
and/or APM shall continue to provide Editorial Services to Purchaser
for additional one (1) year terms (each an "Additional Year"),
Percentage Amounts will be paid as follows:
(i) 10% of all Net Sales up to $3,000,000 during
each Additional Year; plus ----
(ii) 15% of all Net Sales between $3,000,001 and
$4,500,000 during each Additional Year; plus
(iii) 20% on all Net Sales over $4,500,000 during
each Additional Year.
Notwithstanding the foregoing, commencing with the calendar quarter
beginning January 1, 1997, if the Percentage Amounts for Editorial
Services for a prior calendar quarter are less than the amount which
would normally be charged by the persons providing Editorial Services
at their then existing billing rates, Purchaser shall instead pay to
Sellers the reasonable amount determined using the then existing
billing rates of such APM personnel. Notwithstanding the foregoing, if
<PAGE>
at any time the Editorial Services are not provided by APM as agreed,
or are not provided to the reasonable satisfaction of Purchaser, no
royalties will be paid.
5.05 Employee Costs. APM agrees to pay Purchaser $13,186 (the "Service
Expense Amount") which amount represents the reasonable cash compensation paid
by Purchaser to Low, Simms and Griffiths as independent contractors providing
services to Purchaser commencing with the pay period beginning June 13, 1996
until July 31, 1996. Purchaser shall be entitled to deduct from any Percentage
Amounts payable pursuant to Sections 1.02 or 5.04 of this Agreement an amount up
to the aggregate Service Expense Amount. In the event either the Closing does
not occur or the Percentage Amounts payable hereunder do not exceed the Service
Expense Amount, Sellers shall have no obligation to reimburse Purchaser for any
unreimbursed Service Expense Amount.
5.06 Complimentary Copies of Products. During the period beginning on
the Closing Date and ending on May 31, 1999, and during any period during which
APM is providing Editorial Services to the Purchaser, Purchaser shall provide to
APM annually a free copy of each of the Products promptly following its release
for all the then existing APM offices, either in single user or network version;
provided, however, that no more than five copies shall be provided to APM, the
use of such copies shall be restricted to the offices to which the copies are
delivered, and APM shall be responsible for reimbursing the Purchaser for any
out-of-pocket expenses, and including expenses incurred by Text Retrieval
Systems, Inc. for these installations.
5.07 Distributors Agreement. Purchaser and APM shall negotiate in good
faith an agreement pursuant to which APM, and its successors, shall be entitled
to earn commissions or other compensation for the sale of Products on behalf of
Purchaser.
ARTICLE VI
Representations and Warranties of Sellers
In order to induce Purchaser to enter into this Agreement and to
consummate the transactions contemplated hereunder, Sellers jointly and
severally make the following representations and warranties:
6.01 Organization, Power and Authority of the Seller. APM and CCI are
corporations duly organized, legally existing and in good standing under the
laws of Delaware and Utah, respectively and have full corporate power and
authority to own or lease their respective properties, including the Assets, and
operate their respective business, including the Business, to enter into this
Agreement and to carry out the transactions and agreements contemplated hereby.
APM and CCI are duly qualified to do business as a foreign corporation in all
jurisdictions in which such qualification is required or as to which the failure
to so qualify would not have a material adverse effect on the Assets or the
Business.
6.02 Books and Records. The books of account and other financial
records disclosed to Purchaser or to be transferred to Purchaser pursuant hereto
are in all material respects complete and correct and are maintained in all
material respects in accordance with all applicable laws.
6.03 Liabilities of the Seller. Sellers have no liabilities or
obligations, either accrued, absolute, contingent or otherwise, relating to the
Assets or the Business except as shown on Schedule 6.03.
<PAGE>
6.04 Title to and Condition of the Assets. Sellers have good and
marketable title to all of the Assets owned by them as set forth in Schedule
6.04, free and clear of all liens, mortgages, pledges, encumbrances or charges
of every kind, nature, and description whatsoever, except those set forth in
Schedule 6.04.
6.05 Inventory . The inventory and supplies of Sellers shown and
described on Exhibit C consist of items of a quality and quantity usable and
saleable in the normal course of the Business and consist of all of the
inventory of Sellers used or usable in the Business and specifically related to
the Product.
6.06 Receivables of Sellers. Sellers' receivables relating to the sale,
license or other use of the Assets shown on or after June 1, 1996 and described
on Exhibit F including accounts receivable, notes receivable and insurance
proceeds receivable, if any, constitute all of the receivables of Sellers
relating to the Assets and the Business during such period. As of the Closing
Date, all of Seller's receivables described in Exhibit F are valid accounts
receivable which are or will be current and collectible and which have been, or
will be, paid in full within 180 days after the Closing Date.
6.07 Proprietary Rights of Seller.
(a) Sellers own, or have the right to use throughout the
world, the copyright with respect to (i) the source code for the
program which compiles the Program Data into a Folio infobase product,
(ii) the manner in which the Product Data is compiled in a useful and
meaningful format and (iii) the user manual with respect to the
Products, free from claims for infringement or misappropriation; and
after the consummation of the transactions contemplated under this
Agreement, Purchaser will own, or will have the right to use throughout
the world, such rights, free from all other claims, liens, or
encumbrances except as shown and described on Schedule 6.07. Schedule
6.07:
(i) contains a complete list of each registration of
patents, copyrights, trademarks, service marks, trade names,
mask works and other Intellectual Property (collectively
"Registrations") which have been issued to Sellers with
respect to the Intellectual Property;
(ii) identifies each pending Registration with
respect to the Intellectual Property;
(iii) identifies all applications for or
Registrations regarding the Intellectual Property which have
been withdrawn, abandoned, or have lapsed or been denied;
(iv) specifies any advice with respect to the
Registration or protect ability of the Intellectual Property
summarizing such advice; and
(v) identifies all actions taken by Sellers in order
to protect the confidentiality of all trade secrets,
proprietary information and other similar Intellectual
Property.
<PAGE>
Schedule 6.07 also identifies: (A) each license agreement or other
written or oral agreement or permission ("License Agreement") which
Sellers have granted to any third party with respect to any of the
Intellectual Property (together with any exceptions); and (B) each item
of the Intellectual Property that any third party owns and the license,
sublicense, agreement or other permission granted to Sellers in
connection therewith ("Third Party License Agreement"). Sellers have
supplied Purchaser or its counsel with correct and complete copies of
all License Agreements and Third Party License Agreements, and except
as specified in Schedule 6.07, all License Agreements and Third Party
License Agreements may be assigned to Purchaser free of cost or expense
without obtaining the consent or approval of any other person. Sellers
have complied with all License Agreements and Third Party License
Agreements, and to Sellers' knowledge, all other parties to such
agreements have complied with all provisions thereof; and no material
default or event of default exists under any of the License Agreements
or Third Party License Agreements.
(b) Except as set forth on Schedule 6.07, (i) Sellers own all
right, title and interest in and to all of the Intellectual Property
and the Registrations, (ii) none of Sellers or the directors or
officers (or the employees with responsibility for Intellectual
Property matters or using the Intellectual Property) of APM has ever
received any charge, complaint, claim, or notice alleging and have no
other knowledge regarding the invalidity, abuse, misuse, or
unenforceability of any of such right, title or interest, (iii) to the
knowledge of any of Sellers or the directors or officers (or the
employees with responsibility for Intellectual Property matters or
using the Intellectual Property) of APM, no third party has interfered
with, infringed upon, misappropriated, or otherwise come into conflict
with any Intellectual Property rights of Sellers, (iv) none of Sellers
or the directors or officers (or the employees with responsibility for
Intellectual Property matters or using the Intellectual Property) of
APM has received a notice of conflict with the asserted rights of
others within the last five years, and (v) to the knowledge of Sellers,
Sellers have not infringed any such rights of others.
(c) Without limiting any of the foregoing, to the knowledge of
Sellers (i) none of Sellers' respective officers, directors, employees
or independent contractors have disclosed to (without proper obligation
of confidentiality) or otherwise used or utilized on behalf of any
person other than Sellers, any trade secrets or proprietary information
related to the Products, including, without limitation, the source code
for the Products, and (ii) Sellers' respective officers, directors,
employees and independent contractors are contractually obligated to
assign, and have assigned, all rights in the Intellectual Property to
Sellers and true and correct copies thereof have been provided (or will
be provided during the Due Diligence Period) to Purchaser. Schedule
6.07 identifies all individuals who have materially contributed to the
development of the Products.
(d) The Products (i) perform in all material respects in
accordance with all published specifications of Sellers for such
Products, (ii) comply in all material respects with all other published
documentation, descriptions and literature of Sellers with respect to
such Products, and (iii) comply in all material respects with all
representations, warranties and other requirements specified in all of
Sellers' License Agreements.
<PAGE>
6.08 Documents of and Information with Respect to Sellers.
(a) Schedule 6.08(a) accurately and completely sets forth a
true and complete list of all of the contracts of Sellers which are
material to the Assets (the "Material Contracts"), including the
following:
(i) each policy of insurance in force with respect
to the Assets, if any;
(ii) any other agreement, contract or commitment to
which either or both of the Sellers is a party or by which it
is bound which involves a future commitment by the Sellers in
excess of $25,000 and which cannot be terminated without
liability on 90 days or less notice; and
(iii) License Agreements and Third Party License
Agreements (which are listed on Schedule 6.08(a).
Sellers have previously furnished or will furnish Purchaser prior to
the Closing Date a true and complete copy of each such agreement,
contract or commitment listed in Schedule 6.08(a). There has not been
any default in any obligation to be performed by Sellers, nor to the
best knowledge of Sellers, any other party, under any such instrument.
Except as set forth on Schedule 6.08(a), Sellers are not a party to or
bound by any other Material Contracts. All Material Contracts have been
entered into in the ordinary course of business, are on normal and
customary commercial terms.
(b) Schedule 6.08(b) sets forth a list of substantially all of
Sellers' current customers with respect to the Assets by category and
the approximate percentage of revenue of Seller by category for certain
periods set forth therein. The information contained in Schedule
6.08(b) is true and correct in all material respects.
6.09 Litigation Involving the Seller. There are no actions, suits,
claims, governmental investigations or arbitration proceedings pending or to the
knowledge of the Seller threatened against or affecting the Sellers or any of
its assets or properties which could materially affect the Assets or the
Business, and, to the best of the knowledge of Sellers, there is no basis for
any of the foregoing. There are no outstanding orders, decrees or stipulations
issued by any federal, state, local or foreign judicial or administrative
authority in any proceeding to which any of the Sellers is or was a party or the
transactions contemplated herein.
6.10 No Material Adverse Change. Except as set forth on Schedule 6.10,
since June 1, 1996, there has been no change or changes which in the aggregate
have had or will have a material adverse effect on the Business or the Assets.
There is not, to the best of the knowledge of Sellers, any threatened or
prospective event or condition of any character whatsoever which could
materially and adversely affect the Assets or the Business.
<PAGE>
6.11 Compliance with Laws by the Seller. Sellers are in compliance with
all laws, regulations and orders applicable to the Assets and the Business. The
Seller has not received notification of any asserted past or present failure to
comply with any laws relating to the Business or the Assets, and to the best of
the knowledge of Sellers, no proceeding with respect to any such violation is
contemplated.
6.12 Due Authorization; Binding Obligation. The execution, delivery and
performance of this Agreement and the consummation of the transactions
contemplated hereby have been duly authorized by necessary corporate action of
Sellers. This Agreement has been duly executed and delivered by each of Sellers
and is a valid and binding obligation of each of them, enforceable in accordance
with its terms. Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby will:
(a) conflict with or violate any provision of the articles of
incorporation or bylaws of Sellers, or of any law, ordinance or
regulation or any decree or order of any court or administrative or
other governmental body which is either applicable to, binding upon or
enforceable against Sellers or any of them, or
(b) result in any breach of or default under any mortgage,
contract, agreement, indenture, trust or other instrument which is
either binding upon or enforceable against Sellers or the Assets.
Without limiting the generality of the foregoing, none of the Sellers
is a party to any continuing agreement or understanding, made by it or
on its behalf, which limits in any way the ability of (i) Sellers to
enter into this Agreement and perform their respective obligations
hereunder, (ii) Sellers to sell the Assets to Purchaser and Purchaser
to purchase the Assets, all on the terms and subject to the conditions
set forth herein, or (iii) the parties hereto to consummate the
transactions contemplated hereby, nor has the Seller breached any such
agreement, or any prior agreement, which breach would entitle the other
party thereto to any equitable or monetary remedies.
6.13 Acquisition Entirely for Own Account. Each Seller represents and
warrants that such Seller is acquiring Shares solely for such Seller's own
account for investment and not with a view to sale or distribution of the Shares
or any portion or component thereof, and such Seller will not sell, offer to
sell or otherwise dispose of or distribute the Shares or any portion or
component thereof in any transaction other than a transaction complying with the
registration requirements of the Securities Act of 1933, as amended (the "Act"),
and applicable state securities or "Blue Sky" laws, or pursuant to an exemption
therefrom. Each Seller also represents that the entire legal and beneficial
interest of the Shares that such Seller is acquiring is being acquired for, and
will be held for, such Seller's account only, and neither in whole nor in part
for any other person or entity.
6.14 Information Concerning Purchaser. Each Seller represents and
warrants that such Seller has been provided with a copy of Purchaser's most
recent Form 10-K, Form 10-Q, its prior year's and current year's proxy
statements, a letter to shareholders dated July 25, 1996 from Chairman S. Leroy
Reed, Jr. and an Offering Memorandum of Purchaser dated August 30, 1996, and
such other information concerning Purchaser that such Seller deems necessary and
appropriate to enable such Seller to evaluate the financial risk inherent in
<PAGE>
making an investment in the Shares. Each Seller further acknowledges that such
Seller has received satisfactory and complete information concerning the
business and financial condition of Purchaser in response to all inquiries in
respect thereof. Purchaser will provide to Sellers a copy of its current year's
proxy statement when available.
6.15 Economic Risk and Suitability. Each Seller represents and warrants
as follows:
(a) Each Seller realizes that such Seller's
acquisition of the Shares involves a high degree of risk and will be a
highly speculative investment and that such Seller is able, without
impairing such Seller's financial condition, to hold the Shares for an
indefinite period of time and to suffer a complete loss of such
Seller's investment.
(b) Each Seller has carefully considered and has, to
the extent such Seller believes such discussions necessary, discussed
with such Seller's professional, legal, tax and financial advisors the
suitability of an investment in the Shares for the particular legal,
tax and financial situation of such Seller and that such Seller and/or
such Seller's advisors have determined that the Shares are a suitable
investment for such Seller.
(c) Seller has such knowledge and experience in
business and financial matters as will enable such Seller to evaluate
the merits and risks of an investment in the Shares and to make an
informed investment decision.
(d) Seller has carefully read this Agreement and
Purchaser has made available to Seller or Seller's advisors all
information and documents requested by such Seller relating to an
investment in the Shares, and has provided answers to such Seller's
satisfaction to all of Seller's questions concerning Purchaser and the
Shares to be acquired.
(e) Sellers were not organized for the purpose of
acquiring the Shares and Sellers have their principal place of business
and principal office located within the state set forth in its address
shown in Section 12.05.
(f) Sellers understand that neither Purchaser nor any
of its officers or directors has any obligation to register the Shares
under any federal or state securities act or law.
(g) All information that each Seller has provided
Purchaser and such Seller's financial position is correct and complete
as of the date hereof, and if there should be any material change in
such information, such Seller will provide such information to
Purchaser as soon as practicable thereafter.
(h) Each Seller understands that Purchaser is relying
on the truth and accuracy of the declarations, representations,
warranties and agreements made by such Seller to Purchaser herein in
transferring the Shares to such Seller.
<PAGE>
(i) Seller confirms that such Seller has received no
general solicitation or general advertisement and has attended no
seminar or meeting (whose attendees have been invited by any general
solicitation or general advertisement) and has received no
advertisement, article, notice or other communication published in any
newspaper, magazine, or similar media or broadcast or television or
radio regarding the offering of the Shares.
(j) APM acknowledges and warrants that it has had an
opportunity to obtain from Purchaser such information regarding the
shares, the business of the Purchaser and any other information as
would have been disclosed to Sellers in an M-11 securities filing by
Purchaser under New York law and APM has received from Purchaser all
such information it has requested.
6.16 Registration; Restrictions; Legend. The Shares that Sellers are
acquiring have not been registered under the Act, and such Shares must be held
indefinitely unless a transfer of them is subsequently registered under the Act
or an exemption from such registration is available.
(a) Each Seller agrees not to make any sale of any
Shares except either (i) in accordance with a duly filed and effective
registration statement under federal and applicable state law, in which
case Seller must comply with the requirement of delivering a current
prospectus, (ii) in accordance with Rule 144 and applicable state law,
or (iii) in any transaction exempt from the registration requirements
of the Act or any applicable state securities laws. Such Shares are not
transferable on the books of Purchaser unless the certificate submitted
to Purchaser's transfer agent evidencing such shares is accompanied by
a separate certificate executed by a Seller or such Seller's officer,
or other person duly authorized by Seller, for purposes of establishing
compliance with this Agreement. Such certificate shall be in such form
as shall be reasonably satisfactory to Purchaser.
(b) Sellers agree that all certificates representing
the Shares, shall have endorsed thereon substantially the following
legend or legends:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED
FOR INVESTMENT PURPOSES ONLY AND HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 OR UNDER THE LAW OF ANY
STATE. THE SHARES MAY NOT BE SOLD OR TRANSFERRED IN THE
ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM."
6.17 Solvency. Each of the Sellers is now Solvent and will be Solvent
immediately prior to and immediately after giving effect to the transactions
contemplated by this Agreement. For the purposes of this Agreement, "Solvent"
means with respect to a Seller that (a) the fair value of all of its Assets is
in excess of the total amount of its debts (including contingent liabilities);
(b) it is able to pay its debts as they mature; (c) it does not have
unreasonably small capital for the business in which it is engaged or for any
business or transaction in which it is about to engage; and (d) it is not
"insolvent" as such term is defined in Section 101 of the Bankruptcy Code.
<PAGE>
ARTICLE VII
Representations and Warranties of Purchaser
In order to induce Sellers to enter into this Agreement and consummate
the transactions contemplated hereunder, Purchaser makes the following
representations and warranties:
7.01 Organization, Power and Authority of Purchaser. Purchaser is a
corporation duly organized and validly existing under the laws of the State of
Mississippi, with full corporate power and authority to enter into this
Agreement and to carry out the transactions and agreements contemplated hereby.
7.02 Due Authorization; Binding Obligation. The execution, delivery and
performance of this Agreement, the issuance and sale of the Shares and the
consummation of the transactions contemplated hereby have been duly authorized
by all necessary corporate actions of Purchaser. This Agreement has been duly
executed and delivered by Purchaser and is a valid and binding obligation of
Purchaser, enforceable in accordance with its terms. Neither the execution and
delivery of this Agreement, the issuance and sale of the Shares nor the
consummation of the transactions contemplated hereby will: (i) conflict with or
violate any provision of the articles of incorporation or bylaws of Purchaser or
of any decree or order of any court or administration or other governmental body
which is either applicable to, binding upon or enforceable against Purchaser; or
(ii) result in any breach of or default under any mortgage, contract, agreement,
indenture, trust or other instrument which is either binding upon or enforceable
against Purchaser.
7.03 Accuracy of Information Furnished by Purchaser. No representation,
statement or information made or furnished by Purchaser to Sellers contains any
untrue statement of a material fact or omits a material fact necessary to make
the statements contained herein, in light of the circumstances in which they
were made, not misleading.
7.04 Preemptive Rights; Liens; Shares Free of Adverse Interests. The
Shares, when issued in compliance with the provisions of this Agreement, will be
validly issued, fully paid and nonassessable. The issuance, purchase and
delivery of the shares are not subject to preemptive or any other similar rights
of the shareholders of the Purchaser or any liens or encumbrances of any kind
whatsoever. Upon their purchase by the Sellers, the Shares will be free and
clear of any lien, encumbrance, claim or other adverse interest.
7.05 Governmental Consents. No consent, approval, order or
authorization of, or registration, qualification, designation, declaration or
filing with, any foreign, federal, state or local governmental authority is
required to be made by the Purchaser before or in connection with the
consummation of the transactions contemplated by this Agreement except for
compliance with federal securities laws and state securities laws in force in
the states in which Shares are offered and/or sold, which compliance will be
effected in accordance with such laws.
7.06 No Material Adverse Change. Since the date of the most recent Form
10-K or 10-Q provided to Sellers, there has not been any material adverse change
in the financial condition, assets, liabilities, business or prospects of the
Purchaser.
<PAGE>
ARTICLE VIII
Additional Covenants of Sellers
8.01 Best Efforts. Sellers will use their best efforts to cause to be
satisfied as soon as practicable and prior to the Closing Date all of the
conditions set forth in Article III to the obligation of Purchaser to purchase
the Assets.
8.02 Conduct of Business Pending the Closing. From and after the
execution and delivery of this Agreement and until the Closing Date, except as
otherwise provided by the prior written consent of Purchaser:
(a) Sellers will (i) preserve its Business organization
intact, (ii) keep available the services of its officers, employees,
agents and distributors with respect to the Assets and the Business,
and (iii) preserve its relationships with customers, suppliers and
others involving the Assets or the Business, in each case in the manner
in which the same has heretofore been conducted.
(b) Sellers will maintain the Assets in customary repair,
order and condition, reasonable wear and use and damage by unavoidable
casualty excepted, and will maintain insurance of such types and in
such amounts upon all of the Assets and with respect to the Business as
are in effect on the date of this Agreement.
(c) Sellers will not without Purchaser's prior written consent
(i) sell or transfer any of the Assets or (ii) incur any material
obligations or liabilities or enter into any material transaction,
contract, arrangement or agreement with respect to the Business.
8.03 Access to Sellers's Plants, Properties and Records. From and after
the execution and delivery of this Agreement, Sellers will afford to the
representatives of Purchaser reasonable access, during normal business hours and
upon reasonable notice, to Sellers' premises sufficient to enable Purchaser to
inspect the Assets and obtain any information relating to the Business, and
Sellers will furnish to such representatives during such period all such
information relating to the foregoing investigation as Purchaser may reasonably
request; provided, however, that any furnishing of such information to Purchaser
and any investigation by Purchaser shall not affect the right of Purchaser to
rely on the representations and warranties made by Sellers in or pursuant to
this Agreement, and, provided further that Purchaser will hold in confidence all
documents and information concerning Sellers so furnished, and, if the sale of
the Assets pursuant hereto shall not be consummated, such confidence shall be
maintained.
8.04 No Other Discussions. Commencing on the date hereof and extending
through and including the earlier of the Closing Date or termination of this
Agreement pursuant to Section 12.04, Sellers will discontinue negotiations with
others and will not continue or enter into discussions or negotiate with or
entertain or accept the unsolicited offer of any other party concerning the
potential sale of all or any part of the Assets. Sellers will notify Purchaser
of any offers or inquiries with respect thereto and provide copies of any
written offers or proposals.
<PAGE>
ARTICLE IX
Additional Covenants of Purchaser
9.01 Best Efforts. Purchaser will use its best efforts to cause to be
satisfied as soon as practicable and prior to the Closing Date all of the
conditions set forth in Sections 3.06 and 3.07 and Article IV to the obligation
of Sellers to sell the Assets pursuant to this Agreement.
ARTICLE X
Indemnification
10.01 Agreement by Sellers to Indemnify. Each of Sellers jointly and
severally (the "Seller Indemnifying Parties") shall indemnify and hold Purchaser
harmless in respect of the aggregate of all indemnifiable damages of Purchaser.
For this purpose, "indemnifiable damages" of Purchaser means the aggregate of
all expenses, losses, costs, deficiencies, liabilities and damages (including
related reasonable counsel fees and expenses) incurred or suffered by Purchaser
(a) resulting from any inaccurate representation or warranty made by Sellers in
or pursuant to Article VI hereof, (b) resulting from any default in the
performance of any of the covenants or agreements made by Sellers in this
Agreement, (c) any claim or cause of action by any party against the Purchaser
with respect to the Excluded Liabilities (including without limitation all
debts, obligations and liabilities accruing under the Assumed Contracts prior to
the Closing Date, whether or not due and payable prior to the Closing Date); or
(d) the ownership of the Assets or the operation of the Business by Sellers
prior to the Closing Date.
10.02 Agreements by Purchaser to Indemnify. Purchaser agrees to
indemnify and hold Sellers (the "Seller Indemnified Parties") harmless in
respect of the aggregate of all indemnifiable damages of any of the Seller
Indemnified Parties. For this purpose, "indemnifiable damages" of any of the
Seller Indemnified Parties means the aggregate of all expenses, losses, costs,
deficiencies, liabilities and damages (including related reasonable counsel fees
and expenses) incurred or suffered by any of Seller Indemnified Parties
resulting from (a) any inaccurate representation or warranty made by Purchaser
in Article VII hereof, (b) any default in the performance of any of the
covenants or agreements made by Purchaser in this Agreement, (c) the ownership
of the Assets or the operation of the Business by Purchaser after the Closing
Date, or (d) debts, liabilities or obligations accruing under the Assumed
Contracts after the Closing Date and due and payable after the Closing Date.
10.03 Matters Involving Third Parties. If any third party shall notify
any party to this Agreement (the "Indemnified Party") with respect to any matter
which may give rise to a claim for indemnification against any other party (the
"Indemnifying Party") under this Article X then the Indemnified Party shall
notify each Indemnifying Party thereof promptly; provided, however, that no
delay on the part of the Indemnified Party in notifying any Indemnifying Party
shall relieve the Indemnifying Party from any liability or obligation hereunder
unless (and then solely to the extent) the Indemnifying Party thereby is
damaged. In the event any Indemnifying Party notifies the Indemnified Party
within 15 days after the Indemnified Party has given notice of the matter that
the Indemnifying Party is assuming the defense thereof, (a) the Indemnifying
Party will defend the Indemnified Party against the matter with counsel of its
choice reasonably satisfactory to the Indemnified Party, (b) the Indemnified
Party may retain separate co-counsel at its sole cost and expense (except that
the Indemnifying Party will be responsible for the reasonable fees and expenses
of the separate co-counsel to the extent the Indemnified Party concludes that
<PAGE>
the counsel the Indemnifying Party has selected has a conflict of interest), (c)
the Indemnified Party will not consent to the entry of any judgment or enter
into any settlement with respect to the matter without the written consent of
the Indemnifying Party (not to be withheld or delayed unreasonably), and (d) the
Indemnifying Party will not consent to the entry of any judgment with respect to
the matter, or enter into any settlement which does not include a provision
whereby the plaintiff or claimant in the matter releases the Indemnified Party
from all liability with respect thereto, without the written consent of the
Indemnified Party (not to be withheld or delayed unreasonably). In the event no
Indemnifying Party notifies the Indemnified Party within 15 days after the
Indemnified Party has given notice of the matter that the Indemnifying Party is
assuming the defense thereof, however, the Indemnified Party may defend against,
or enter into any settlement with respect to, the matter in any manner it may
deem appropriate.
10.04 Nature and Survival of Representations and Warranties. Except as
set forth herein, all representations and warranties made by the parties hereto
in this Agreement or pursuant hereto shall survive the Closing hereunder and any
investigation at any time made by or on behalf of the Sellers or Purchaser until
the first anniversary of the Closing Date. The representations, warranties and
covenants contained in Sections 5.01, 5.02, 5.04, 5.06, 5.07, 6.04, 6.07(a),
6.07(b), 607(c), 6.12, 6.17, 7.02 and 7.04 shall survive the Closing
indefinitely. The representations and warranties relating to liabilities of
Sellers referred to in subsections 10.01(c) and (d) above shall survive the
Closing until the expiration of the applicable statute of limitations with
respect to each such liability. The representations, warranties, and covenants
contained in Section 11.01 of this Agreement shall survive the Closing until the
expiration of the Covenant Period (the date upon which the survival of the
respective representation, warranty, covenant or agreement terminates shall be
referred to as the "Termination Date"). After the Termination Date, no
Indemnified Party may commence any action against any Indemnifying Party in
respect of the inaccuracy of any representation or warranty contained in this
Agreement. All statements contained in any certificate or other instrument
executed and delivered by the Sellers or Purchaser pursuant to this Agreement or
in connection with the transactions contemplated hereby shall be deemed
representations and warranties by the Sellers or Purchaser, respectively,
hereunder.
10.05 Limitations on Indemnification. The Purchaser and Sellers shall
not be entitled to recover from the other party any indemnifiable damages in
respect of a breach of a representation or warranty of Sellers or Purchaser,
respectively, under this Agreement in excess of the sum of (i) the fair market
value of the Shares and (ii) the aggregate amount of Percentage Amounts that
have been paid to APM pursuant to Sections 1.02 and 5.04 of this Agreement from
the Closing Date through the date on which the claim for indemnification is due
and payable whether by agreement, final judgment or otherwise (the "Payment
Date"). For purposes of this Section 10.05, the "fair market value" of the
Shares shall be based on the average last closing sale price of the Shares for
the month immediately prior to the Closing Date on the principal securities
market on which the Shares are traded in the United States.
ARTICLE XI
Restrictive Covenants
11.01 Non-Competition. For the period during which Percentage Amounts
are being paid or are payable to APM and for two (2) years thereafter (the
"Covenant Period"), Sellers agrees, and Sellers agree to cause their employees,
not to directly or indirectly manage, operate, represent, promote, do research
for or consult for, work for, or participate in the operation, acquisition,
<PAGE>
management or development of the commercial sale or license of any computer
program, product or asset involving Folio or other hypertext infobase products
relating to the provision of coding and reimbursement data in the health-care
reimbursement industry in the United States of America, including, without
limitation, the obligation on the part of Sellers and their employees not to
take any action which would directly or indirectly adversely affect the
relationship between Purchaser and the AMA or the AAO or to promote or support
any other person in selling any such computer program, product or asset to the
AMA or the AAO. "Affiliates" shall mean an entity which controls, is controlled
by, or is under common control with a Seller. The limitations set forth in this
Section 11.01 shall not be binding upon Computer Sciences Corporation , the
parent company of APM, and its Affiliates other than APM; provided, however,
that notwithstanding the foregoing, neither Computer Sciences Corporation not
its Affiliates shall be permitted to engage the current or future employees and
independent contractors of APM or CCI (including but not limited to Douglas E.
Pedersen, Steven Low, William Simms and Amy Griffiths), in a manner which would
violate the provisions of this Section 11.01.
11.02 Confidentiality. The parties hereto acknowledge and agree that
following the Closing Date all Trade Secrets (as hereinafter defined), and all
physical embodiments thereof, are confidential to and shall be and remain the
sole and exclusive property of Purchaser. In addition, following the Closing
Date, all Intellectual Property is the sole and exclusive property of Purchaser.
Sellers further agree that (a) all Trade Secrets shall be held in the strictest
confidence; (b) they shall not, without the prior written consent of Purchaser,
disclose, reproduce, distribute or otherwise disseminate such Trade Secrets, and
shall protect such Trade Secrets from disclosure by others; and (c) they shall
make no use of such Trade Secrets without the prior written consent of
Purchaser. "Trade Secrets" shall mean any and all data and information relating
to the Assets or the Business which (i) derive independent economic value,
actual or potential, from not being generally known to, and not being readily
ascertainable by proper means by other persons who can obtain economic value
from their disclosure or use; and (ii) are the subject of efforts that are
reasonable under the circumstances to maintain their secrecy, including but not
limited to technical or nontechnical data, formulas, compilations, programs,
devices, methods, techniques, drawings, financial data and plans, pricing data,
and lists of current or potential customers.
11.03 Limitation on Remedies for Breach of Article XI or
Non-Competition Agreements. Notwithstanding anything to the contrary set forth
herein, Sellers' and the Shareholders' total cumulative liability to Purchaser
for any breach of this Article XI or any breach of a Non-Competition Agreement
by a Shareholder (either , a "Breach") and regardless of the form of action,
whether in contract or in tort, shall be (a) payment by the Sellers or
Shareholders, jointly and severally, to Purchaser upon demand an amount equal to
the sum of (i) the market value of the Shares held by Sellers and Shareholders
on the date of such Breach, and (ii) in the event all or a portion of the Shares
have been sold prior to such date, the market value of such Shares on the dates
of such sale (but in any event no less than the value of such Shares on the date
of the Closing), and (b) termination as of the date of such Breach of
Purchaser's obligation to pay the Percentage Amounts set forth in Sections 1.02
and 5.04 of the Asset Purchase Agreement. Purchaser agrees that the foregoing
are the sole remedies available to it in the event of a Breach. The foregoing
shall constitute liquidated damages and not a penalty, it being acknowledged by
the parties hereto that it would be difficult or impossible to ascertain the
<PAGE>
amount of any damages resulting from a Breach and that such liquidated damages
constitute a reasonable estimate of the damages which Purchaser would actually
incur upon any such Breach. Purchaser hereby waives its right to maintain a
judicial action for specific performance of the provisions of this Article XI or
to enjoin either of Sellers from committing any act in breach of this Article XI
or any other remedies available to Purchaser at law or in equity. Purchaser
acknowledges and agrees that the exclusive remedy set forth herein shall not be
deemed or alleged by Purchaser to have failed of its essential purpose.
ARTICLE XII
Miscellaneous
12.01 Severability. If any term or provision of this Agreement or the
application thereof to any person or circumstance shall, to any extent, be held
invalid or unenforceable by a court of competent jurisdiction, the remainder of
this Agreement or the application of any such term or provision to persons or
circumstances other than those as to which it is held invalid or unenforceable,
shall not be affected thereby, and each term and provision of this Agreement
shall be valid and enforceable to the fullest extent permitted by law. If any of
the provisions contained in this Agreement shall for any reason be held to be
excessively broad as to duration, scope, activity or subject, such provision
shall be construed by limiting and reducing it, so as to be valid and
enforceable to the extent compatible with the applicable law or the
determination by a court of competent jurisdiction.
12.02 Brokers' Commission. Purchaser will indemnify and hold harmless
Sellers from the commission, fee or claim of any person, firm or corporation
employed or retained or claiming to be employed or retained by Purchaser to
bring about, or to represent it in, the transactions contemplated hereby.
Sellers will indemnify and hold harmless Purchaser from the commission, fee or
claim of any person, firm or corporation employed or retained or claiming to be
employed or retained by Sellers to bring about, or to represent them in, the
transactions contemplated hereby.
12.03 Amendment and Modification. The parties hereto may amend, modify
and supplement this Agreement in such manner as may be agreed upon by them in
writing.
12.04 Termination.
(a) Anything to the contrary herein notwithstanding, this
Agreement may be terminated and
the transactions contemplated hereby may be abandoned:
(i) by the mutual written consent of all of the
parties hereto at any time prior to the Closing Date;
(ii) by Purchaser in its sole discretion if for any
reason Purchaser is unsatisfied following its due diligence
review of the Assets and the Business and notice thereof is
given by Purchaser to Sellers within thirty (30) days of the
date hereof;
<PAGE>
(iii) unless terminated pursuant to Sections (i) or
(ii), by any party in the event of the material breach by any
other party of any provision of this Agreement, which breach
is not remedied by the breaching party within 30 days after
receipt or notice thereof from the terminating party; or
(iv) unless terminated pursuant to Sections (i),
(ii) or (iii), by any party hereto if the Closing has not
taken place by the ninetieth (90th) day after the date of this
Agreement.
If this Agreement is terminated pursuant to clause (i), (ii) or (iii)
of this Section 12.04, no party shall have any liability for any costs,
expenses, loss of anticipated profit or any further obligation for breach of
warranty or otherwise to any other party to this Agreement. Any termination of
this Agreement other than pursuant to clauses (i), (ii) or (iii) of this Section
12.04 shall be without prejudice to any other rights or remedies of the
respective parties.
(b) The risk of any loss to the Assets to be sold by Sellers
hereunder and all liability with respect to injury and damage occurring
in connection therewith shall be the sole responsibility of Sellers
until the completion of the Closing. If any material part of said
properties shall be damaged by fire or other casualty prior to the
completion of the Closing hereunder, Purchaser shall have the right and
option:
(i) to terminate this Agreement, without liability
to any party thereto; or
(ii) to proceed with the Closing hereunder, in which
event such casualty shall not constitute a breach by Sellers
or any representation, warranty or covenant in this Agreement,
and Purchaser shall be entitled to receive and retain the
insurance proceeds arising from such casualty.
12.05 Notice. All notices required to be given in accordance with this
Agreement shall be deemed to have been received upon receipt after being sent
U.S. Mail, certified or registered, return receipt requested, or, if sent by
telecopier, when successfully transmitted, or, if sent by any other means, when
delivered, to the following addresses:
If to Purchaser:
Ethika Corporation
107 Executive Center
Hilton Head Island, SC 29928
Attn: G. Thomas Reed, President and Chief Operating Officer
Telecopier No.: (803) 785-3315
If to APM:
American Practice Management
1675 Broadway, 18th Floor
New York, NY 10019
Attn: Arthur Spiegel III
Telecopier No.: (212) 903-9301
<PAGE>
If to CCI:
Consulting Concepts, Inc.
3548 Monza Drive
Salt Lake City, Utah 84109
Attn: Douglas E. Pedersen
Telecopier No.: (801) 288-0699
with a copy to:
Willkie Farr & Gallagher
153 E. 53rd Street
New York, NY 10022
Attn: Harvey L. Sperry, Esq.
Telecopier No.: (212) 821-8111
The parties hereto may change the above shown notice addresses by
giving notice in the manner acquired hereunder of such new address.
12.06 Binding Effect. This Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective successors, assigns,
heirs and legal representatives. This Agreement may not be assigned by Purchaser
except to another corporation controlled by or under common control with
Purchaser. In any such event, Purchaser shall remain directly liable for all
undertakings and obligations hereunder.
12.07 Entire Agreement. This Agreement and the exhibits and schedules
attached hereto contain the entire agreement of the parties hereto with respect
to the purchase of the Assets and the other transactions contemplated herein,
and supersede all prior understandings and agreements of the parties with
respect to the subject matter hereof. Any reference herein to this Agreement
shall be deemed to include the schedules and exhibits attached hereto.
12.08 Headings; Etc. The descriptive headings in this Agreement are
inserted for convenience only and do not constitute a part of this Agreement.
References to "Sections" and "subsections", unless otherwise stated, refer to
sections and subsections of this Agreement. Unless otherwise specified,
references to "Exhibits" and "Schedules" refer to exhibits and schedules which
are attached hereto and are hereby made a part hereof.
12.09 Execution in Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be deemed an original, and all of
which together will constitute one and the same instrument.
12.10 Schedules. To the extent any disclosure in a schedule puts
Purchaser on actual notice of the facts reflected therein, such disclosure shall
be deemed to be a disclosure in all other schedules under this Agreement as to
such facts. References on any schedule to any document, instrument, contract or
agreement shall not be deemed for any purpose of this Agreement to be a
disclosure of any term, provision or statement of fact of, or relating to, such
document, instrument, contract or agreement, (a) unless and until a copy of such
document, instrument, contract or agreement has been provided to Purchaser, and
(b) until the expiration of the Due Diligence Period.
<PAGE>
12.11 Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of South Carolina applicable to
contracts made and to be performed herein.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered as of the day and year first above written.
PURCHASER:
ETHIKA CORPORATION
By: ____________________
Title:________________________
SELLERS:
AMERICAN PRACTICE MANAGEMENT, INC.
By: ____________________
Title: ____________________
CONSULTING CONCEPTS, INC.
By: ____________________
Title: ____________________
<PAGE>
EXHIBIT E
Allocation of Purchase Price
100% of the value of the Shares will be allocated to the Products.
The balance of the Purchase Price, consisting of the Percentage Amounts
payable pursuant to Section 1.02(b), shall be allocated to the other
Assets being transferred by Sellers to Purchaser pursuant to Section
1.01.
<PAGE>
EXHIBIT (3)(b)(3)
BYLAWS
OF
ETHIKA CORPORATION
(FORMERLY DIXIE NATIONAL CORPORATION)
ARTICLE I
OFFICES
The principal office of the Corporation in the State of Mississippi
shall be located in the City of Jackson, County of Hinds. The Corporation may
have such other offices, either within or without the State of Mississippi, as
the Board of Directors may designate or as the business of the Corporation may
require from time to time.
The registered office of the Corporation to be maintained in the State
of Mississippi may be, but need not be, identical to the principal office in the
State of Mississippi, and the address of the registered office may be changed
from time to time by the Board of Directors.
ARTICLE II
SHAREHOLDERS
Section 1. Annual Meeting. The annual meeting of the Shareholders shall
be held on the first Friday in April in each year at 1:30 p.m., or on such other
date and at such time as the Board of Directors, or the Executive Committee
thereof, of the Corporation may by resolution designate. Such meeting shall be
for the purpose of electing Directors and for the transaction as such other
business as may properly come before the meeting. If the day fixed for the
annual meeting shall be a legal holiday in the State of Mississippi, such
meeting shall be held on the next succeeding business day. If the election of
Directors shall not be held at the annual meeting of Shareholders, or at any
adjournment thereof, the Board of Directors shall cause the election to be held
at a special meeting of the Shareholders as soon as practical following the date
of the annual meeting.
Section 2. Special Meetings. Special meetings of the Shareholders may
be called by the President or by the Board of Directors and shall be called by
the President at the request of the holders of not less than 25 percent of the
outstanding shares of the Corporation entitled to vote at the meeting.
Section 3. Place of Meeting. The Board of Directors may designate any
place, either within or without the State of Mississippi, as the place of
meeting for any annual or special meeting of the Shareholders called by the
Board of Directors. If no designation is made, or if a special meeting be
otherwise called, the place of the meeting shall be the registered office of the
Corporation in the State of Mississippi.
Section 4. Notice of Meeting. Written or printed notice stating the
place, day and hour of the meeting and, in case of a special meeting, the
purpose or purposes for which the meeting is called, shall be delivered not less
than 10 nor more than 60 days before the date of the meeting, either personally
or by mail, by or at the direction of the President, or the Secretary, or the
<PAGE>
Officer or persons calling the meeting, to each shareholder of record entitled
to vote at such meeting. If mailed, such notice shall be deemed to be delivered
when deposited in the United States Mail, addressed to the shareholder at his
address as it appears on the stock transfer books of the Corporation, postage
prepaid.
Section 5. Closing of Transfer Books or Fixing of Record Date. For the
purpose of determining Shareholders entitled to notice of or to vote at any
meeting of Shareholders or any adjournment thereof, or entitled to receive
payment of any dividend, or in order to make a determination of Shareholders for
any other proper purpose, the Board of Directors may provide that the stock
transfer books shall be closed for a stated period but not to exceed, in any
case, 60 days. If the stock transfer books shall be closed for the purpose of
determining Shareholders entitled to notice of or to vote at a meeting of
Shareholders, such books shall be closed for at least 10 days immediately
preceding such meeting. In lieu of closing the stock transfer books, the Board
of Directors may fix in advance a date as the record date for any determination
of Shareholders, such date in any case to be not more than 60 days and, in case
of a meeting of Shareholders, not less than 10 days prior to the date on which
the particular action, requiring such determination of Shareholders, is to be
taken. If the stock transfer books are not closed and no record date is fixed
for the determination of Shareholders entitled to receive notice of or to vote
at a meeting, or receive payment of a dividend, the date on which notice of the
meeting is mailed or the date on which the resolution of the Board of Directors
declaring such dividend is adopted, as the case may be, shall be the record date
for such determination of Shareholders. When a determination of Shareholders
entitled to vote at any meeting of Shareholders has been made as provided in
this section, such determination shall apply to any adjournment thereof.
Section 6. Voting Lists. The Officer or agent having charge of the
stock transfer books for shares of the Corporation shall make, at least 10 days
before each meeting of Shareholders, a complete list of the Shareholders
entitled to vote at such meeting, or any adjournment thereof, arranged in
alphabetical order, with the address of, and the number of shares held by each,
which list, for a period of 10 days prior to such meeting, shall be kept on file
at the registered office of the Corporation and shall be subject to inspection
by any shareholder at any time during usual business hours. Such list shall also
be produced and kept open at the time and place of the meeting and shall be
subject to the inspection of any shareholder during the whole time of the
meeting. The original stock transfer books shall be prima facie evidence as to
who are the stockholders entitled to examine such list or transfer books or to
vote at any meeting of shareholder.
Section 7. Quorum. A majority of the outstanding shares of the
Corporation entitled to vote, represented in person or by proxy, shall
constitute a quorum at a meeting of Shareholders. If less than a majority of the
outstanding shares are represented at a meeting, a majority of the shares so
represented at a meeting, a majority of the shares so represented may adjourn
the meeting from time to time without further notice. At such adjourned meeting
at which a quorum shall be present or represented, any business may be
transacted which might have been transacted at the meeting as originally
notified. The Shareholders present at a duly organized meeting may continue to
transact business until adjournment, notwithstanding the withdrawal of enough
Shareholders to leave less than a quorum.
Section 8. Proxies. At all meetings of Shareholders, a shareholder may
vote by proxy executed in writing by the shareholder or by his duly authorized
attorney-in-fact. Such proxy shall be filed with the Secretary of the
Corporation before or at the time of the meeting. No proxy shall be valid after
11 months from the date of its execution, unless otherwise provided in the
proxy. A proxy may be withdrawn at any time.
<PAGE>
Section 9. Voting of Shares. Each outstanding share entitled to vote
shall be entitled to one vote upon each matter submitted to a vote at a meeting
of Shareholders, except as to any limitations that may apply to preferred stock
of the Corporation, if any, and subject to the right of cumulative voting for
Directors.
Section 10. Voting of Shares by Certain Holders. Shares standing in the
name of another Corporation may be voted by such Officer, agent or proxy as the
bylaws of such Corporation may prescribe or, in the absence of such provisions,
as the Board of Directors of such Corporation may determine.
Shares held by an administrator, executor, guardian or conservator may
be voted by him, either in person or by proxy, without a transfer of such shares
into his name. Shares standing the name of a trustee may be voted by him, either
in person or by proxy, but not trustee shall be entitled to vote shares held by
him without a transfer of such shares into his name.
Shares standing in the name of a receiver may be voted by such
receiver, and shares held by or under the control of a receiver may be voted by
such receiver without the transfer thereof into his name if authority so to do
be contained in an appropriate order of the court by which such receiver was
appointed.
A shareholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledgee, and
thereafter the pledgee shall be entitled to vote the shares so transferred.
ARTICLE III
BOARD OF DIRECTORS
Section 1. General Powers. The business and affairs of the Corporation
shall be managed by its Board of Directors.
Section 2. Chairman. There shall be a Chairman of the Board of
Directors elected annually by the Directors.
Section 3. Executive Committee. There is hereby established an
Executive Committee of the Board of Directors which shall consist of the
Chairman of the Board of Directors, who shall serve as Chairman of the Executive
Committee, along with two other members of the Board of Directors, nominated by
the Chairman, who shall be subject to ratification by the Board of Directors.
The Executive Committee shall have and may exercise all the authority of the
Board of Directors, save and except such authority as is expressly reserved to
the full Board of Directors by the Mississippi Business Corporation Law.
Section 4. Other Committees. There shall be such other committees of
the Board of Directors as the Chairman may from time to time designate and
appoint. The acts of all committees of the Board of Directors, other than the
Executive Committee, shall be subject to approval of the Board of Directors, or
of its Executive Committee.
Section 5. Secretary. The Secretary of the Corporation shall serve as
Secretary to the Board of Directors and all committees thereof and shall
maintain minutes of all meetings in appropriate minute books.
Section 6. Number, Classification, Tenure and Qualifications. The
number of Directors of the Corporation shall not be less than five nor more than
fifteen. No person shall be eligible to serve as a Director unless, when his
term commences, he is at least 21 years of age. The number of Directors shall be
fixed annually by the stockholders at the annual meeting.
Section 7. Regular Meetings. A regular meeting of the Board of
Directors shall be held immediately after, and at the same place as, the annual
meeting of Shareholders. The Board of Directors may provide the time and place,
either within or without the State of Mississippi, for the holding of additional
regular meetings without notice other than the resolution calling for such
regular meetings.
<PAGE>
Section 8. Special Meetings. Special meetings of the Board of Directors
may be called by or at the request of the Chairman of the Board of Directors,
the President of the Corporation, or by not less than 20 percent of the Board of
Directors. The person or persons authorized to call special meetings of the
Board of Directors may fix any place, either within or without the State of
Mississippi, as the place for holding any special meeting of the Board of
Directors called by them.
Section 9. Notice of Special Meeting. Special meetings of the Board of
Directors may be called pursuant to Section 8 of this Article III upon seven
days' written notice. Such notice shall be either delivered in person, by United
States Mail, or by telegram. Notice by mail or telegram shall be addressed to
each Director at his address shown on the records of the Corporation. Mail
notice is deemed delivered upon deposit in the United States Mail, addressed as
aforesaid, postage prepaid. Telegraphic notice is deemed delivered upon
acceptance by the telegraph company.
Notice of a special meeting may be waived by any Director. Attendance
at a special meeting constitutes a waiver of notice of such meeting unless a
Director specifically causes the minutes thereof to reflect his attendance
solely to challenge the proper calling or convening of such meeting. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the Board of Directors need be specified in the notice or waiver of notice of
such meeting.
Section 10. Quorum. A majority of the number of Directors fixed by
Section 6 of this Article III shall constitute a quorum for the transaction of
business at any meeting of the Board of Directors, but if less than such
majority is present at a meeting, a majority of the Directors present may
adjourn the meeting from time to time without further notice.
Section 11. Vacancies. Any vacancies occurring in the Board of
Directors or any Directorship to be filled by reason of an increase of the
number of Directors shall be filled by election at an annual meeting of the
Shareholders or a special meeting of the Shareholders called for that purpose. A
Director elected to fill a vacancy shall be elected for the unexpired term of
his predecessor in office.
Section 12. Presumption of Assent. A Director of the Corporation who is
present at a meeting of the Board of Directors at which action on any corporate
matter is taken shall be presumed to have assented to the action taken unless
his dissent shall be entered in the minutes of the meeting or unless he shall
file his written dissent to such action with the person acting as the Secretary
of the meeting before the adjournment thereof or shall forward such dissent by
registered mail to the Secretary of the Corporation within three business days
after the adjournment of the meeting Such right to dissent shall not apply to a
Director who voted in favor of such action.
Section 13. Compensation. By resolution of the Board of Directors, the
Directors may be paid their expenses, if any, of attendance at each meeting of
the Board of Directors, or committee thereof, and may be paid a fixed sum for
attendance at each meeting of the Board of Directors, or committee thereof, or a
stated salary as Director. No such payment shall preclude any Director from
serving the Corporation in any other capacity and receiving compensation
therefor.
<PAGE>
ARTICLE IV
OFFICERS
Section 1. Number and Qualifications. The Officers of the Corporation
shall be a chief executive Officer, a President, one or more Vice Presidents
(the number thereof to be determined by the Board of Directors), a Secretary and
a Treasurer, each of whom shall be elected by the Board of Directors. Such other
Officers and assistant Officers as may be deemed necessary may be elected or
appointed by the Board of Directors. Any two or more offices may be held by the
same person, except the offices of President and Secretary, and except the
offices as Chairman of the Board of Directors and President of the Corporation.
No person shall be eligible to serve as an Officer of the Corporation unless
when his term commences he is at least 21 years of age and not more than 65
years of age. Any Officer attaining the age of 65 during his term of office
shall serve the unexpired portion thereof.
Section 2. Election and Term of Office. The Officers of the Corporation
to be elected by the Board of Directors shall be elected annually by the Board
of Directors at the first meeting of the Board of Directors held after each
annual meeting of the Shareholders. If the election of Officers shall not be
held at such meeting, such election shall be held as soon thereafter as
conveniently may be. Each Officer shall hold office until his successor shall
have been duly elected and shall have qualified or until his death or until he
shall resign or shall have been removed in the manner hereinafter provided.
Section 3. Vacancies. A vacancy in any office because of death,
resignation, removal, disqualification or otherwise may be filled by the Board
of Directors for the unexpired portion of the term.
Section 4. Chief Executive Officer. The chief executive Officer,
subject to the control of the Board of Directors, shall supervise and control
the affairs of the Corporation.
Section 5. President. The President shall perform and discharge such
duties and responsibilities as may be assigned to that office by the chief
executive Officer and the Board of Directors of the Corporation. The President
may sign, with the Secretary or any other proper Officer of the Corporation
thereunto authorized by the Board of Directors, certificates for shares of the
Corporation, and deeds, mortgages, bonds, contracts or other instruments which
the Board of Directors has authorized to be executed, except in cases where the
signing and execution thereof shall be expressly delegated by the Board of
Directors or by these bylaws to some other Officer of the Corporation, or shall
be required by law to be otherwise signed or executed.
Section 6. The Vice Presidents. The Vice Presidents shall have such
duties as may be from time to time prescribed by the Board of Directors.
Section 7. Secretary. The Secretary shall: (a) keep the minutes of
meeting of the Shareholders, Directors and committees of the Board of Directors
in one or more books provided for that purpose; (b) see that all notices are
duly given in accordance with the provisions of these bylaws as required by law;
(c) be custodian of the corporate records and of the seal of the Corporation and
see that the seal of the Corporation is affixed to all documents, the execution
of which on behalf of the Corporation under its seal, is duly authorized; (d)
keep a register of the post office address of each shareholder, which shall be
furnished to the Secretary by such shareholder; (e) sign with other designated
Officers certificates for shares of the Corporation, the issuance of which shall
have been authorized by resolution of the Board of Directors; (f) have general
charge of the stock transfer books of the Corporation; (g) in general perform
all duties incident to the office of Secretary and such other duties as from
time to time may be assigned to him by the President or by the Board of
<PAGE>
Directors.
Section 8. The Treasurer. The Treasurer shall: (a) have charge and
custody of and be responsible for all funds and securities of the Corporation;
receive and give receipts for monies due and payable to the Corporation from any
source whatsoever; and deposit all such monies in the name of the Corporation in
such banks, trust companies or other depositories as shall be selected in
accordance with the provisions of these bylaws; and (b) in general perform all
the duties incident to the office of Treasurer and such other duties as from
time to time may be assigned to him by the President or by the Board of
Directors.
Section 9. Assistant Secretaries and Assistant Treasurers. The
assistant secretaries and assistant Treasurers, in general, shall perform such
duties as shall be assigned to them by the Board of Directors or any Officer
designated by the Board of Directors.
Section 10. Compensation. The compensation of the Officers shall be
fixed from time to time by the Board of Directors, and no Officer shall be
prevented from receiving such salary by reason of the fact that he is also a
Director of the Corporation.
ARTICLE V
CONTRACTS, LOANS, CHECKS AND DEPOSITS
Section 1. Contracts. The Board of Directors may authorize any Officer
or Officers, agent or agents, to enter into any contract or execute and deliver
any instrument in the name of and on behalf of the Corporation, and such
authority may be general or confined to specific instances.
Section 2. Loans. No loans shall be contracted on behalf of the
Corporation and no evidences of indebtedness shall be issued in its name unless
authorized by a resolution of the Board of Directors. Such authority may be
general or confined to specific instances.
Section 3. Checks, Drafts and Evidence of Indebtedness. All checks,
drafts or other orders for the payment of money, notes or other evidences of
indebtedness issued in the name of the Corporation shall be signed by such
Officer or Officers of the Corporation and in such manner as shall from time to
time be determined by resolution of the Board of Directors.
Section 4. Deposits. All funds of the Corporation not otherwise
employed shall be deposited from time to time to the credit of the Corporation
in such banks, trust companies or other depositories as the Board of Directors
may select.
ARTICLE VI
CERTIFICATES FOR SHARES AND THEIR TRANSFER
Section 1. Certificates for Shares. Certificates representing shares of
the Corporation shall be in such form as shall be determined by the Board of
Directors. Such certificates shall be signed by the President or a Vice
President and by the Secretary or an Assistant Secretary. All certificates for
shares shall be consecutively numbered or otherwise identified. The name and
address of the persons to whom the shares represented thereby are issued, with
the number of shares and date of issue, shall be entered on the stock transfer
books of the Corporation. All certificates surrendered to the Corporation for
transfer shall be canceled and no new certificate shall be issued until the
former certificate for a like number of shares shall have been surrendered and
canceled, except that in case of a lost, destroyed or mutilated certificate a
new one may be issued therefor upon such terms and indemnity to the Corporation
as the Board of Directors may prescribe.
<PAGE>
Section 2. Transfer of Shares. Transfer of shares of the Corporation
shall be made only on the stock transfer books of the Corporation by the holder
of record thereof or by his legal representative, who shall furnish proper
evidence of authority to transfer, or by his attorney thereunto authorized by
power of attorney duly executed and filed with the Secretary of the Corporation,
and on surrender for cancellation of the certificate for such shares. The person
in whose name shares stand on the books of the Corporation shall be deemed by
the Corporation to be the owner thereof for all purposes.
ARTICLE VII
FISCAL YEAR
The fiscal year of the Corporation shall begin on the first day of
January and end on the 31st day of December in each year; provided, however,
that the Board of Directors of the Corporation may, by resolution, establish the
beginning and ending of the fiscal year of the Corporation.
ARTICLE VIII
DIVIDENDS
The Board of Directors may from time to time declare, and the
Corporation may pay, dividends on its outstanding shares in the manner and upon
the terms and conditions provided by law and its Articles of Incorporation.
ARTICLE IX
SEAL
The Board of Directors shall provide a corporate seal which shall be
circular in form and shall have inscribed thereon the name of the Corporation
and the state of incorporation and the words "Corporate Seal."
ARTICLE X
AMENDMENTS
These bylaws may be altered, amended or repealed and new bylaws may be
adopted by the Board of Directors at any regular or special meeting of the Board
of Directors.
ARTICLE XI
INDEMNIFICATION OF OFFICERS AND DIRECTORS
To the fullest extent permitted by the Mississippi Business Corporation
Act, (the "Act") specifically including, but not limited to ss.79-4-8.50 through
ss.79-4-8.58 inclusive, this Corporation shall indemnify each of its Directors
and Officers and hold them harmless from and against any loss, damage, or
expense; including, but not limited to, attorneys fees and expenses, incurred or
paid by an indemnified party as a result of such parties' service or action as
an Officer or Director of this Corporation, or as a result of serving as an
Officer or Director of any other Corporation at the request or instance of this
Corporation.
As used herein, the term "Director" shall have the meaning set forth
ss.79-4-8.5 of the Act. The term "Officer" shall mean the holder of any office
of a Corporation called for or permitted by the Certificate of Incorporation or
Bylaws of such Corporation and to which the holder thereof is elected by the
Board of Directors of such Corporation. The term "indemnified party" shall mean
any Officer or Director entitled to indemnity under the provision of this Bylaw.
EXHIBIT (21 )
<TABLE>
<CAPTION>
ETHIKA CORPORATION
SUBSIDIARIES OF THE REGISTRANT
AS OF DECEMBER 31, 1996
PERCENTAGE OF OUTSTANDING STOCK
NAME OF SUBSIDIARY PLACE OF INCORPORATION HELD BY REGISTRANT
------------------ ---------------------- ------------------
<S> <C> <C>
Compass Data Systems, Inc. Utah 100%
Executive Capital Corporation Mississippi 100%
Text Retrieval Systems, Inc. Florida 100%
Vanguard, Inc. Mississippi 100%
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,906,085
<SECURITIES> 0
<RECEIVABLES> 86,235
<ALLOWANCES> 8,258
<INVENTORY> 21,672
<CURRENT-ASSETS> 2,255,514
<PP&E> 499,892
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,917,048
<CURRENT-LIABILITIES> 887,362
<BONDS> 205,092
0
0
<COMMON> 11,324,273
<OTHER-SE> (8,545,179)
<TOTAL-LIABILITY-AND-EQUITY> 3,917,048
<SALES> 287,164
<TOTAL-REVENUES> 287,164
<CGS> 193,869
<TOTAL-COSTS> 3,229,016
<OTHER-EXPENSES> (658,461)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,283,391)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,283,391)
<EPS-PRIMARY> .209
<EPS-DILUTED> .209
</TABLE>
