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, 1997 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 20, 1998, 20,360,346 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 $4,072,069.
DOCUMENTS INCORPORATED BY REFERENCE
Certain Exhibits
<PAGE>
PART I
ITEM 1 - BUSINESS
General
Ethika Corporation ("Ethika" or the "Corporation"), through its wholly-owned
subsidiaries, Compass Data Systems, Inc. ("CDS") a Utah corporation acquired on
August 17, 1996, Legislative Information Systems, Inc. ("LIS") a Virginia
corporation acquired on June 10, 1997, and Text Retrieval Systems, Inc. ("TRS")
a Florida Corporation, has for the last two fiscal years been primarily engaged
in publishing electronic reference libraries that link related data sources for
convenient access by personal computers. As a result of the recent developments
described below, the Corporation's future business plan following completion of
the pending acquisition of North American Digicom Corporation ("NADC"), a
Colorado corporation is to be engaged in the Tele-communications industry. The
transaction is a reverse acquisition where the Corporation will issue shares of
its' common stock in exchange for all of the common stock of NADC (See Recent
Developments), but NADC will become the historical reporting company and is
treated as the acquirer for accounting purposes.
Recent Developments
The discussion that follows 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.
On December 12, 1997 the Corporation entered into a Settlement Agreement with
the Plaintiffs of the legal action filed in U.S. District Court for the Southern
District of Mississippi Jackson Division (see Legal Proceedings). The terms of
the settlement included; the dismissal of the pending proceeding and mutual
release of any and all other claims between the parties, the sale of 7,000,000
shares of the Corporation's common stock to La Salle Investment, Ltd., one of
the Plaintiffs for $630,000, ( comprised of cash ($25,000) and marketable
securities ($605,000)), the resignations of three of the Corporation's
directors, and the appointment of three directors designated by the Plaintiffs.
The resignation of the Corporation's President was requested and received and
Dennis Brovarone, one of the newly appointed directors was made President. The
new management of the Corporation then embarked on the actions described below.
On January 26, 1998, the Corporation entered into an Agreement and Plan of
Reorganization (the Reorganization Agreement) with North American Digicom
Corporation ("NADC"), a privately owned company headquartered in Lakewood,
Colorado, to acquire 100% of the outstanding common stock of NADC. The
Reorganization Agreement also requires that the Corporation's common stock be
reverse split on the basis of one (1) new share for every twenty-two and one
half (22.5) shares presently outstanding with all fractional shares being
rounded up to the next highest multiple of fifty (50) shares. Then the
shareholders of NADC will exchange their common stock for Ethika common stock at
the rate of three (3) shares of Ethika common stock for four (4) shares of NADC
stock. The NADC shareholders will receive approximately 19.6 million post-split
shares of Ethika, which will represent approximately 95% of the then outstanding
shares. The Reorganization Agreement also requires that the Corporation's
Articles of Incorporation be amended to eliminate the par value of the
Corporation's common stock, authorize a class of preferred stock whose rights
and preferences can be set by the Board of Directors and authorize a name change
<PAGE>
of the Corporation to North American Digicom Corporation. The Reorganization
Agreement also calls for the Corporation's shareholders to approve a re-domicile
of the Corporation to Colorado. Upon execution of the Reorganization Agreement,
the remaining four directors, Anthony Spuria, William Stubblefield, Marcia Cohen
and Herbert Rogers resigned. Philip Grey, Louis Scotti and Wayne Johnson were
appointed to the Corporation's Board of Directors. Mr. Grey, Mr. Scotti and Mr.
Johnson are officers and directors of NADC. This transaction is a reverse
acquisition where the NADC will become the historical company and is treated as
the acquirer for accounting purposes.
Closing of the Reorganization Agreement is conditioned upon surrender of the
NADC common stock for exchange for the Corporation's common stock and approval
of the Reorganization by Shareholders at the Annual Shareholders meeting
together with approval by shareholders of the reverse split and the above
described amendments to the Corporation's Article of Incorporation. Closing was
also conditioned upon the execution of a Voting Trust Agreement by a stockholder
group, (See Security Interest of Beneficial Owners) which holds fifty-one
percent (51%) of the Corporation's common stock. This Voting Trust Agreement was
executed on or about March 16, 1998 and irrevocably gives the Trustee voting
authority over the subject common stock and requires the Trustee to vote in
favor of the items included in the Reorganization Agreement and submitted to the
Corporation's shareholders for vote at the May 29, 1998 Shareholders Meeting. A
meeting of the NADC shareholders has been called for April 15, 1998 to approve
the transaction.
Based upon the Board of Directors and management's confidence that the
Reorganization Agreement will be approved and closed as planned, management has
proceeded with the integration of the Corporation's operations with those of
NADC and taken the actions described below.
North American Digicom Corporation was incorporated as a Colorado corporation on
December 27, 1995. NADC was initially formed to explore potential opportunities
associated with, and arising from the deregulation of the telecommunications
industry. On December 23, 1996 NADC commenced actual operations through the
activation of its P.C. based debit card platform.
In April of 1997, NADC commenced sales of private line and other local services.
On May 1, 1997, North American Digicom Corporation loaded its first switched
one-plus customers. On June 7, 1997, NADC acquired in a stock for stock
exchange, United Online, Inc., a Colorado corporation engaged in the sales of
Internet services. On October 20, 1997, NADC acquired in a stock for stock
exchange, Kidztime TV, Inc., ("KTV" or the "Network") a Colorado corporation.
United Online utilizes a network-marketing model to distribute its products, and
Kidztime TV is a two-year-old cable network specializing in providing violence
free children's programming on various cable systems.
Disposition of Electronic Publishing Operating Units
Based upon analysis of the electronic publishing market and the amount of
capital that will be required to compete effectively in this marketplace,
together with the poor performance the Corporation has experienced since its
entry into this industry, the Board of Directors and management has determined
it to be in the best interest of the Corporation to divest itself of its
electronic publishing business unit which is comprised of TRS, CDS and LIS.
Accordingly, the accompanying financial statements reflect the decision to
dispose of this segment. This divestiture will allow the Corporation to focus
its attention and resources on its new Tele-communications business.
<PAGE>
Acquisition and Disposition of Text Retrieval Systems, Inc.
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.
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 contingently returnable shares ($1,991,250) was included in the
purchase price resulting in a total estimated purchase price at acquisition of
$2,659,482. In the fourth quarter of 1996, management determined that 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 in March 1997
amended the agreement whereby the earnings targets were revised and extended
through December 31, 1997. Based upon this amended agreement and the
Corporation's actual performance for the year ended December 31, 1997, the
number of shares issued in this transaction were reduced to 732,640 shares. The
remaining 1,767,360 contingently returnable shares issued have been returned to
the Corporation and canceled. The issuance of these shares resulted in
additional goodwill.
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 affiliated 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.
As a result of the continued losses in TRS and its extensive capital needs to
achieve profitability the Corporation negotiated an agreement to sell TRS. On
February 17, 1998, the Corporation completed the sale of Text Retrieval Systems,
Inc. to TRS Acquisition Corporation, a closely held corporation for $150,000
cash and future royalties not to exceed $1,500,000 over the next ten years.
Acquisition and Disposition of Compass Data Systems, Inc. and Code Manager
On August 17, 1996 Ethika purchased 100% of Compass Data Systems, Inc. ("CDS"),
a privately-held corporation based in Salt Lake City, Utah for a total purchase
price of $500,000 paid as $100,000 in cash and 726,612 shares of common stock
valued at $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.
<PAGE>
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 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. The preparation and updating of this product line are
included with the results of CDS.
On April 2, 1998, the Corporation completed a transaction with Ben Ezra
Weinstein and Company, Inc., a publicly held New Mexico corporation ("BNEZ")
engaged in the electronic publishing of financial software to sell CDS
(including Code Manager, see below), and its 8% interest in InfoDynamics
including the note receivable from InfoDynamics. The selling price of $850,000
was paid in convertible preferred stock of BNEZ which has not resulted in any
impairment of the net assets.
Acquisition and Disposition of Legislative Information Systems, Inc.
On June 10, 1997 the Corporation acquired Legislative Information Systems
Corporation ("LIS") in a business combination accounted for as a pooling of
interests. LIS became a wholly owned subsidiary of the Corporation through the
exchange of 1,123,433 shares ($616,203) of the Corporation's common stock for
all of the outstanding stock of LIS. LIS is an electronic publishing company
located in Annandale, Virginia specializing in federal aviation regulations,
banking regulations, and custom service contracts.
In March 1998, the Corporation initiated negotiations with BNEZ to sell LIS. The
selling price is expected be paid in preferred stock of BNEZ. The selling price
of LIS is expected to be in excess of its net equity, therefore no impairment of
assets are anticipated.
Investment in Alanco Stock
As part of the Settlement with the Peeper Group, in December 1997, the
Corporation received 891,500 shares of Alanco stock having a fair value of
$605,000 in connection with the issuance of 7,000,000 shares of Ethika common
stock issued to La Salle Investment, Ltd., a member of the Peeper Group (see
Legal Proceedings below). The Corporation has subsequent to December 31, 1997
sold 172,500 shares at a loss of $4,038. Alanco is a publicly traded company
that files periodic reports under the Securities Exchange Act of 1934 and is
traded on the NASDAQ SmallCap Market under the symbol ALAN. At December 31,
1997, the Corporation recorded an unrealized loss of $55,719 related to these
shares.
Sale of Life Insurance Company
The Corporation was organized in 1966 as a Mississippi corporation under the
name "Dixie National Corporation". The name was changed to Ethika Corporation in
June 1996. 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
<PAGE>
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 by 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.
Employees
At December 31, 1997, the Corporation had (in all locations) twenty-six
employees including Officers. As of December 31, 1997, NADC had eighty-five (85)
full time employees.
ITEM 2 - PROPERTIES
Ethika's previous headquarters building in Jackson, Mississippi, was sold on
July 16, 1997 for $700,000 less closing costs of $55,630 and the mortgage
balance of $255,398 netting $388,972 in cash to the Corporation. The Corporation
has operating lease agreements for office space in Salt Lake City, Utah ("CDS"),
Annandale, VA, ("LIS"), and Hilton Head Island, SC (Corporate Headquarters).
Ethika's corporate office space is leased from a former member of the Board of
Directors for $ 1,400 per month.
North American Digicom Corporation is headquarted in Lakewood, Colorado. The
Lakewood facility houses NADC's executive staff, marketing and television
operations. This facility is sub-leased from Cowels Enthusiastic Media, and has
approximately 17 months remaining on the sub-lease. The Lakewood facility is
approximately 12,000 square feet and costs the Company approximately $12,000.00
per month. Additionally, the Company leases an aggregate of 8,000 square feet
from Local Service Corporation in Aurora, Colorado. The Company conducts all
technology functions and customer services from this facility. NADC pays
approximately $8,500.00 per month and has approximately 30 months remaining on
this lease.
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 then Chairman, S.L. Reed, Jr. This suit alleged breach of
fiduciary duties, fraud, and conspiracy to breach fiduciary duty of loyalty and
care, breach of contract, misrepresentation, and conversion. These allegations
arose 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.
On December 12, 1997, Ethika entered into a settlement by mutual agreement of
all parties to this lawsuit. Terms of the settlement includes (1) withdrawal and
dismissal of any present or future lawsuits among the parties; (2) sale of
7,000,000 shares of Ethika unregistered common stock to La Salle Investment,
Ltd., a party to the lawsuit for $0.09 per share (see below); (3) Ethika calling
a Meeting of Shareholders for the purpose of electing Directors and voting on
such other matters as necessary. Such meeting to take place at the earliest date
permitted subject to Security and Exchange Commission regulations; (4)
Resignation of three (3) members of the seven member Board of Directors to be
replaced by three (3) members designated by the Peeper Group to serve as
directors until the Meeting of Shareholders (3) above is held.
<PAGE>
The Corporation, in conjunction with the above settlement entered into a
Subscription Agreement for the sale of 7,000,000 shares of its unregistered
common stock to LaSalle Investment, Ltd., a party to the lawsuit for $0.09 per
share. The Corporation received total consideration of $630,000 consisting of
$25,000 cash and $605,000 of Alanco stock (891,500 shares). As a result of the
issuance of the 7,000,000 shares, and the cancellation of the contingently
issued shares to the TRS shareholders, the holdings of the Peeper Group
increased to 51% resulting in change of control of Ethika Corporation. (See
Security Interest of Beneficial Owners below.)
The Corporation was notified by Standard Management Corporation ("SMC") on June
26, 1997 that its subsidiary, Standard Life Insurance of Indiana, had received a
Citation and Original Petition captioned "Rilla Lindley versus Standard Life
Insurance Company of Indiana, Dixie National Life Insurance Company, Randy
Owens" filed in 2nd Judicial District Court, Parish of Brenville, State of
Louisiana. Standard's notification constituted a claim notice pursuant to
Section 10.3 of the Second Restated Stock Purchase Agreement dated August 30,
1995 by and among Standard Life and Dixie National Life and Dixie National
Corporation (now Ethika Corporation) in which Ethika agreed to indemnify
Standard under certain conditions against qualified third-party claims
originating prior to the sale of Dixie National Life to Standard. The scope of
Ethika's indemnity obligation, if any, under the Agreement is limited to claims
predicated upon occurrences prior to closing based on actions or inactions of
Dixie National Life Insurance Company.
The third-party claim involves, among other things, allegations regarding a
vanishing premium life insurance policy issued by Dixie National Life which was
purchased by the plaintiff in August 1989 from defendant Owens, an employee of a
general insurance agency in Louisiana. The claim appears to be styled in the
form of a class action. An investigation into the Citation's allegations by the
defendants, including legal representation of the Corporation, has been
initiated. Potential liabilities, if any, of the various defendants have not
been determined.
Pursuant to agreements with Plaintiff counsel no answer would be filed pending
settlement discussions and the filing of an amended complaint properly pleading
as a class action suit. In January 1998, the Corporation informed SMC that it
could not defend the action. To the Corporation's knowledge, no further
settlement discussions have been held and no amended complaint has been filed.
Regulatory Agency Administrative Proceedings
Prior to NADC's acquisition of kidZtime TVTM, Inc. ("KTV") in October, 1997,
Capital Funding and Financial Group, Inc. ("Capital Funding"), as an affiliate
of KTV, solicited and sold approximately $47,000,000 of partnership interests in
seventy-two KTV territorial affiliates which received licenses to cablecast KTV
programming within their respective territories. Upon closing of NADC's
acquisition of KTV on October 20, 1997, KTV ceased its affiliate relationship
with Capital Funding, no new KTV affiliates were formed by Capital Funding and
no offering and sales of partnership interests were made by Capital Funding
other than to close the then pending KTV affiliate partnership offering.
Approximately twenty-five state securities law regulatory agencies have made
inquiries or entered Cease and Desist Orders against Capital Funding and KTV
based upon assertions KTV affiliate partnership interests were offered and sold
as unregistered securities. KTV entered into voluntary consent orders with the
States of Arizona, Idaho, Kansas, Oregon and Wisconsin whereby KTV did not admit
<PAGE>
or deny any violations of state securities law, and consented any future sales
of securities in these states would be in compliance with each State's
securities law. On December 5, 1997 the Securities and Exchange Commission (SEC)
ordered a formal investigation on the same matters. As of March 31, 1998, the
SEC's investigation remains ongoing and NADC has been, and intends to, fully
cooperate with the investigation.
On or about March 20, 1998, KTV, NADC and other defendants were served with a
civil action entitled CREATIVE COMMOTION, LLP, Plaintiff v. KIDZTIME TV, INC.,
et al, filed in the District Court, City and County of Denver, Colorado. The
action alleges breach of contract and fraudulent inducement with respect to an
alleged consulting contract with the plaintiff for advertising, marketing and
public relations services for KTV. NADC intends to vigorously defend against the
claims and counterclaim against the plaintiff.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
PART II
ITEM 5- MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Corporation's common stock was traded in the over-the-counter market and was
quoted on the NASDAQ Small Cap market system under the symbol ETKA until
February 13, 1998. At that time, the Corporation was notified that a NASDAQ
Listings Qualifications Panel had ruled that as a result of the trading price of
its common stock being below the $1.00 per share minimum price for continued
listing, the stock was delisted from the NASDAQ Small Cap Market. Ethika's
common stock is currently trading on the NASD OTC Electronic Bulletin Board
"Pink Sheets" under its ETKA symbol. The Corporation has filed an appeal with
NASDAQ to reinstate its listing on the Small Cap Market based upon the Market
Capitalization Alternative Listing requirements. At this time, there can be no
assurance that the Corporation will be relisted on the Small Cap Market. 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.
1997 1996
--------------- ---------------
High Low High Low
---- --- ---- ---
Quarter
First 5/8 13/32 1 1/8
Second 9/16 1/4 7/8 3/8
Third 9/16 9/64 11/16 3/8
Fourth 9/64 3/32 1 13/32
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 20, 1998 was 2,414.
<PAGE>
The Corporation issued shares of common stock in connection with three
acquisition transactions and a private placement of securities in 1997. These
include the issuance of: 180,000 shares issued in February 1997 in consideration
for the CodeManager Reference Library, 1,123,433 shares issued in June 1997 in
consideration for the acquisition of LIS and 732,640 shares issued as final
settlement of the TRS transaction and 7,000,000 shares at $0.09 per share issued
in December 1997 under a Subscription Agreement entered into in connection with
the settlement of the EURAM, B.V., Peeper, et al. vs. Ethika lawsuit (see Legal
Proceedings). The securities were issued in private transactions pursuant to
negotiated purchase agreements and in reliance upon the exemption from
registration pursuant to Section 4(2) of the Securities Act of 1933. See
"Business Recent Developments."
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>
1997 1996 (1) 1995 (1) 1994 (2) 1993 (2)
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR
ENDED
DECEMBER 31:
Loss from
continuing
Operations $ 1,123,195 $ 1,314,334 $ 1,439,976 $ 119,564 $ 117,910
Other income
(expense) 401,643 894,718 (941,767) 29,929 --
Loss from
discontinuing
Operations 1,317,925 2,019,344 4,668,025 2,465,144 839,228
------------ ------------ ------------ ------------ ------------
NET LOSS $ (1,993,977) $ (2,438,960) $ (6,875,251) $ (2,554,779) $ (957,138)
============ ============ ============ ============ ============
PER COMMON
SHARE AMOUNTS
Basic and
diluted
Net (loss) $ (.151) $ (.203) $ (.649) $ (.39) $ (.15)
============ ============ ============ ============ ============
AT YEAR-END:
TOTAL ASSETS $ 2,594,522 $ 4,044,747 $ 5,342,461 $ 44,577,452 $ 56,255,734
============ ============ ============ ============ ============
Total Debt $ 0 $ 340,008 $ 481,636 $ 6,103,839 $ 6,253,670
============ ============ ============ ============ ============
</TABLE>
(1) Amounts have been restated to reflect the pooling-of-interest with LIS.
(2) The years ended December 31, 1994 and 1993 have not been restated for the
LIS transaction as Ethika was engaged only in the life insurance industry
at that time.
<PAGE>
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.
The Corporation began its transition to an applied technology company during
1996 through the acquisition of TRS and CDS. In 1997, the Corporation acquired
the Code Manager product and LIS (See "Recent Developments" above). TRS, CDS and
LIS are primarily engaged in publishing electronic reference libraries that link
related data sources for convenient access by personal computers. In the first
quarter of 1998, the Board of Directors and management began to dispose of these
subsidiaries and to discontinue operations in this segment. Accordingly, the
results of operations from this segment have been reclassified, for all periods
presented, to "Loss from discontinued operations". Additionally, a provision of
$80,000 has been made related to the anticipated losses from this segment
subsequent to 1997 through the disposal of all components of the segment.
Selling, general, and administrative expenses decreased by approximately
$191,139 in 1997 resulting primarily from decreased legal fees due to the
litigation as discussed in Item 3 - Legal Proceedings, acquisition search and
related costs. Other income and expense items generated $401,643 and $894,718 in
income for the periods December 31, 1997 and 1996. This is primarily due to the
sale of the former corporate headquarters located in Jackson, Mississippi in
1997 and rental income and interest income in 1996. A decrease in interest
expense to $18,868 from $66,747 in 1997 and 1996 was due to the lower average
debt level; the gain on the sale of the Alanco stock in 1996 was $671,160.
There were no provisions from income taxes in 1997 or 1996 due to taxable net
operating loss generated by current operations. The deferred tax benefit in 1997
is directly attributable to the sale of the former corporate headquarters noted
above. 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 $6,875,251 in 1995
compared to a net loss of $2,554,779 in 1994. On a per-share basis the net loss
for 1995 was $.65 compared to a net loss of $.39 in 1994.
Acquisition of North American Digicom Corporation
On January 26, 1998, the Ethika Board of Directors unanimously approved the
Agreement and Plan of Reorganization calling for the acquisition of 100% of the
outstanding common stock of North American Digicom Corporation (NADC). On March
4, 1998 by mutual agreement of the parties, the closing date has been extended
<PAGE>
to on or before June 12, 1998, to allow for the vote of shareholders at the May
Annual Meeting. As a result of a Voting Trust Agreement (see Recent Developments
above) whereby fifty-one percent (51%) of the Corporation's presently
outstanding shares of common stock are committed to vote in favor of the
Reorganization with NADC, the Corporation has been operating as if the
Reorganization was completed.
At closing of this transaction, subsequent to the approval by Ethika
shareholders at its annual meeting to be held in May 1998, the Shareholders of
NADC will exchange their common stock for Ethika common stock at the rate of
three (3) shares of Ethika common stock for every four (4) shares of NADC stock.
At the conclusion of this transaction, current Shareholders of NADC will receive
approximately 19.6 million post-split shares of Ethika representing
approximately 95% of the then-outstanding shares and will be in control of the
Corporation. Three of the nominees for the Board of Directors are full-time
Officers of NADC. Upon approval of the transaction, the name of Ethika
Corporation will be changed to North American Digicom Corporation.
NADC's audited financial statements (see exhibit (4)(2) (5)) for the six months
ended December 31, 1997 show revenues of $2,467,540 of which $1,844, 609
represent revenue recognized from long distance telephone service including
prepaid telephone calling cards (deferred revenue from prepaid cards at December
31, 1997 was $5,823,983 representing revenues to be recognized during 1998);
$610,688 represent earnings from television licensing and programming and
$12,243 form Internet services. Operating losses for the six months ended
December 31, 1997, were $789,091 for the long distance segment; $289,598 for the
television segment and $214,204 for the Internet segment. NADC's consolidated
balance sheet at December 31, 1997 had current assets of $9,251,635 and plant
and equipment net of accumulated depreciation of $2,160,894. Liabilities
excluding deferred revenue (see above) were $7,191,516.
Liquidity and Capital Resources
The Corporation accomplished the acquisitions of TRS, CDS, Code Manager and LIS
through the issuance of its common stock. The acquisition of NADC will also be
accomplished by the exchange of stock. Heavy cash drains were placed upon the
Corporation as a result of the litigation activities, (see Legal Proceedings),
failed acquisition attempts and continued negative cash flows experienced by the
TRS and LIS divisions during the last six months of 1997 and the first two
months of 1998. As a result of these developments, management does not believe
that its current working capital and anticipated levels of internally generated
funds will be sufficient to fund its operating requirements for 1998 and
management has sought to cut the Corporation's operational expenses through
divestiture of its unprofitable subsidiaries so that it may concentrate its
capital resources on the Tele-communications business. (See Recent Developments
above). Additionally, NADC, the entity that the Corporation has proposed
acquiring, received a going concern opinion from its independent accountants,
with regard to its December 31, 1997 financial statements.
Limited Operating History, New Business Strategy and Potential Changes to
Business Strategies
Ethika has had a limited operating history since the sale of its life insurance
subsidiary in 1995. The Corporation reported a net loss of $1,993,977 and
$2,438,960 for the year ended December 31, 1997 and 1996, and an accumulated
deficit of $10,535,727 and $8,541,750 as of ended December 31, 1997 and 1996. No
assurance can be given that the Corporation will be able to achieve or sustain
profitable operations.
<PAGE>
The Corporation's business strategy has been to pursue the acquisition of new
business opportunities; initially focusing on businesses utilizing applied
technology. The Corporation began implementing this strategy in early 1996 based
on Management's analysis of the potential markets, products, opportunities and
difficulties that faced the Corporation. (See Recent Developments - Disposition
of Electronic Publishing Segment). The pending acquisition of NADC marks the
Corporation's entry into the mass telecommunications industry. The strength of
NADC lies in its ability to integrate multi facets of the telecommunications
network services under one umbrella.
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.
Subsequent to the completion of the acquisition of NADC, the Corporation intends
to focus on expanding its Tele-communications business through acquisitions and
internal growth. However, no assurance can be given that it can identify,
develop or 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 and delivery method of its
products and services by adapting its products and services to emerging and
changing technology. No assurance can be given that the corporations current
technology will not be replaced by other technology, or that the Corporation
could adapt its products and services to any such alternative technologies on a
timely basis. Furthermore, the Corporation may choose not to invest significant
resources to explore the feasibility of adopting alternative technologies.
From time to time, operating system and delivery technology developers will
announce substantial modifications to their systems. Following such
developments, the Corporation may be required to expend substantial financial
and personnel resources to achieve compatibility with the Corporation's products
and services, the costs of which will increase as the Corporation offers a
greater number of products and services. Should technology changes occur without
the Corporation having the opportunity to develop or modify products and
services that are compatible with such changes, the resulting decline in demand
for the Corporation's products and services could have a material adverse effect
on the Corporation's results of operations and financial condition.
<PAGE>
The telecommunications and information distribution markets are characterized by
continuously evolving standards and technology. The Corporation's ability to
anticipate industry standards, to continue to apply advances in
telecommunications and electronic information distribution technologies 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 technology. 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.
Early State of Development of Industry; Unpredictable Market Acceptance
While the Corporation believes that the market and demand for mass
telecommunications systems and services 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, services 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 or services.
Competition
The Corporation through the NADC acquisition, will compete in the
Tele-communications industry comprised of companies such as AT&T and MCI.
Existing competitors may continue to broaden their product lines and potential
competitors, including large manufacturers, and Tele-communications supplies 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, to develop alternative systems for delivering these types of
information. There can be no assurance that any of the Corporation's products
and services will compete effectively against other products in business to
business long distance services, internet services or in children's television
programming. 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 of NADC, 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 industries the Corporation competes in is intense, and
there can be no assurance that the Corporation will be successful in attracting
and retaining such personnel.
<PAGE>
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. NADC however has
trademarks on its United Online service, kidZtime TV TM, kidZtime Online TM,
kidZtime Challenge TM and Citybites TM. The Corporation also 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 services or to obtain and use information that the Corporation
regards as proprietary. Policing unauthorized use of the Corporation's products
or services is difficult, and while the Corporation is unable to determine the
extent to which piracy of its products exists, 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, or providers of alternative products or services
could cause the market price of the Corporation's common stock to fluctuate
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 common stock was traded in the over-the-counter market and was
quoted on the NASDAQ Small Cap market system under the symbol ETKA until
February 13, 1998. At that time, the Corporation was notified that a NASDAQ
Listings Qualifications Panel had ruled that as a result of the trading price of
its common stock being below the $1.00 per share minimum price for continued
listing, the stock was delisted from the NASDAQ Small Cap Market. Ethika's
common stock is currently trading on the NASD OT Electronic Bulletin Board under
its ETKA symbol. The Corporation has filed an appeal with NASDAQ to reinstate
its listing on the Small Cap Market based upon the Market Capitalization
Alternative Listing requirements. At this time, there can be no assurance that
the Corporation will be relisted on the Small Cap Market.
In addition, if the Corporation is unsuccessful in its appeal with NASDAQ, 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
Report of independent
accountants...............................................................
Report of independent
accountants...............................................................
Consolidated balance sheet as of December 31, 1997,
and 1996.................................................................
Consolidated statement of operations for the years ended
December 31, 1997, 1996, and 1995.......................................
Consolidated statement of cash flows for the years ended
December 31, 1997, 1996, and 1995.......................................
Consolidated statement of changes in stockholders' equity for the
years ended December 31, 1997, 1996, and 1995...........................
Note 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 (the Company) at December 31, 1997 and 1996,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1997, 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
audits 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
audits provide a reasonable basis for the opinion expressed above.
As more fully discussed in Note 1, on January 26, 1998 the Company entered into
an Agreement and Plan of Reorganization (Reorganization Agreement) with North
American Digicom Corporation to acquire 100% of the outstanding common stock of
North American Digicom Corporation. The Reorganization Agreement, among other
things, requires the Company's common stock to be reverse split, which will
result in North American Digicom Corporation owning approximately 95% of the
then outstanding shares. The Reorganization Agreement is subject to approval by
the shareholders of both the Company and North American Digicom Corporation.
Subsequent to the date of the Reorganization Agreement and through March 20,
1998, the Company has loaned approximately $425,000 to North American Digicom
Corporation. Furthermore, the Company's Board of Directors and management
determined it to be in the best interest of the Company to divest itself of its
electronic publishing business units, and since February 1998 the Company has
sold two of its operating companies and has entered into negotiations to sell
its remaining operation.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 14 to the
financial statements, the Company has suffered recurring losses from operations
and has an accumulated deficit that raise substantial doubt about its ability to
continue as a going concern. Additionally, North American Digicom Corporation,
also received a going concern opinion, dated February 14, 1998, from its
independent accountants with regard to its December 31, 1997 financial
statements. Management's plans in regard to these matters are also described in
Note 14. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/PRICE WATERHOUSE, LLP
- ------------------------
PRICE WATERHOUSE, LLP
Atlanta, Georgia
March 20, 1998, except as to Note 1 paragraph 6 and Note 8 paragraph 4 which are
as of April 2, 1998
<PAGE>
Report of Independent Accountant
To The Shareholders
Ethika Corporation (formerly Dixie National Corporation)
Hilton Head Island, SC
We have audited the accompanying consolidated statement of operations,
stockholders' equity and cash flows of Ethika Corporation (formerly Dixie
National Corporation) and subsidiaries as of December 31, 1995 prior to the
restatement described in Note 5. 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 referred to above present
fairly, in all material respects, the results of operations and cash flow of
Ethika Corporation and subsidiaries for the year ended December 31, 1995, in
conformity with generally accepted accounting principles. We have not audited
the consolidated financial statements of Ethika Corporation and its subsidiaries
for any period subsequent to December 31, 1995 nor have we examined any
adjustments applied to the 1995 financial statements.
/s/HORNE CPA GROUP
- ------------------
HORNE CPA GROUP
Jackson, Mississippi
March 7, 1996
<PAGE>
<TABLE>
<CAPTION>
Ethika Corporation and Subsidiaries
Consolidated Balance Sheet December 31, 1997 and 1996
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 535,651 $ 1,908,142
Accounts receivable, net of allowance for doubtful
accounts of $8,258 -- 137,487
Federal income tax refund receivable -- 135,817
Leases receivable 112,763 105,705
Investment securities- Trading 549,281 --
Inventory -- 21,672
Net assets held for sale 739,545 --
------------ ------------
Total Current Assets 1,937,240 2,308,823
Property and equipment, net of accumulated depreciation 45,097 544,943
Leases receivable 166,746 277,430
Intangible and other assets, net of accumulated
amortization of $567,233 -- 913,551
------------ ------------
Total Assets $ 2,149,083 $ 4,044,747
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities:
Accounts payable and accrued expenses $ 367,992 $ 591,048
Current portion of notes payable -- 134,916
Deferred revenue -- 285,944
Accrued loss on discontinued operations 80,000 --
------------ ------------
Total Current Liabilities 447,992 1,011,908
Notes payable -- 205,092
Deferred income taxes -- 45,500
------------ ------------
Total Liabilities 447,992 1,262,500
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Ethika Corporation and Subsidiaries
Consolidated Balance Sheet December 31, 1997 and 1996
1997 1996
------------ ------------
<S> <C> <C>
Stockholders' Equity
Common Stock, $1 par value authorized 50,000,000 shares;
issued 20,387,658 shares and 14,975,018; outstanding
20,360,346 shares and 14,947,706 shares; 20,360,346 12,447,706
December 31, 1996 include 2,500,000 contingently returnable shares
Discount on Common Stock (8,123,528) (1,123,709)
Accumulated Deficit (10,535,727) (8,541,750)
------------ ------------
Total Stockholders' Equity 1,701,091 2,782,247
------------ ------------
Contingencies
Total Liabilities and Stockholders' Equity $ 2,149,083 $ 4,044,747
============ ============
</TABLE>
The Accompanying notes are an integral part of these Consolidated Financial
Statements.
<PAGE>
<TABLE>
<CAPTION>
Ethika Corporation and Subsidiaries
Consolidated Statement of Operations
For the years ended December 31, 1997,
1996 and 1995
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
General and administrative expenses $ 1,123,195 $ 1,314,334 $ 1,439,976
Rental income 0 138,775 46,400
Interest income 134,381 174,945 101,565
Gain (loss) on disposal of fixed Assets 341,849 (23,415) 16,835
Gain (loss) from investment securities (55,719) 671,160 (693,339)
Interest expense (18,868) (66,747) (436,204)
----------- ----------- -----------
(721,552) (419,616) (2,404,719)
Income tax benefit 45,500 -0- 174,517
----------- ----------- -----------
Loss from continuing operations (676,052) (419,616) (2,230,202)
Discontinued operations:
Loss from operations (1,237,925) (2,019,344) (470,514)
Loss on disposals (80,000) 0 (4,174,535)
----------- ----------- -----------
Net loss $(1,993,977) $(2,438,960) $(6,875,251)
=========== =========== ===========
Basic and diluted earnings per share:
Loss from continuing operations $ (.051) $ (.035) $ (.211)
=========== =========== ===========
Loss from discontinued operations $ (.100) $ (.168) $ (.438)
=========== =========== ===========
Basic and diluted net loss per share $ (.151) $ (.203) $ (.649)
=========== =========== ===========
</TABLE>
The Accompanying notes are an integral part of these Consolidated Financial
Statements
<PAGE>
<TABLE>
<CAPTION>
Ethika Corporation and Subsidiaries Consolidated Statement of Cash Flows
For the years ended December 31, 1997, 1996 and 1995
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss $(1,993,977) $(2,438,960) $(6,875,251)
Adjustments to reconcile net (loss)
to net cash provided by operating activities
Depreciation and Amortization 672,634 674,553 84,754
Net loss in earnings of affiliate -- 265,643 --
Loss on disposal discontinued operations 80,000 -- 4,174,535
(Gain) Loss on disposal of fixed assets (341,849) 23,415 --
Realized and unrealized (gain)loss on
investment securities 55,719 (672,785) 755,919
Provision for deferred taxes -- (81,983) --
Changes in balance sheet accounts:
(Increase) decrease in goodwill and other assets (2,646) (18,052) 632
(Increase) decrease in accounts receivable (16,173) 114,569 (83,611)
(Increase) decrease in income taxes 90,317 166,183 123,884
(Increase) decrease in inventory 21,672 (584)
(Increase) decrease in accrued investment income (13,737) -- 412,705
----------- ----------- -----------
Increase ( decrease) in accounts payable
and other liabilities (63,395) 177,715 (892,131)
Increase ( decrease) in deferred revenue (166) 190,759 --
Deferred policy acquisition costs -- -- (307,364)
Value of insurance purchased, net -- -- 699,285
Sales of investment securities - trading -- 2,900,057 --
----------- ----------- -----------
Net cash provided by (used from)
Operating activities: (1,511,601) 1,300,530 (1,906,643)
----------- ----------- -----------
Cash flows from investing activities:
Payments for acquisitions -- (621,098) --
Note to InfoDynamics (250,000) -- --
Proceeds from sale of building 644,370 -- --
Purchases of equipment (43,878) (96,124) (37,172)
Payments received from leases 103,626 88,137 --
Proceeds from investments sold or matured -- -- 4,858,753
Costs of investments acquired -- -- (2,314,683)
Temporary investments, net -- -- 4,192,867
Proceeds from sales of insurance assets -- -- 410,771
Proceeds from sale of discontinued operations, net -- -- 1,350,640
----------- ----------- -----------
Net cash (used from) provided by
Investing activities 454,118 (629,085) 8,461,176
----------- ----------- -----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Ethika Corporation and Subsidiaries Consolidated Statement of Cash Flows
For the years ended December 31, 1997, 1996 and 1995
(continued)
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from financing activities:
Net (payments) on debt (340,008) (141,628) (5,634,713)
Proceeds from issuance of stock 25,000 -- --
Other -- -- (1,112)
----------- ----------- -----------
Net cash used from financing activities (315,008) (141,628) (5,635,825)
----------- ----------- -----------
Net increase (decrease) in cash and cash
Equivalents (1,372,491) 529,817 918,708
Cash and cash equivalents - beginning of
Period 1,908,142 1,378,325 459,617
----------- ----------- -----------
Cash and cash equivalents - end of period $ 535,651 1,908,142 1,378,325
=========== =========== ===========
Supplemental Cash Flow Information:
Cash payments for interest $ 18,868 $ 64,779 $ 436,204
=========== =========== ===========
Supplemental Schedule of Non-Cash
Investing and Financing Activities:
Common stock issued for equity
securities of nonaffiliated company $ 605,000 $ -- $ 2,000,000
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
<PAGE>
<TABLE>
<CAPTION>
Ethika Corporation
Statement of Changes in Shareholders' Equity
For the years ending December 31, 1997, 1996 and 1995
Retained
Common Discount on Unrealized Earnings/ Total
Stock Common Holding Accumulated Shareholders'
Shares Amount Stock Losses Deficit Equity
------ ------ ----- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 9,518,406 $ 9,518,406 ($ 925,011) $ 772,461 $ 9,365,856
Net loss, as restated for LIS (6,875,251) (6,875,251)
Recovery of holding losses
In investments available for sale 925,011 925,011
Common stock issued 2,202,688 2,202,688 (996,222) 0 1,206,466
---------- ------------ ----------- ----------- ----------- ------------
Balance at December 31, 1995 11,721,094 11,721,094 (996,222) 0 (6,102,790) 4,622,082
Net loss, as restated for LIS (2,438,960) (2,438,960)
Common stock issuedforCDS acquisition 726,612 726,612 (127,487) 0 0 599,125
---------- ------------ ----------- ----------- ----------- ------------
Balance at December 31, 1996 12,447,706 12,447,70 (1,123,709) 0 (8,541,750) 2,782,247
Net loss (1,993,977) (1,993,977)
Shares issued for AMA Product 180,000 180,000 (78,750) 101,250
Shares issued for consideration 7,000,000 7,000,000 (6,370,000) 630,000
Shares issued for TRS business
combination 732,640 732,640 (551,069) 0 0 181,571
---------- ------------ ----------- ----------- ----------- ------------
Balance at December 31, 1997 20,360,346 $ 20,360,346 $ (8,123,528) $ 0 $(10,535,727) $ 1,701,091
========== ============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ETHIKA CORPORATION
DECEMBER 31, 1997
NOTE 1 - SUBSEQUENT EVENTS
On January 26, 1998, the Corporation entered into an Agreement and Plan of
Reorganization (the "Reorganization Agreement") with North American Digicom
Corporation ("NADC"), a privately owned company headquartered in Lakewood,
Colorado, to acquire 100% of the outstanding common stock of NADC. The
Reorganization Agreement requires that the Corporation's common stock be reverse
split on the basis of one (1) new share for every twenty-two and one half (22.5)
shares presently outstanding with all fractional shares being rounded up to the
next highest multiple of fifty (50) shares. Then the shareholders of NADC will
exchange their common stock for Ethika common stock at the rate of three (3)
shares of Ethika common stock for four (4) shares of NADC stock. The NADC
shareholders will receive approximately 19.6 million post-split shares of
Ethika, which will represent approximately 95% of the then outstanding shares.
The Reorganization Agreement also requires that the Corporation's Articles of
Incorporation be amended to eliminate the par value of the Corporation's common
stock, authorize a class of preferred stock whose rights and preferences can be
set by the Board of Directors and authorize a name change of the Corporation to
North American Digicom Corporation. The Reorganization Agreement also calls for
the Corporation's shareholders to approve a re-domicile of the Corporation to
Colorado. This transaction is a reverse acquisition, where NADC will become the
historical reporting company and is treated as the acquirer for accounting
purposes.
Closing of the Reorganization Agreement is conditioned upon surrender of the
NADC common stock in exchange for the Corporation's common stock and approval of
the Reorganization by Shareholders at the Annual Shareholders meeting together
with approval by shareholders of the reverse split and the above described
amendments to the Corporation's Article of Incorporation. Closing was also
conditioned upon the execution of a Voting Trust Agreement by a stockholder
group which holds fifty-one percent (51%) of the Corporation's common stock.
This Voting Trust Agreement was executed on or about March 16, 1998 and
irrevocably gives the Trustee (Frank Grey, who is a member of Ethika's Board and
President of NADC) voting authority over the subject common stock and requires
the Trustee to vote in favor of the items included in the Reorganization
Agreement. The NADC shareholders must also provide their approval of the terms
and conditions of this transaction.
NADC is a mass communications company which integrates retail and wholesale
long-distance services including nationwide internet services, prepaid phone
cards through its wholly-owned subsidiary, United Online, violence-free
television programming distributed nationwide through its wholly-owned
subsidiary, kidZtime TV TM, Inc., and other telecommunications services under
one umbrella utilizing the most current technology in providing services to its
customers.
Subsequent to the approval of the Reorganization Agreement by the Board of
Directors of Ethika and NADC, Ethika extended a line of credit to NADC not to
exceed $500,000 to be secured by NADC's equipment and accounts receivable. As of
March 20, 1998, $425,000 with interest at 6% has been advanced against this line
of credit.
<PAGE>
Additionally, the Board of Directors and management has determined it to be in
the best interest of the Corporation to divest itself of its electronic
publishing business units and focus its attentions on the NADC's
Tele-communications business.
On February 17, 1998, the Corporation completed the sale of Text Retrieval
Systems, Inc. to TRS Acquisition Corporation, a closely held corporation for
$150,000 cash and future royalties not to exceed $1,500,000 over the next ten
years. Moreover on April 2, 1998 the Corporation completed a transaction with
Ben Ezra Weinstein and Company, Inc., a publicly held New Mexico corporation
("BNEZ") engaged in the electronic publishing of financial software to sell CDS
and its 8% equity interest in InfoDynamics, Inc., including the note receivable
from InfoDynamics, Inc. The selling price of $850,000 was paid in convertible
preferred stock of BNEZ which has not resulted in any impairment of the net
assets. In March 1998, the Corporation initiated negotiations with BNEZ to sell
Legislative Information Systems, Inc. (LIS). The selling price for this
transaction is also expected to be paid in securities of BNEZ. (See Note 8)
NOTE 2--BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations: Ethika Corporation (the "Corporation") operates as an
applied technology company through its wholly-owned subsidiaries, Text Retrieval
Systems, Inc. ("TRS"), Compass Data Systems, Inc. ("CDS") and Legislative
Information Systems, Inc. ("LIS"). See business combination information in Note
5. TRS, CDS and LIS are engaged in publishing electronic libraries that link
related data sources for convenient access by personal computers. Certain
products of TRS, CDS and LIS are sold nationally, while others are specific to
states such as Florida, Missouri, and Kansas.
Basis of Presentation: During the first quarter of 1998, the Board of Directors
and management began to implement a plan of disposition for the Corporation's
operating units; TRS, CDS and LIS. As of October 2, 1995, the Corporation sold
its life insurance subsidiary, Dixie Life Insurance Company ("Dixie Life").
Accordingly, 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, and that have
original maturity of ninety days or less.
Investments: At December 31, 1997 and 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 the statement of operations. At December 31, 1996, the
Corporation had no investments in marketable securities.
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 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.
Revenue associated with customer programming is recorded, when completed and
billed.
<PAGE>
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.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could 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.
Financial instruments that potentially subject the Corporation to concentrations
of credit risk consist principally of trade accounts receivable. The Corporation
extends credit to its customers based on an evaluation of the customer's
financial condition, generally without requiring collateral. Exposure to losses
on accounts receivables is primarily dependent on each customer's financial
condition. The Corporation monitors its exposure for credit losses and maintains
allowances for such losses.
Earnings Per Share: The Corporation adopted Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("SFAS No. 128") during 1997. SFAS No.
128 provides for new accounting principles to be used in the calculation of
earnings per share and was effective for financial statements for both interim
and annual periods ended after December 15, 1997. The Corporation has restated
its net loss per share for all periods presented to give effect to SFAS No. 128
and to reflect the acquisition of LIS. Basic and diluted earnings per share are
based on the weighted average number of common shares outstanding of 13,161,467,
11,995,813, and 10,592,075 for the years ended December 31, 1997, 1996, and
1995, respectively. Earnings per share calculations for 1996 include
contingently returnable shares only if their impact is dilutive.
Restatement and Reclassifications: Certain 1996 and 1995 amounts have been
retroactively restated to reflect the merger with LIS, which has been accounted
for as a pooling-of-interests. Certain amounts in the prior years' statements
have been reclassified to conform with the current year financial statements.
<PAGE>
NOTE 3 - PROPERTY AND EQUIPMENT
A summary of property and equipment at December 31 follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Land $ 0 $ 140,436
Building 0 654,602
Furniture and equipment 64,797 122,918
Computer hardware and software 0 159,655
----------- -----------
64,797 1,077,611
Less: Accumulated depreciation (19,700) (532,668)
----------- -----------
$ 45,097 $ 544,943
=========== ===========
</TABLE>
The Corporation's former headquarters in Jackson, Mississippi, was sold in July
1997 for a gain of $341,849. The Corporation has operating lease agreements for
office space, and certain office equipment. Ethika's corporate office space is
leased from a former member of the Board of Directors at the rate of
approximately $1,400 per month. For the year ended December 31, 1997 payments on
all operating leases were $161,515.
NOTE 4- ACCOUNTS PAYABLE AND ACCRUED EXPENSES
A summary of accounts payable and accrued expenses at December 31 follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Accrued expenses $323,837 $247,088
Accounts payable 41,681 150,253
Non-compete 0
50,000
Other 0
47,805
Accrued payroll and related 2,474 32,616
-------- --------
Withholdings $367,992 $527,762
======== ========
</TABLE>
NOTE 5 - NOTE PAYABLE
At December 31, 1996, the Corporation had a Note Payable to a bank bearing
interest at prime plus 3/4% (9.25% at December 31, 1996), payable in monthly
installments of $11,846, secured by the land and building. The Corporation sold
these assets (See Note 3) in 1997 and repaid the entire note balance. The
Corporation had no debt obligations other than normal accounts payable and
accruals at December 31, 1997.
<PAGE>
NOTE 6 - BUSINESS COMBINATIONS
On April 2, 1996 the Corporation completed the acquisition of Text Retrieval
Systems, Inc. ("TRS"), a privately-held corporation based in Ponte Vedra Beach,
Florida. The transaction has been accounted for as a purchase and accordingly
the results of operations of TRS since April 2, 1996 have been included in the
Corporation's Results of Operations. TRS publishes electronic reference
libraries that link related data sources for convenient access by personal
computers. The Corporation had previously acquired a 35% initial ownership
interest in TRS through the issuance of 100,000 shares of its stock to the TRS
shareholders and the extension of a line of credit during 1995. The completion
of the purchase transaction included cash paid through prior advances to TRS and
the issuance of 2,500,000 shares of contingently returnable common stock.
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 contingently returnable shares ($1,991,250) was included in the
purchase price resulting in a total estimated purchase price at acquisition of
$2,659,482. In the fourth quarter of 1996, management determined that 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 in March 1997,
amended the agreement whereby the earnings targets were revised and extended
through December 31, 1997. Based upon this amended agreement and the
Corporation's actual performance for the year ended December 31, 1997, the
number of shares issued in this transaction were reduced to 732,640 shares. The
remaining 1,767,360 contingently returnable shares issued have been returned to
the Corporation and canceled. The issuance of the additional shares resulted in
recording of additional goodwill in 1997. Additional consideration of $181,571
was recorded as goodwill in the fourth quarter of 1997. Related amortization
expenses of $67,829 have been recorded in the December 31, 1997 financial
statements.
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.
On February 17, 1998, the Corporation completed the sale of Text Retrieval
Systems, Inc. to TRS Acquisition Corporation, a closely held corporation for
$150,000 cash and future royalties not to exceed $1,500,000 over the next ten
years.
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.
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
financial statements.
<PAGE>
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.
On June 10, 1997 the Corporation acquired Legislative Information Systems
Corporation ("LIS") in a business combination accounted for as a pooling of
interests. LIS became a wholly owned subsidiary of the Corporation through the
exchange of 1,123,433 shares ($616,203) of the Corporation's common stock for
all of the outstanding stock of LIS. The effect of the LIS acquisition for the
years ended December 31, 1996 and 1995 was to include $633,814 and $634,804,
respectively, of additional revenues and $153,601 and $25,679, respectively, of
additional net loss. These amounts are included in the amount reported for loss
from discontinued operations.
NOTE 7 - 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>
1997 1996
----------- -----------
<S> <C> <C>
Deferred tax liabilities:
Depreciation -- $ 45,500
----------- -----------
-- 45,500
----------- -----------
Deferred tax assets:
Amortization of non-compete $ 12,445 5,432
Deferred revenue 97,165 82,756
Unrealized loss on equity investment 357,410 357,410
Allowance for bad debts 5,199 2,808
Net operating loss carry-forward 953,882 524,744
Unrealized loss in marketable securities 18,944 0
----------- -----------
1,445,045 973,150
Valuation allowance (1,445,045) (973,150)
----------- -----------
Deferred tax asset --
----------- -----------
Net deferred tax liability $ -- $ 45,500
----------- -----------
</TABLE>
The Corporation recorded a valuation allowance of $1,445,045 and $973,150 as of
December 31, 1997, and 1996 respectively, 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>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Current $ 429,138 $ (81,983) 302,000
Deferred (383,638) 81,983 $(127,483)
--------- --------- ---------
$ 45,500 $ 0 $ 174,517
========= ========= =========
</TABLE>
The Corporation has net operating loss carry-forwards at December 31, 1997 of
approximately $2,806,000 which expire through 2012.
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>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Expected tax benefit $ 662,482 $ 776,527 $ 2,388,200
Non-deductible goodwill (201,966) (184,383) --
Alternative Minimum Tax -- -- 78,000
Loss on sale of life insurance subsidiary -- -- (1,904,700)
Valuation allowance (471,895) (498,469) (474, 681)
Other 56,879 (93,675) 87,698
----------- ----------- -----------
Total income tax benefit $ 45,500 $ -- $ 174,517
=========== =========== ===========
</TABLE>
NOTE 8 - DISCONTINUED OPERATIONS
In February 1998, the Corporation's Board of Directors and management adopted a
formal plan to divest itself of its electronic publishing business, consisting
of TRS, CDS and LIS (collectively the "Segment"), based upon an analysis of the
electronic publishing market and the amount of capital that management expects
will be required to compete effectively in that market, together with the recent
poor performance that the Corporation has experienced since its entry into the
industry. The Segment represents virtually all of the Corporation's assets and
operations. The Segment has been accounted for as a discontinued operation in
accordance with APB 30, which among other provisions requires the plan of
disposal to be carried out within one year. Accordingly, the financial
statements have been restated for this transaction. A provision of $80,000 has
been recorded in the financial statements related to anticipated losses from the
operations of the Segment through the actual disposal dates. Further, net assets
consisting primarily of accounts receivable, notes receivable, property and
equipment, intangibles, accounts payable and deferred revenue of this segment
have been reclassified to net assets held for sale.
<PAGE>
Revenues for the Segment approximated $1,641,000, $921,000 and $635,000 for the
years ended December 31, 1997, 1996 and 1995, respectively.
As a part of the plan of disposal, the Corporation completed the sale of TRS to
TRS Acquisition Corporation, a closely held corporation, for $150,000 in cash
and future royalties not to exceed $1,500,000 over the next ten years.
Additionally, on April 2, 1998, the Corporation completed a transaction with Ben
Ezra Weinstein and Company, Inc. ("BNEZ"), a publicly held New Mexico
corporation engaged in the electronic publishing of financial software, to sell
CDS and its 8% equity interest in InfoDynamics, including the note receivable
from InfoDynamics. The selling price of $850,000 was paid in convertible
preferred stock of BNEZ which has not resulted in any impairment of the net
assets. In March 1998, the Corporation also initiated negotiations with BNEZ to
sell LIS. The selling price for this transaction is expected to also be paid in
convertible preferred stock of BNEZ. No provision for loss on sale of these
subsidiaries has been provided as the management expects that the value of the
securities received will exceed the net book value of the Segment. However, the
preferred stock will not be convertible to common stock for a period of one
year.
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 accounts 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.
The sale resulted in a loss of $4,174,535. 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. The loss from operations for the year ended December 31, 1995
includes losses of $396,148 for this transaction.
NOTE 9 - 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 1997, 1996 and
1995. As of December 31, 1997, there were 145,000 remaining common stock shares
reserved for granting and there were 355,000 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. Members of the
Corporation's Board of Directors vest in stock options at the grant date. If an
optionee is involuntarily terminated for reasons other than justifiable cause,
all outstanding options become vested and may be executed within three (3)
months of termination. Due to involuntary terminations subsequent to December
31, 1997, 290,000 options granted to purchase common stock, will be exercisable
on or before April 30, 1998. If not exercised at that time these options will
expire.
<PAGE>
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 loss and loss per share would have been increased to the pro
forma amounts indicated below if these amounts had been recorded in the
financial statements:
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------- ----------------- --------------- -------------- ------------
<S> <C> <C> <C> <C>
Net Loss As reported $ (1,993,977) $ (2,438,960) $(6,875,251)
Proforma $ (2,040,597) $ (2,492,861) $(6,943,332)
Loss per share As reported $ (0.151) $ (0.203) $ (0.649)
Proforma $ (0.155) $ (0.208) $ (0.656)
</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 1997, 1996 and 1995:
Dividend yields 0%
Expected volatility 137%
Risk-free interest rate 6.26%
Expected life of option 4 years
The fair value of options granted during 1997, 1996 and 1995 was $46,620,
$53,901 and $68,081 respectively.
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 $.80
Granted 130,000 $.59 - $.68 $.62
Canceled (20,000) $.91 $.91
--------
Outstanding at December 31, 1996 250,000 $.50 - $.91 $.70
Granted 125,000 $.35 - $.42 $.41
Canceled (20,000) $.68 $.68
--------
Outstanding at December 31, 1997 355,000 $.35 - $.91 $.60
========
</TABLE>
As of December 31, 1997 and 1996 the total number of exercisable stock options
was 88,000 and 40,000 respectively.
<PAGE>
NOTE 10 - LEASING ACTIVITIES
During 1995, the Corporation entered into leasing activities which consist of
the leasing of fry cook units to be placed in various locations and operated by
the lessee. All of the Corporation's leases are classified as direct financing
leases. Under the direct financing method of accounting for leases, the total
net rental 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
is as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Total minimum lease payments to be received $306,690 $454,929
Unearned lease income 27,181 71,794
-------- --------
Net investment in direct financing leases $279,509 $383,135
======== ========
</TABLE>
The minimum future lease payments receivable under the direct financing leases
are as follows:
1998 $148,239
1999 137,514
2000 20,937
--------
Total minimum future
Lease payments $306,690
========
NOTE 11 - CONTINGENCIES
The Corporation was notified by Standard Management Corporation on June 26, 1997
that its subsidiary, Standard Life Insurance of Indiana, had received a Citation
and Original Petition captioned "Rilla Lindley versus Standard Life Insurance
Company of Indiana, Dixie National Life Insurance Company, Randy Owens" filed in
2nd Judicial District Court, Parish of Brenville, State of Louisiana. Standard's
notification constituted a claim notice pursuant to Section 10.3 of the Second
Restated Stock Purchase Agreement dated August 30, 1995 by and among Standard
Life and Dixie National Life and Dixie National Corporation (now Ethika
Corporation) in which Ethika agreed to indemnify Standard under certain
conditions against qualified third-party claims originating prior to the sale of
Dixie National Life to Standard. The scope of Ethika's indemnity obligation, if
any, under the Agreement is limited to claims predicated upon occurrences prior
to closing based on actions or inactions of Dixie National Life Insurance
Company.
<PAGE>
The third-party claim involves, among other things, allegations regarding a
vanishing premium life insurance policy issued by Dixie National Life which was
purchased by the plaintiff in August 1989 from defendant Owens, an employee of a
general insurance agency in Louisiana. The claim appears to be styled in the
form of a class action. An investigation into the Citation's allegations by the
defendants, including legal representation of the Corporation, has been
initiated. Potential liabilities, if any, of the various defendants have not
been determined.
Pursuant to agreements with Plaintiff counsel no answer would be filed pending
settlement discussions and the filing of an amended complaint properly pleading
as a class action suit. In January 1998, the Corporation informed SMC that it
could not defend the action. To the Corporation's knowledge, no further
settlement discussions have been held and no amended complaint has been filed.
NOTE 12 - SALE OF COMMON STOCK - LAWSUIT SETTLEMENT
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 then
Chairman, S.L. Reed, Jr. This suit alleged breach of fiduciary duties, fraud,
and conspiracy to breach fiduciary duty of loyalty and care, breach of contract,
misrepresentation, and conversion. These allegations arose 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.
On December 12, 1997, Ethika entered into a settlement by mutual agreement of
all parties to this lawsuit. Terms of the settlement includes (1) withdrawal and
dismissal of any present or future lawsuits among the parties; (2) sale of
7,000,000 shares of Ethika unregistered common stock to La Salle Investment,
Ltd., a party to the lawsuit for $0.09 per share (see below); (3) Ethika calling
a Meeting of Shareholders for the purpose of electing Directors and voting on
such other matters as necessary. Such meeting to take place at the earliest date
permitted subject to Security and Exchange Commission regulations; (4)
Resignation of three (3) members of the current Board of Directors to be
replaced by three (3) members designated by the Peeper Group to serve as
directors until the Meeting of Shareholders (3) above is held.
The Corporation, in conjunction with the above settlement entered into a
Subscription Agreement for the sale of 7,000,000 shares of its unregistered
common stock to LaSalle Investment, Ltd., a party to the lawsuit for $0.09 per
share. The Corporation received total consideration of $630,000 consisting of
$25,000 cash and $605,000 of Alanco stock (891,500 shares). The Schedule 13-D
filed with the SEC indicates that beneficial ownership of the "Reporting
Persons" increased to 51% as a result of this transaction, and the cancellation
of the contingently issued shares to the TRS shareholders resulting in change of
control of Ethika Corporation.
<PAGE>
NOTE 13 - 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.
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 14 - GOING CONCERN
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. For the twelve month period ended
December 31, 1997, the Company incurred a loss from operations of $1,993,977 and
had an accumulated deficit of $10,535,727 that raise substantial doubt about its
ability to continue as a going concern. Additionally, NADC, the entity that the
Corporation has proposed acquiring, received a going concern opinion from its
independent accountants with regard to its December 31, 1997 financial
statements.
The Corporation anticipates that through its reverse acquisition of North
American Digicom Corporation, the combined company will be able to obtain
additional debt or equity capital.
LAST PAGE OF AUDITED FINANCIAL STATEMENTS
<PAGE>
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:
Director
Name Age Since
---- --- -----
Russell C. Burk 40 1997
Dennis Brovarone 42 1997
Philip F. Grey 45 1998
Dennis P. Nielson 58 1997
Wayne Johnson 40 1998
Louis Scotti 42 1998
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:
Executive Officers
Name Age Since
---- --- -----
Dennis Brovarone 42 1997
Chairman and President Pro-Tem
Chief Executive Officer
David E. Williams 48 1996
Secretary, Treasurer, Vice President
Finance, and Chief Financial
Officer
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:
Dennis Brovarone - Mr. Brovarone, 42, has been practicing corporate and
securities law since 1986 and as a sole practitioner since 1990. He was elected
to the Board in December 1997 and is Chairman of the Corporation's Board of
Directors. Mr. Brovarone also serves as President Pro-tem and Chairman of the
Executive Committee. Prior to 1990, Mr. Brovarone served as in-house counsel to
R.B. Marich, Inc.; a Denver, Colorado based brokerage firm. Mr. Brovarone served
as President (Chairman) of the Board of Directors of The Community Involved
Charter School, from January 1995 to March 1998, a four-year old K-12
independently chartered public school located in Lakewood, Colorado. He also
serves as a Director of Innovative Medical Services in San Diego, California.
<PAGE>
Russell C. Burk - Mr. Burk, 40, has been practicing corporate securities law
since 1990 and as a sole practitioner since 1997. He was elected to the Board in
December 1997. From 1993 to 1997, Mr. Burk was Vice President, General Counsel
for RAF Financial Corporation, Denver, Co.
Philip F. Grey - Mr. Grey, 45, has served as President, Chief Executive Officer,
and Director of North American Digicom Corporation since its inception in
December 1995. He also serves as Chairman of the Board of United Online, a
wholly owned subsidiary of Digicom. Since 1994 Mr. Grey has served as President
and CEO of Premier Financial Services, Inc., a Denver, Colorado-based
business-consulting firm. Since 1991, Mr. Grey has served as President and CEO
of Phillips Energy Corporation.
Wayne Johnson - Mr. Johnson, 40, is Chief Operating Officer of
technical/delivery systems and a Director of North American Digicom Corporation.
He has served as Director of Engineering for Key Communications Group and was
Director of Installation at International Network Solutions. Mr. Johnson has
owned and operated International Communications Consultants, Inc.
Louis C. Scotti - Mr. Scotti, 42, has been Chief Financial Officer, Treasurer,
and a Director of North American Digicom Corporation since 1996. He also serves
as President and Chief Executive Officer of kidZtime TV, Inc. Mr. Scotti served
as President and Managing Director of the Prometheus Group. From 1992 to 1995 he
served as President of Carcharodon Acquisitions, Inc.
Dennis Nielsen - Mr. Nielsen, 55, has been a director since March 1993, he has
been self employed as a business consultant offering assistance to business on
restructuring, financing or assisting with possible mergers or acquisitions.
Previously he was owner of P&N, Inc. and Hufburn Sales, Inc., both automobile
dealerships.
David E. Williams - Vice President Finance, Secretary, Treasurer 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 and Chief Operating Officer of
Immunomedics, Inc. and Psychiatric Bio Sciences, Inc. He also served as Group
Operations Controller for Johnson & Johnson and for 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 judgment of permanent injunction
against the Corporation. The judgment was entered on the basis of a complaint
filed by the SEC. The Corporation consented to the entry of final judgment of
permanent injunction without admitting or denying the allegations contained in
the SEC's complaint. The final judgment to which the Corporation consented
enjoin it 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.
<PAGE>
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.
The interim Directors appointed; Dennis Brovarone, Russell Burk and Dennis
Nielson, on December 22, 1997, and those appointed January 26, 1998; Philip
Grey, Louis Scotti and Wayne Johnson, did not timely file their forms 3 or forms
5. The directors who resigned January 26, 1998,; Anthony Spuria, Marcia Cohen,
Herbert Rogers and William Stubblefield did not timely file their forms 5 at
year end and to the best of the Corporation's knowledge have not filed their
form 5. These forms have now all been filed and indicate that none of the
present Board of Directors hold common stock and that Dennis Brovarone, Russell
Burk, and Dennis Nielson after closing of the Reorganization agreement, have
received options to acquire 7,500 post-split shares of the corporation's common
stock at an exercise price of $5.00 per share.
ITEM 11 - EXECUTIVE COMPENSATION
Summary Compensation Table
The following Summary Compensation Table sets forth for each of the last three
years ended December 31, 1997, information concerning the total compensation
paid or awarded to the Corporation's Chief Executive Officer 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 1997.
<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. 1997 (2) $36,000 $0 50,000 $0
Chairman and CEO
1996 $36,000 $0 50,000 $0
1995 (1) $25,346 $0 50,000 $0
Dennis Brovarone 1997 (3) $ 0 $0 0 $0
Chairman and CEO
</TABLE>
(1) Commenced employment January 1995
(2) Resigned as Chairman and Director in December 1997 and CEO in January 1998
(3) Joined the Board and elected Chairman in December 1997. Appointed CEO in
January 1998. Mr. Brovarone receives a fee of $5,000 per month starting
January 1998 as compensation for his services.
Option Grants in 1997
The following table sets forth information concerning options to purchase shares
of common stock which were granted during 1997 to the individuals named in the
Summary Compensation table.
<PAGE>
<TABLE>
<CAPTION>
Potential Realizable Value at
Assumed Annual Rates of Stock
Price Appreciation for Option
Term 10 Years
Individual Grants
Number of % of Total
Securities Options
Underlying Granted to
Options Employees in Exercise Expiration
Name Granted Fiscal Year Price Date 5% 10%
- ---- ------- ----------- ----- ---- -- ---
<S> <C> <C> <C> <C> <C> <C>
S.L. Reed, Jr. 50,000 (1) 40% $0.42 05/05/05 $48,052 $76,515
</TABLE>
(1) These options would have begun vesting on May 30, 1998 at the rate of 20%
per year for five years, however, this option was accelerated in accordance
with the provisions of the Stock Option Plan since Mr. Reed's resignation
was requested in conjunction with the settlement of the "Peeper Group"
lawsuit. (See Certain Relationships and Related Transactions below for
additional information).
Fiscal Year End Option Value Table
The following table sets forth information as of December 31, 1997 concerning
the unexercised options held by Officers named in the Summary Compensation
Table, none of whom exercised options in 1997. Options are "in-the-money" when
the fair market of underlying common stock exceeds the exercise price of the
option. The closing price of common stock on December 31, 1997 was $0.19 per
share.
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised In-the-Money
Unexercised Options at Options at
Name December 31, 1997 December 31, 1997
- -------------------- --------------------------------------- -----------------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
S.L. Reed, Jr. 150,000 0 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. At the July 31, 1997
Board Meeting, the Directors approved the suspension of the monthly retainer fee
of $400 and its subsequent reinstatement on March 31, 1998.
As a group, the previous six non-employee Directors of the Corporation were paid
$27,550 during fiscal year 1997. The current Directors received no compensation
during fiscal year 1997.
<PAGE>
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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 February 20, 1998 of persons
known by the Corporation to be holders of 5% or more of the outstanding common
stock. Information as to the number of shares beneficially owned has been
furnished by the persons named in the table and by reference to documents filed
with the Securities and Exchange Commission by holders of 5% or more of such
common stock.
<TABLE>
<CAPTION>
Name and Address Shares
Of Beneficial Owner Beneficially Owned Percent of Class
------------------- ------------------ ----------------
<S> <C> <C>
Alfred Peeper 0 (1) 0%
Calle Hamburg 22
Benidorm, Spain ALC 03500
Argere Holdings, S.A. 420,000 (1) 1.9%
18 Boulevard Royal
L-2449 Luxembourg
Eur-Am B.V. 461,100 (1) 2.1%
Calle Hamburg 22
Benidorm, Spain ALC 03500
La Roche Holdings, S.A. 902,500 (1) 4.1%
18 Boulevard Royal
L-2449 Luxembourg
La Salle Investment, Ltd. 7,997,929 (1) 36.1%
35 Rue De Bains
Geneva, Switzerland 1205
Rial Equity Group, S.A. 600,000 (1) 2.7%
C/o SAGEM
35 Rue De Bains
Geneva, Switzerland 1205
Directors and Officers 19,000 *
As a Group
</TABLE>
* Less than 1%.
(1) Alfred Peeper is an investment manager headquartered and operating in
Benidorm, Spain. Mr. Peeper holds a power of attorney for each Reporting Person
which gives him authority to purchase, sell, and exercise all voting rights
relating to each "Group Member." This Reporting Person represents 51% of the
total outstanding shares of Ethika common stock.
<PAGE>
Security Ownership of Management
The following table sets forth information as to the beneficial ownership of the
Corporation's common stock as of February 20, 1998, by each Director, nominee;
Executive Officer named in the Summary Compensation Table and by all Directors
and Executive Officers as a group.
<TABLE>
<CAPTION>
Name of Shares Percent
Beneficial Owner Beneficially Owned (1) of Class
---------------- ---------------------- --------
<S> <C> <C>
Russell C. Burk None 0%
Dennis Brovarone 7,500 *
Philip F. Grey None 0%
Louis Scotti None
Wayne Johnson None
Dennis P. Nielsen None 0%
Directors, nominees, and 11,500 (2) *
Executive Officers as a group (7
persons)
</TABLE>
(1) Current Board Members who have no outstanding shares of Ethika common stock.
(2) Includes shares issuable upon exercise of vested stock options. * Represents
less than 1%.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On June 10, 1997 the Corporation acquired Legislative Information Systems
Corporation (LIS) in a business combination accounted for as a pooling of
interests. LIS became a wholly owned subsidiary of the Corporation through the
exchange of 1,123,433 shares ($616,203) of the Corporation's common stock for
all of the outstanding stock of LIS. Mr. Don Withrow, who was a 55% owner of
LIS, received 617,888 shares of Ethika common stock. In addition, Mr. Withrow
entered into a one-year employment contract at an annual salary of $80,000 plus
bonus based upon performance. LIS is an electronic publishing company located in
Annandale, Virginia specializing in federal aviation regulations, banking
regulations, and custom service contracts.
Ethika Corporation, in conjunction with settlement of a lawsuit 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 then-Chairman, S.L. Reed, Jr., entered into a
Subscription Agreement for the sale of 7,000,000 shares of its unregistered
common stock to LaSalle Investment, Ltd., a party to the lawsuit for $0.09 per
share. The Schedule 13-D filed with the SEC indicates that beneficial ownership
of the "Reporting Persons" increased to 51% as a result of this transaction
resulting in change of control of Ethika Corporation.
On January 8, 1998 the Corporation entered into a Letter of Intent to acquire in
a reverse acquisition 100% of the outstanding common stock of NADC. (See Recent
Developments for additional information). On January 27, 1998 the parties
executed a Definitive Agreement to accomplish the acquisition on or before March
6, 1998. On March 4, 1998, the parties agreed to extend the closing date of this
transaction to on or before June 30, 1998.
<PAGE>
At closing, the shareholders of NAD will exchange their common stock for Ethika
common stock at the rate of three (3) shares of Ethika common stock for every
four (4) shares of NAD stock. The NAD shareholders will receive approximately
19.6 million post-split shares of Ethika, which will represent approximately 95%
of the then-outstanding shares.
NAD is a mass communications company which integrates retail and wholesale
long-distance services including nationwide internet services, prepaid phone
cards through its wholly-owned subsidiary, United Online, violence-free
television programming distributed nationwide through its wholly-owned
subsidiary, kidZtime TV, Inc., and other telecommunications services under one
umbrella utilizing the most current technology in providing services to its
customers.
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 Registrants Annual Report or
dated as of February 26, 1996 between Form 10-K for the year ended
Dixie National Corporation and Text December 31, 1995. Exhibit (2)(c)
Retrieval Systems, Inc. including
Amended restated option agreement.
(2)(a) Acquisition of Compass Data Systems, Inc. Registrants Annual Report or Form 10-K for
the year ended December 31, 1996.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
(2)(b) Asset Purchase Agreement between Registrants Annual Report of Form 10-K
Ethika Corporation and American Practice the year ended December 31, 1996.
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).
(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 Registrants Annual Report or
Effective January 24, 1996 Form 10-K for the year ended
December 31, 1995. Exhibit (3)(b)(1)
(3)(b)(2) Amendment to Article IV of Bylaws Registrants Annual Report or
Effective March 24, 1996 Form 10-K for the year ended
December 31, 1995. Exhibit (3)(b)(2)
(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.
(4)(2) (1) Agreement and Plan of Reorganization Registrant's Annual Report of Form
For Ethika Corporation to acquire 10-K for the year ended
North American Digicom Corporation December 31, 1997
(4)(2) (2) Memorandum of Agreement extending Registrant's Annual Report of Form
The closing date of the acquisition of 10-K for the year ended
North American Digicom Corporation December 31, 1997
(4)(2) (3) Voting Trust Agreement between Registrant's Annual Report of Form
Controlling group of stockholders and 10-K for the year ended
Trustee to vote block of shares at December 31, 1997
Annual Meeting
(4)(2) (4) North American Digicom Corporation Registrant's Annual Report of Form
Audited Financial Statements for the 10-K for the year ended
Periods ended December 31, 1997, December 31, 1997
June 30, 1997 and June 30, 1996
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
(4)(2) (5) Proforma Unaudited Balance Sheet and Registrant's Annual Report of Form
Statement of operation for Ethika after 10-K for the year ended
The acquisition of North American December 31, 1997
Digicom Corporation
(4)(2) (6) Memorandum of Understanding between Registrant's Annual Report of Form
Ethika Corporation and various litigation 10-K for the year ended
In settlement of the complaint styled December 31, 1997
Eur. Am. Et al. Vs. Ethika et al., case
No. 3:96CV688LN
(4)(2) (7) Purchase Agreement between Ethika Registrant's Annual Report of Form
Corporation and TRS Acquisition Corp. 10-K for the year ended
For the sale of all of the stock and assets December 31, 1997
Of Text Retrieval Systems, Inc. to TRS
Acquisition Corp.
(4)(2) (8) Stock Purchase Agreement between Registrant's Annual Report of Form
Ethika Corporation and Ben Ezra 10-K for the year ended
Weinstein & Company for the sale of December 31, 1997
Compass Data Systems, Inc. to Ben
Ezra Weinstein & Company
(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
</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.
(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, 1997:
Date of Current Report
(or Amendment) Items Reported
-------------- --------------
December 29, 1997 Change in control of registrant; settlement of lawsuit.
<PAGE>
(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>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ETHIKA CORPORATION
(Registrant)
Date: April 8, 1998 By: /s/Dennis Brovarone
-------------------
Dennis Brovarone
Chairman of the Board
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/Dennis Brovarone April 8, 1998
- -------------------
Dennis Brovarone
Chairman of the Board & Chief Executive Officer
(Principal Executive Officer)
/s/Philip F. Grey April 8, 1998
- -----------------
Philip F. Grey
Director
/s/Russell C. Burk April 8, 1998
- ------------------
Russell C. Burk
Director
/s/Dennis P. Nielsen April 8, 1998
- --------------------
Dennis P. Nielsen
Director
/s/Louis C. Scotti April 8, 1998
- ------------------
Louis C. Scotti
Director
/s/Wayne Johnson April 8, 1998
- ----------------
Wayne Johnson
Director
/s/David E Williams April 8, 1998
- -------------------
David E. Williams
Vice President Finance
(Principal Financial and Accounting Officer)
(4)(2)(1)
AGREEMENT AND PLAN OF REORGANIZATION
This Agreement is made as of the 26th day of January, 1998 by and among
Ethika Corporation, a Mississippi corporation (hereinafter referred to as
"Ethika") and North American Digicom Corporation, a Colorado corporation
(hereinafter referred to as "Digicom"), and is based on the following:
PREMISES
A. This Agreement provides for the exchange of all of the outstanding
common stock of Digicom for shares of common voting stock of Ethika, all for the
purpose of effecting a tax-free reorganization pursuant to Sections 354,
368(a)(1)(A) and 368(a)(2)(E) of the Internal Revenue Code of 1986, as amended.
B. The Boards of Directors of Digicom and Ethika have agreed, subject
to the conditions set forth in this Agreement, and by these premises do hereby
evidence their agreement, that it is desirable and in the best interests of said
corporations and their stockholders, that Digicom be held as a wholly-owned
subsidiary of Ethika. This Agreement is being entered into for the purposes of
setting forth the terms and conditions of the exchange of the shares of Digicom
into shares of Ethika.
AGREEMENT
Now, therefore, on the stated premises and for and in consideration of
the mutual covenants and agreements hereinafter set forth and the mutual
benefits to the parties to be derived herefrom, it is hereby agreed as follows:
ARTICLE 1
REPRESENTATIONS, COVENANTS AND WARRANTIES OF ETHIKA
As an inducement to, and to obtain the reliance of Digicom, Ethika
represents and warrants as follows:
1.1 Organization, Good Standing, Power, Etc. Ethika (i) is a
corporation duly organized, validly existing and in good standing under the law
of the State of Mississippi; (ii) is qualified or authorized to do business as a
foreign corporation and is in good standing in all jurisdictions in which
qualification or authorization may be required; and (iii) has all requisite
corporate power and authority, licenses and permits to own or lease and operate
its properties and carry on its business as presently being conducted and to
execute, deliver and perform this Agreement and consummate the transactions
contemplated hereby.
1.2 Certificate of Incorporation and Bylaws. Prior to execution of this
Agreement by both parties Ethika has furnished to Digicom's representatives
complete and correct copies of (i) its Certificate of Incorporation, as amended
to date, and (ii) its Bylaws, as amended to date. Ethika's Certificate of
Incorporation and Bylaws are in full force and effect, and Ethika is not in
violation of any of the provisions thereof.
<PAGE>
1.3 Capitalization. The authorized capital stock of Ethika consists
solely of 50,000,000 shares of Common Stock, $1.00 par value, (the "Ethika
Common Stock"), of which, on the date hereof 20,380,725 shares are issued and
outstanding. There are approximately 31,700 shares of common stock held in the
treasury of Ethika. At the Closing of this Agreement, and giving effect to the
reverse split of Ethika Common Stock as required by Section 5.1(c)(5) below, and
giving effect to the exchange ratio of four (4) shares of Digicom Common Stock
for three (3) shares of Ethika Common Stock required below, approximately
ninety-five percent (95%) of Ethika Common Stock will have been lawfully and
validly issued to the Shareholders of Digicom. All of such issued and
outstanding shares of the Ethika Common Stock have been duly authorized and
validly issued and are fully paid and non-assessable with no personal liability
attaching to the ownership thereof. All issued and outstanding shares are
legally issued, fully paid and non-assessable, and were not issued in violation
of the preemptive or other rights of any person.
1.4 Options, Warrants, Rights, Etc. Except for the 500,000 shares
reserved to the 1995 Ethika Stock Option Plan and the grants of options to
acquire 355,000 shares pursuant thereto as set forth on Exhibit 1.4 attached
hereto, Ethika does not have outstanding any option, warrant or other right to
purchase, or convert any obligation into, any shares of Ethika Common Stock, nor
any instruments or obligations to confer or create such rights.
1.5 Subsidiaries. Ethika has five wholly owned subsidiaries, Text
Retrieval Systems, Inc., Legislative Information Systems Corporation, Compass
Data Systems, Inc., Executive Capital Corp. and Advantage, Inc. Representations
and warranties set forth in Section 1.1 are the same for Ethika wholly owned
subsidiaries as to their respective states of incorporation. In addition, Ethika
owns an approximate 8% interest in the capital stock of InfoDynamics, Inc.
1.6 Authorization of Agreement. This Agreement has been or will be at
Closing duly and validly authorized, executed and delivered by Ethika.
1.7 Tax Matters. On or before Closing, Ethika will have prepared and
filed with the appropriate United States, state and local governmental agencies,
and all foreign countries and political subdivisions thereof, all tax returns
required to be filed to the date of Closing; Ethika will have paid all taxes
shown on such tax returns to be payable or which have become due pursuant to any
assessment, deficiency, notice, 30-day letter or similar notice received by it;
and the provisions for income taxes payable in the Balance Sheets of Ethika
delivered to Digicom are sufficient for all accrued and unpaid taxes, whether or
not disputed and for all periods to and including the date of such Balance
Sheet. On or before Closing, Ethika will provide true and accurate copies of all
tax returns filed for the last three fiscal years, together with a balance sheet
and income statement as of the date of this Agreement. The balance sheet and
income statement of Ethika shall be updated through Closing.
1.8 Compliance with Applicable Laws. The conduct by Ethika of their
business does not violate or infringe on any domestic (federal, state or local)
or foreign law, statute, ordinance or regulation now in effect, or, to the
knowledge of Ethika proposed to be adopted, the enforcement of which would
materially and adversely affect its business or the value of its properties or
assets.
<PAGE>
1.9 Litigation. Except as disclosed by Memorandum attached hereto as
Exhibit 1.9, there is no material claim, action, suit, proceeding, arbitration,
investigation or inquiry pending before any federal, state, municipal, foreign
or other court or governmental or administrative body or agency, or any private
arbitration tribunal, or to the knowledge of Ethika, threatened, against,
relating to or affecting Ethika and its wholly owned subsidiaries, or any of
their properties or business, or the transactions contemplated by this
Agreement; nor to the knowledge of Ethika is there any basis for any such
material claim, action, suit, proceeding, arbitration, investigation or inquiry
which may have any adverse effect upon the assets, properties or business of
Ethika and its wholly owned subsidiaries, or the transactions contemplated by
this Agreement. Neither Ethika nor any officer, director, partner or employee of
Ethika , have been permanently or temporarily enjoined by order, judgment or
decree of any court or other tribunal or any agency from engaging in or
continuing any conduct or practice in connection with the business engaged in by
Ethika. There is not in existence at present any order, judgment or decree of
any court or other tribunal or any agency enjoining or requiring Ethika to take
any material action of any kind or to which Ethika or their respective business,
properties or assets are subject or bound. Ethika is not in default under any
order, license, regulation or demand of any federal, state or municipal or other
governmental agency or with respect to any order, writ, injunction or decree or
any court which would have a materially adverse impact upon Ethika's operations
or affairs.
1.10 Other Information. Except the contracts and commitments entered
into in the ordinary course of business and as set forth on Exhibit 1.10, Ethika
does not presently have any material contractual commitments, non-executive
officer employees or employee benefit commitments. In addition, none of the
information and documents made or to be made available by Ethika or any of its
representatives to Digicom or any of its representatives in connection with the
transactions contemplated by this Agreement is materially false or misleading or
contains any material misstatements of fact or omits any material fact necessary
to be stated in order to make the statements therein not misleading.
1.11 No Adverse Changes. Since the date of Ethika's most recent audited
financial statements, there has been no undisclosed material adverse change in
Ethika's financial condition, assets, liabilities, or business.
1.12 Exchange Act Filings and Financial Statements. On or before
Closing, Ethika has delivered to Digicom true and accurate copies of all
Financial Statements and reports filed by Ethika with the United States
Securities and Exchange Commission (the SEC) pursuant to Section 15(d) of the
Securities Exchange Act of 1934 (the 1934 Act) including without limitation,
registration statements, 10-K's, 10-Q's, Form 8's, etc. for each of the annual,
quarterly or other fiscal periods for the past three fiscal years. Ethika
financial statements have been prepared in accordance with generally accepted
accounting principles applied on a basis consistent with that of prior years or
periods and fairly present the financial position and results of operations of
Ethika as of the respective dates and for the periods indicated in such
statements. The Balance Sheets of Ethika included in the statements make full
and adequate provision for all obligations, liabilities or commitments (fixed
and contingent) of Ethika as of their respective dates. As of the date of such
financial statements, Ethika had no material obligations, liabilities or
commitments (fixed or contingent) not required to be reserved against in the
<PAGE>
foregoing financial statements or disclosed in the notes thereto in accordance
with generally accepted accounting principles, and since the date of the most
recent balance sheet has not incurred any material obligations, liabilities or
commitments except the transactions contemplated by this Agreement. Ethika will
file all reports required of it under the 1934 Act as a result of this
transaction, including a Form 8-K.
1.13 Shareholder List. Upon the closing of this Agreement, Ethika shall
furnish to Digicom a true and complete list of all shareholders of Ethika,
including name, address, telephone number, and relationship of any beneficial or
indirect interests known to Ethika or its officers, directors, or advisors, of
greater than 1,000,000 shares individually and/or in the aggregate of such
beneficial or indirect interests.
ARTICLE 2
REPRESENTATIONS, COVENANTS AND WARRANTIES OF DIGICOM
As an inducement to, and to obtain the reliance of Ethika, Digicom
represents and warrants as follows:
2.1 Organization, Good Standing, Power, Etc. Digicom (i) is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Colorado, and (ii) has all requisite corporate power and
authority, licenses, permits and franchises to own or lease and operate its
properties and carry on its business as presently being conducted and to
execute, deliver and perform this Agreement and consummate the transactions
contemplated hereby.
2.2 Certificate of Incorporation and Bylaws. Upon execution of this
Agreement by both parties, Digicom will furnish to Ethika's representatives a
complete and correct copy of (i) Digicom's Certificate of Incorporation, as
amended to date; and (ii) Digicom's Bylaws, as amended to date. Digicom's
Certificate of Incorporation and Bylaws are in full force and effect, and
Digicom is not in violation of any of the provisions thereof.
2.3 Capitalization. The authorized capital stock of Digicom consists
solely of: (1) 50,000,000 authorized shares of Common Stock, no par value, (the
"Digicom Common Stock"), of which, at closing 26,097,913 shares are issued and
outstanding and no shares are held in the treasury of Digicom. All of such
issued and outstanding shares of Digicom Common Stock have been duly authorized
and validly issued and are fully paid and non-assessable with no personal
liability attaching to the ownership thereof; (2) 10,000,000 authorized shares
of Convertible Preferred Stock, $100.00 par value, (the "Digicom Convertible
Preferred Stock"), of which, as of January 19, 1998, 4,970 shares are issued and
outstanding and no shares are held in the treasury of Digicom. Between January
19, 1998 and the date of closing additional shares of Digicom Convertible
Preferred Stock will be sold and a final listing thereof will be set forth in
the shareholders list as provided for in Section 2.15. All such issued and
outstanding shares of Digicom Convertible Preferred Stock at closing will have
been duly authorized and validly issued, and fully paid and non-assessable, with
no personal liability attaching to the ownership thereof.
2.4 Options, Warrants, Rights, Etc. Digicom does not have outstanding
any option, warrant or other right to purchase or convert any obligation into,
any shares of the Digicom Common Stock, nor any instruments or obligations to
confer or create such rights, except those option to purchase 162,500 shares of
Digicom Common Stock as set forth on Exhibit 2.4 attached hereto.
<PAGE>
2.5 Subsidiaries. Digicom has three wholly owned subsidiaries, Digicom
Communications, Inc., United Online, Inc. and KidZtime TV, Inc.; and, Digicom
does not own a controlling interest in any capital stock of any other
corporation. Representations and warranties set forth in Section 2.1 are the
same for Digicom's wholly owned subsidiaries.
2.6 Authorization of Agreement. This Agreement has been or will be at
Closing duly and validly authorized, executed and delivered by Digicom.
2.7 Tax Matters. On or before Closing, Digicom will have prepared and
filed with the appropriate United States, state and local governmental agencies,
and all foreign countries and political subdivisions thereof, all tax returns
required to be filed to the date of Closing; Digicom will have paid all taxes
shown on such tax returns to be payable or which have become due pursuant to any
assessment, deficiency, notice, 30-day letter or similar notice received by it;
and the provisions for income taxes payable in the Balance Sheets of Digicom
delivered to Ethika are sufficient for all accrued and unpaid taxes, whether or
not disputed and for all periods to and including the date of such Balance
Sheet. On or before Closing, Digicom will provide true and accurate copies of
all tax returns filed for the last three fiscal years, together with a balance
sheet and income statement as of the date of this Agreement. The balance sheet
and income statement of Digicom shall be updated through Closing.
2.8 Financial Statements. Digicom has delivered, or will deliver prior
to Closing, to Ethika audited financial statements for its most recent fiscal
year ended June 30, 1997 together with audited interim financial statements for
the six months ended December 31, 1997. These financial statements have been
prepared in accordance with generally accepted accounting principles applied on
a basis consistent with that of prior years or periods, are correct and complete
and fairly present the financial position and results of operations of Digicom
as of the respective dates and for the periods indicated in such statements. The
Balance Sheets of Digicom included in the statements make full and adequate
provisions for all obligations, liabilities or commitments (fixed and
contingent) of Digicom as of their respective dates. As of the date of such
financial statements, Digicom has no obligations, liabilities or commitments
(fixed or contingent) not required to be reserved against in the foregoing
financial statements or disclosed in the notes thereto in accordance with
generally accepted accounting principles, except the transactions contemplated
by this Agreement.
2.9 Material Contracts. Digicom is a party to the material contracts
set forth on Exhibit 2.9. There has not occurred any default by Digicom or any
event which with the lapse of time or the election of any person other than
Digicom, or any combination thereof, will become a default, except defaults, if
any, which will not result in any material loss to or liability of Digicom.
2.10 Permits, Licenses, Etc. Digicom has all permits, licenses, orders
and approvals of federal, state, local or foreign governmental or regulatory
bodies that are required in order to permit it to carry on its business as
presently conducted.
2.11 Compliance with Applicable Laws. The conduct by Digicom of its
business does not violate or infringe upon any domestic (federal, state or
local) or foreign law, statute, ordinance or regulation now in effect, or, to
the knowledge of Digicom, proposed to be adopted, the enforcement of which would
materially and adversely affect its business or the value of its properties or
assets.
<PAGE>
2.12 Litigation. Except as disclosed by Memorandum attached hereto as
Exhibit 2.12, there is no material claim, action, suit, proceeding, arbitration,
investigation or inquiry pending before any federal, state, municipal, foreign
or other court or governmental or administrative body or agency, or any private
arbitration tribunal, or to the knowledge of Digicom threatened, against,
relating to or affecting Digicom or any of its properties or business, or the
transactions contemplated by this Agreement; nor to the knowledge of Digicom is
there any basis for any such material claim, action, suit, proceeding,
arbitration, investigation or inquiry which may have any adverse effect upon the
assets, properties or business of Digicom, or the transactions contemplated by
this Agreement. Neither Digicom nor any officer, director, partner or employee
of Digicom, has been permanently or temporarily enjoined by order, judgment or
decree of any court or other tribunal or any agency from engaging in or
continuing any conduct or practice in connection with the business engaged in by
Digicom. There is not in existence at present any order, judgment or decree of
any court or other tribunal or any agency enjoining or requiring Digicom to take
any material action of any kind or to Digicom or its respective business,
properties or assets are subject or bound. Digicom is not in default under any
order, license, regulation or demand of any federal, state or municipal or other
governmental agency or with respect to any order, writ, injunction or decree of
any court which would have a materially adverse impact upon Digicom's operations
or affairs.
2.13 Other Information. None of the information and documents which
have been furnished or made available by Digicom or any of its representatives
to Ethika or any of their representatives in connection with the transactions
contemplated by this Agreement is materially false or misleading or contains any
material misstatements of fact or omits any material fact necessary to be stated
in order to make the statements therein not misleading.
2.14 Investment Representation. With respect to the remaining Common
Stock not registered pursuant to Section 4.4 below, each Digicom shareholder
shall sign representations that the Digicom shareholder is acquiring the shares
of Ethika Common Stock issuable hereunder for their own account and agrees not
to distribute such Shares within the meaning of the Securities Act of 1933 (the
1933 Act) unless an appropriate registration statement has been filed with the
SEC, or unless an exemption from registration under the 1933 Act is available
according to opinion of counsel for Ethika; each such certificate shall be
stamped or otherwise imprinted with the following, or a substantially similar
legend:
"The shares represented by this certificate have not been registered
under the Securities Act of 1933 (the "Act") nor any state securities
laws. These shares may not be offered for sale, sold or otherwise
transferred except pursuant to an effective registration statement
under the Act or pursuant to an opinion of counsel acceptable to Ethika
that an exemption from such registration is available."
2.15 Shareholder List. On or before Closing, Digicom will obtain from
all Digicom shareholders information and representations that said shareholders
have sufficient investment sophistication and ability to take the financial
risks associated with this transaction, and those representations contained in
this Section 2.15, which meet the standards for availability of an exemption
from the registration requirements of the 1933 Act, and from the registration
and/or qualification requirements of any other applicable securities law. The
foregoing notwithstanding, the Shares issuable hereunder may be registered in
the name of, or transferred to, family members, trusts and other related
parties.
<PAGE>
ARTICLE 3
PLAN OF EXCHANGE
3.1 The Exchange. The issued and outstanding shares of common stock of
Digicom shall be converted into shares of Ethika Common Stock as follows:
(a) Every four shares of Digicom Common Stock outstanding on
the Closing Date (26,097,913 total) shall be converted into three (3)
shares of Ethika Common Stock; or, a total of 19,647,894 shares of
Ethika Common Stock for all of the issued and outstanding shares of
Digicom Common Stock. Ethika shall not issue or exchange any fractional
shares or interests in the Ethika Common Stock in connection with the
foregoing conversion. If any holder of Digicom common stock would
otherwise be entitled to a fractional share on exchange of such shares,
Ethika shall round the number of shares of the Ethika Common Stock to
be issued to such stockholder to the nearest whole share (.50 and
greater rounded up, .49 and lower rounded down). The exchanged Ethika
Common Stock shall thereupon be validly issued and outstanding, fully
paid, and non-assessable, and shall not be liable to any further call,
nor shall the holder thereof be liable for any further payments with
respect thereto.
(b) After the Closing Date, each holder of an outstanding
certificate which prior thereto represented shares of Digicom Common
Stock shall be entitled, on surrender thereof, to receive in exchange
therefor a certificate or certificates representing the number of whole
shares of Ethika Common Stock into which the shares of Digicom Common
Stock so surrendered shall have been converted as aforesaid in such
denominations as such holder may request. Until so surrendered, each
such outstanding certificate (which prior to the Effective Date of the
exchange represented shares of Common Stock of Digicom) shall for all
purposes evidence the ownership of the shares of Ethika Common Stock
into which such shares shall have been converted; provided, that
dividends or other distributions which are payable in respect of shares
of Ethika Common Stock for which shares of Digicom Common Stock are
exchanged, shall not be paid to holders of certificates representing
such shares of Digicom Common Stock until such certificates shall have
been surrendered in exchange for certificates representing Ethika
Common Stock. On such surrender, the holder(s) of such shares shall be
entitled to receive such dividends or other distributions, without
interest.
(c) After the Closing Date, pursuant to authorization of the
post-closing Ethika Board of Directors, each holder of an outstanding
certificate which prior thereto represented shares of Digicom
Convertible Preferred Stock shall be entitled, on surrender thereof, to
receive in exchange therefor a certificate or certificates of an equal
number of Ethika Convertible Preferred Stock, convertible to the number
of whole shares of Ethika Common Stock as if the Digicom Convertible
Preferred Stock had been converted to Digicom Common stock as if and on
the closing date, and, into which the Digicom Convertible Preferred
Stock so surrendered shall have been converted as aforesaid in such
denominations as such holder may request. Until so surrendered, each
such outstanding certificate (which prior to the Effective Date of the
exchange represented shares of Digicom Convertible Preferred Stock)
shall for all purposes evidence the ownership of the shares of Ethika
Convertible Preferred Stock into which such shares shall have been
converted; provided, that dividends or other distributions which are
<PAGE>
payable in respect of shares of Ethika Convertible Preferred Stock for
which shares of Digicom Convertible Preferred Stock are exchanged,
shall not be paid to holders of certificates representing such shares
of Digicom Convertible Preferred Stock until such certificates shall
have been surrendered in exchange for certificates representing Ethika
Convertible Preferred Stock. On such surrender, the holder(s) of such
shares shall be entitled to receive such dividends or other
distributions, without interest.
(d) After the Closing Date, each holder of an outstanding
certificate which prior thereto represented an option to acquire shares
of Digicom Common Stock shall be entitled, on surrender thereof, to
receive in exchange therefor a certificate or certificates representing
an option to acquire the number of whole shares of Ethika Common Stock
into which the shares of Digicom Common Stock, had the option been
exercised as of the date of closing, would have been so surrendered,
and shall have been converted.
3.2 Closing. The Closing of the transactions contemplated by this
Agreement shall take place on such date as may be agreed upon by the parties,
but no later than March 6, 1998 (herein called the "Closing Date"), at the
offices of Digicom, 12265 W. Bayaud Ave, 3rd Floor, Lakewood, Colorado 80228, or
such other time and location as the parties may mutually agree.
3.3 Closing Events. At the Closing, each of the respective parties
hereto shall execute, acknowledge, and deliver (or shall cause to be executed,
acknowledged, and delivered) any agreements, resolutions, or other instruments
required by this Agreement to be so delivered at or prior to the Closing,
together with such other items as may be reasonably requested by the parties
hereto and their respective legal counsel in order to effectuate or evidence the
transactions contemplated hereby.
3.4 Directors of Ethika. Effective on the execution of this Agreement,
the Board of Directors of Ethika shall consist of the following persons:
(1) Dennis Brovarone (4) Philip F. Grey
(2) Russell Burke (5) Jeffrey Evensen
(3) Dennis Neilson (6) W. Craig Nelson
(7) William D. Peterson
And the resignations of Marcia Cohen; William Stubblefield, Herbert Rogers and
Anthony Spuria are attached hereto as Exhibits 3, 4a, b, c and d.
3.5 Officers of Ethika. Effective on the Closing Date of this
transaction all existing executive officers and employees of Ethika shall have
submitted their resignations effective on Closing, and the Board shall have
elected new officers of Ethika to consist of the following persons, and/or such
other persons as the Ethika board may determine:
NAME OFFICE
(1) Jeffrey Evensen Chairman of the Board
(2) Philip F. Grey President
(3) W. Craig Nelson Vice President
(4) William D. Peterson Secretary
(5) Louis C. Scotti Treasurer/CFO
(6) Wayne Johnson COO
<PAGE>
ARTICLE 4
SPECIAL COVENANTS
4.1 Due Diligence. The parties hereto shall have up to and including
February , 20, 1998 within which to complete their due diligence investigations
on the other party and the transaction contemplated hereunder. In the event
either party hereto decides, in its sole discretion, not to proceed with the
Closing based on its due diligence investigation, it shall notify the other in
writing on or before 5:00 P.M. Mountain Time, February 23, 1998 of such decision
and this Agreement, except Sections 4.2, 4.4 and 6.11 shall become null and
void, and no liability shall occur to any of the parties herein.
4.2 Exchange of Information. Each party shall cooperate fully by
exchanging information requested by the other party in a timely manner. Without
in any manner reducing or otherwise mitigating the representations contained
herein, each party and/or its attorneys shall have the opportunity to meet with
the accountants and attorneys of the other party to discuss its respective legal
and financial condition and this transaction. If this transaction is not
completed, all documents received by each party and/or its attorney shall be
returned to the other party and all such information so received shall be
treated as confidential in accordance with Section 6.11.
4.3 Conduct of Business. Prior to Closing, Ethika and Digicom shall
each conduct its business in the normal course, and shall not sell, pledge, or
assign any assets, without the prior written approval of the other party, except
in the regular course of business. Neither Ethika or Digicom shall amend its
Articles of Incorporation or Bylaws, declare dividends, redeem or sell stock or
other securities, incur additional or newly-funded liabilities, acquire or
dispose of fixed assets, change employment terms, enter into any material or
long-term contract, guarantee obligations of any third party, settle or
discharge any balance sheet receivable for less than its stated amount, pay more
on any liability than its stated amount, or enter into any other transaction
other than in the regular course of business and with notice to the other party.
4.4 Registration of Shares. Within thirty (30) days following the
Closing Ethika will file an S-1, or other appropriate registration statement, to
register for public resale of five percent (5%) of the Ethika Common Stock
received by non-affiliated Digicom shareholders pursuant to this Agreement.
ARTICLE 5
CONDITIONS PRECEDENT TO OBLIGATIONS OF PARTIES
5.1 Digicom's Closing Conditions. The obligations of Digicom hereunder
are subject to fulfillment prior to or at the Closing of each of the following
conditions:
(a) Closing Date. The transactions contemplated by this
Agreement shall be closed on or before March 6, 1998.
(b) Shareholder Agreement. A Shareholder Agreement in the form
attached hereto as Exhibit 5.1(b) shall have been executed by the
Peeper Group as defined by a Schedule 13D filed with the SEC whereby
the Peeper Group and such other Ethika shareholders as may be party to
the agreement, agree and transfer their voting rights to Digicom for
not less than fifty-one percent of the outstanding common stock of
Ethika.
<PAGE>
(c) Ethika Shareholder Meeting. Ethika shall have duly called
and held a Special Meeting of its Shareholders for the following
purposes:
1. Ratification of the transaction with Digicom for Digicom to
become a wholly owned subsidiary of Ethika;
2. Eliminate the par value on the authorized common stock;
3. Authorize a class of 10,000,000 shares of preferred stock,
issueable in series whose rights and preferences may be set by
the board of directors prior to issuance;
4. Reverse split the outstanding shares of Ethika Common Stock, one
new share for every twenty-two and one half (22 1/2) currently
outstanding shares, with each fractional share rounded up to the
next whole share and each stockholders total share position
rounded up to the next whole multiple of 50;
5. Change the name of Ethika to North American Digicom Corporation;
6. Authorize the redomicile of Ethika to Delaware or Nevada;
7. Elect the following persons to the Ethika board of directors:
Philip F. Grey; Wayne Johnson; Louis Scotti; W. Craig Nelson;
William D. Peterson; Jeffrey Evensen and two independent
directors to be named subsequent to execution of this Agreement.
(d) Representations and Warranties. The representations and
warranties of Ethika made pursuant to Article 1 above, shall be true
and accurate in all material respects as of the Closing Date.
(e) Performance. Ethika shall have performed and complied with
all agreements and conditions required by this Agreement to be
performed or complied with by it prior to or at the Closing.
(f) No Adverse Changes. There shall not have been, since the
date of the latest audited financial statements of Ethika, any
undisclosed materially adverse change in Ethika's financial condition,
assets, liabilities or business.
(g) Opinion of Ethika's Counsel. Ethika shall have delivered
to Digicom an opinion of Ethika's counsel, James H. Neeld III, Attorney
at Law, dated the Closing Date to the effect that: (i) Ethika is a
corporation duly organized, validly existing and in good standing under
the laws of the State of Mississippi, has all requisite power to carry
on its business as now being conducted and to execute, deliver and
perform this Agreement and to perform its obligations thereunder; (ii)
Ethika is duly qualified to do business as a foreign corporation and is
good standing in each jurisdiction in which the nature of the business
conducted by it or the property owned, operated or leased by it makes
such qualification necessary; (iii) this Agreement has been duly
authorized by all necessary corporate action on the part of Ethika, has
been duly executed and delivered by Ethika and constitutes the legal,
valid and binding obligation of Ethika enforceable in accordance with
its terms except as enforceability thereof may be limited by the
insolvency or other laws affecting the rights of creditors and the
enforcement of remedies; (iv) Ethika has prepared and filed with the
SEC all periodic reports required of it under the 1934 Act; (v) the
Shares issuable hereunder have been duly authorized and will be validly
issued; fully paid and non-assessable with no personal liability
attaching to the ownership thereof; (vi) neither the execution,
delivery and performance by Ethika of this Agreement, nor compliance by
<PAGE>
Ethika with the terms and provisions hereof, will conflict with, or
result in a breach of the terms, conditions or provisions of, or will
constitute a default under, the Articles of Incorporation or Bylaws of
Ethika or any agreement or instrument known to such counsel to which
Ethika is a party or by which Ethika or any of its properties or assets
are bound; (vii) there are no actions, suits or proceedings pending or,
to the knowledge of such counsel, threatened against Ethika before any
court or administrative agency, which have, in the opinion of such
counsel, if adversely decided, will have any material adverse effect on
the business or financial condition of Ethika or which questions the
validity of this Agreement or the Shares issuable hereunder. In
rendering his opinion, counsel shall be allowed to rely on written
representations of officers and directors of the Company as to factual
matters without independent verification thereof.
(h) Due Diligence. Digicom shall have completed and be
satisfied with its due diligence investigation of Ethika pursuant to
Article 4.1.
5.2 Ethika's Closing Conditions. The obligations of Ethika hereunder
are subject to fulfillment prior to or at the Closing of each of the following
conditions:
(a) Closing Date. The transactions contemplated by this
Agreement shall be closed on or before March 6, 1998.
(b) Tender of Digicom Shares. On or prior to the closing date,
the Digicom shareholders shall have endorsed and tendered to Ethika,
certificates representing one hundred percent (100%) of the outstanding
Digicom Common Stock, Digicom Convertible Preferred Stock and options
to acquire Digicom Common Stock.
(c) Audited Financial Statements. Digicom shall have delivered
to Ethika, audited financial statements of Digicom and its subsidiary
through December 31, 1997. These financial statements have been
prepared in accordance with generally accepted accounting principles
applied on a basis consistent with that of prior years or periods, are
correct and complete and fairly present the financial position and
results of operations of Digicom as of the dates and for the periods
indicated in such statements.
(d) Representations and Warranties. The representations and
warranties of Digicom made pursuant to Article 2 above, shall be true
and accurate in all material respects as of the Closing Date.
(e) Performance. Digicom shall have performed and complied
with all agreements and conditions required by this Agreement to be
performed or complied with by it prior to or at the Closing.
(f) No Adverse Changes. There shall not have been, since the
date of the latest audited financial statements of Digicom, any
materially adverse change in Digicom's financial condition, assets,
liabilities or business.
<PAGE>
(g) Opinion of Digicom's Counsel. Digicom shall have delivered
to Ethika, an opinion of Digicom's counsel, William D. Peterson,
Attorney at Law, dated the Closing Date to the effect that: (i) Digicom
is a corporation duly organized, validly existing and in good standing
under the laws of the State of Colorado has all requisite power to
carry on its business as now being conducted and to execute, deliver
and perform this Agreement and to perform its obligations thereunder;
(ii) Digicom is duly qualified to do business as a foreign corporation
and is in good standing in each jurisdiction in which the nature of the
business conducted by it or the property owned, operated or leased by
it makes such qualification necessary; (iii) this Agreement has been
duly authorized by all necessary corporate action on the part of
Digicom, has been duly executed and delivered by Digicom and
constitutes the legal, valid and binding obligation of Digicom,
enforceable in accordance with its terms except as enforceability
thereof may be limited by the insolvency or other laws affecting the
rights of creditors and the enforcement of remedies; (iv) neither the
execution, delivery and performance by Digicom of this Agreement, nor
compliance by Digicom with the terms and provisions hereof, will
conflict with, or result in a breach of the terms, conditions or
provisions of, or will constitute a default under, the Articles of
Incorporation or Bylaws of Digicom or any agreement or instrument known
to such counsel to which Digicom is a party or by which Digicom or any
of its properties or assets is bound; (v) there are no actions, suits
or proceedings pending or, to the knowledge of such counsel, threatened
against Digicom before any court or administrative agency, which, in
the opinion of such counsel, if adversely decided, will have any
material adverse effect on the business or financial condition of
Digicom or which questions the validity of this Agreement. In rendering
their opinion, counsel shall be allowed to rely on written
representations of officers and directors of the Company as to factual
matters without independent verification thereof.
ARTICLE 6
MISCELLANEOUS
6.1 Expenses and Further Assurances. The parties hereto shall each bear
their respective costs and expenses incurred in connection with the transactions
contemplated by this Agreement. Each party hereto will use its best efforts to
provide any and all additional information, execute and deliver any and all
documents or other written material, and perform any and all acts necessary to
carry-out the intent of this Agreement.
6.2 Survival of Representations, Warranties and Covenants. All of the
representations, warranties and covenants made as of the date of this Agreement
and as of Closing, shall survive the closing of this transaction.
6.3 Successors and Assigns. All representations, warranties, covenants
and agreements in this Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective heirs, representatives,
successors and assigns whether so expressed or not.
6.4 Governing Law. This Agreement is to be governed by and interpreted
under the laws of the State of Colorado, without giving effect to the principles
of conflicts of laws thereof.
<PAGE>
6.5 Notices. All notices, requests, consents and other communications
hereunder shall be in writing and shall be deemed to have been duly given (a) on
date of delivery if delivered personally or (b) on the fifth day after being
sent by certified mail, return receipt requested, with postage prepaid as
follows:
If to Ethika addressed to: Dennis Brovarone
Ethika Corporation
107 The Executive Center
Hilton Head Island, SC 29928
If to Digicom, addressed to: Philip F. Grey
North American Digicom Corporation
12265 W. Bayaud Ave., 3rd Floor
Lakewood, CO 80228
6.6 Section and Other Headings. The section and other headings herein
contained are for convenience only and shall not be construed as part of this
Agreement.
6.7 Counterparts. This Agreement may be executed in any number of
counterparts and each counterpart shall constitute an original instrument, but
all such separate counterparts shall constitute but one and the same instrument.
6.8 Entire Agreement. This Agreement constitutes the entire agreement
between the parties hereto and supersedes all prior agreements, understandings
and arrangements, oral or written, between the parties hereto with respect to
the subject matter hereof. This Agreement may not be amended or modified, except
by a written agreement signed by all parties hereto.
6.9 Severability. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffectual to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction.
6.10 Arbitration. Disputes between the parties hereto regarding the
subject matter of this Agreement, if any, shall be resolved by an arbitration in
Denver, Colorado conducted by the American Arbitration Association; and, any
arbitration award entered shall be final and conclusive upon the parties with
the prevailing party entitled to costs and reasonable attorney fees in
connection with such arbitration, and the enforcement of an arbitration award.
6.11 Confidentiality. Each party hereto agrees with the other parties
that, unless and until this Agreement has been consummated, or for a period of
one (1) year from the date of this Agreement if the transaction contemplated by
this Agreement is not consummated, it and its representatives will hold in
strict confidence all data and information obtained with respect to the other
party from any representative, Officer, Director or employee, or from any books
or records or from personal inspection, of such other party, and shall not use
such data or information or disclose the same to others, except: (i) to the
extent such data or information has theretofore been publicly disclosed, is a
matter of public knowledge or is required by law to be publicly disclosed; and
(ii) to the extent that such data or information must be used or disclosed in
order to consummate the transactions contemplated by this Agreement.
<PAGE>
IN WITNESS WHEREOF, the corporate parties hereto have caused this
Agreement to be executed by their respective Officers, hereunto duly authorized,
as of the date first above written.
ETHIKA CORPORATION
By:______________________________
Dennis Brovarone, President pro tem
By:______________________________
David Williams, Secretary
NORTH AMERICAN DIGICOM CORPORATION
By:______________________________
Philip F. Grey, President
By:______________________________
William D. Peterson, Secretary
<PAGE>
(4)(2)(2)
MEMORANDUM OF AGREEMENT
This Memorandum of Agreement is executed this 3rd Day of March, 1998 by
Ethika Corporation (Ethika) and North American Digicom Corporation (Digicom)
with reference to and by way of amendment to the Agreement and Plan of
Reorganization (the Reorganization Agreement) entered into by Ethika and Digicom
on or about January 26, 1998.
In consideration of the Reorganization Agreement and the performance
rendered pursuant thereto, Ethika and Digicom agree as follows:
1. Ethika and Digicom agree that Section 3.2 and Section 5.1(a) of the
Reorganization Agreement are hereby amended to require Closing on or before June
30, 1998.
2. With reference to Section 1.5 of the Reorganization Agreement,
Digicom consented to the sale of Ethika's Text Retrieval Systems, Inc.,
subsidiary and consents to the proposed sales of Ethika's Compass Data Systems,
Inc., and Legislative Information Systems, Inc.
3. With reference to Section 4.1, Ethika and Digicom agree they have
completed their due diligence and that the Reorganization Agreement is
irrevocable and binding subject only to the Closing Conditions set forth in
Article 5 of the Reorganization Agreement.
4. Ethika and Digicom agree that the $425,000 which Ethika has loaned
to Digicom shall be secured by the assets and receivables of Digicom until
Closing of the Reorganization Agreement.
5. All other terms and conditions of the Reorganization Agreement not
specifically modified by this Memorandum of Agreement are reaffirmed as valid
and in full force and effect.
ETHIKA CORPORATION NORTH AMERICAN DIGICOM CORPORATION
Dennis Brovarone, President Philip F. Grey, President
<PAGE>
(4)(2)(3)
VOTING TRUST AGREEMENT
THIS AGREEMENT is made the 16 day of March, 1998, by and between the
individuals and business entities signing below (hereinafter referred to as
"Stockholders"), and Philip F. Grey, Trustee, and his successor and successors
in the Trust, (hereinafter collectively referred to as "Voting Trustee"):
EXPLANATORY STATEMENT
A. Ethika Corporation. (hereinafter referred to as "Corporation") is a
Mississippi corporation.
B. Stockholders are the owners and holders of certain shares of the
capital stock of the Corporation issued and outstanding and entitled to vote and
as set forth by their names below(hereinafter referred to as the "Shares").
C. Stockholders deem it to be in the best interest of the Stockholders
and Corporation to have the Shares voted during the term of the Voting Trust by
Voting Trustee.
NOW, THEREFORE, Stockholders, in consideration of the mutual promises
of the other Stockholders and the Voting Trustee and in order to assure the
voting of the Shares by Voting Trustee does hereby transfer the voting rights of
the Shares to Voting Trustee for the purpose of vesting in Voting Trustee the
right to vote thereon and to act in respect thereof until the day after the next
special or annual meeting of the shareholders of the Corporation or for a period
not to exceed one (1) year, upon the following terms and conditions:
FIRST: Stockholders agree immediately to irrevocably assign and
transfer to Voting Trustee the voting rights of the Shares set opposite their
respective signature hereto, for the purpose of vesting in Voting Trustee, as
Trustee of an active trust, the right to vote thereon and act in respect
thereof, until the day after the next special or annual meeting of the
shareholders of the Corporation or for a period of one (1) year from the date
hereof, subject to earlier termination by the Trustee pursuant to the terms
hereof.
SECOND: Upon execution of this Voting Trust Agreement by each
Stockholder, each Stockholder shall surrender their certificates to the Voting
Trustee for the term of this Agreement.
THIRD: This Agreement shall terminate, on the date following the next
special or annual meeting of the shareholders of the Corporation or one [1] year
from date of Agreement which ever occurs first, without notice by or action of
the Voting Trustee; but, at any earlier time, it may be terminated by the
written action of the Voting Trustee, in his/ her uncontrolled discretion, by
signing a declaration to that effect and sending a copy of the same to each
registered holder of voting trust certificates issued hereunder. On the first
day following the next special or annual meeting of Shareholders or March 13,
1999, or upon the earlier termination of this Agreement as above specified,
Voting Trustee, shall deliver the proper certificates of stock of the
Corporation to the appropriate Stockholders and thereupon all liability of
Voting Trustee, or his successors, or successor, or of any of them, for the
delivery of said stock certificates shall cease and terminate.
<PAGE>
FOURTH: Until the actual transfer of stock certificates to the
Stockholders upon termination of this Agreement, the Voting Trustee shall in
respect of any and all of the stock held by him hereunder, possess and be
entitled to exercise the right to vote thereon for every purpose, in person or
by proxy and to consent to any lawful corporate act of Corporation, as though
absolute owner of said stock, it being expressly agreed that no voting right
shall remain with the Stockholders by or under this Agreement, or by or under
any other agreement, express or implied. Voting Trustee agrees to vote in the
affirmative for the matters to be set before the shareholders of the Corporation
as called for by the Agreement and Plan of Reorganization by and between the
Corporation and North American Digicom Corporation dated as of January 27, 1998
which is herein incorporated by reference. Any person acting as a Voting Trustee
under this Agreement may, directly or indirectly, transact any lawful business
with the Corporation, notwithstanding his position as Voting Trustee. Voting
Trustee may also serve as director and compensated officer of the Corporation
and may vote for himself, as such. At the next special or annual meeting of the
shareholders of Corporation the Voting Trustee may vote or act in person or by
proxy to any other person whether or not such other person is a Voting Trustee,
and any person acting as a Voting Trustee may give a power of attorney to any
other person, whether or not such other person is acting as a Voting Trustee, to
sign for him/her in case of action taken in writing without a meeting. Voting
Trustee may adopt his/her own rules of procedure and may vote as stockholder of
the Corporation in person or by proxy. Voting Trustee as hereinbefore provided,
the person acting
FIFTH: In the event of the death, resignation or other permanent
inability to serve as Voting Trustee of the said Philip F. Grey, then Louis
Scotti shall serve as successor Voting Trustee, and in the event of the death,
resignation, inability or refusal to serve as Voting Trustee of Louis Scotti,
then, anything contained herein to the contrary notwithstanding, this Agreement
shall cease and terminate without notice by or action of such successor Voting
Trustee. Such successor shall serve for the unexpired term in the place and
stead of the prior Voting Trustee, as above provided, and the authority, powers,
duties, obligations, and limitations of the said original Voting Trustee shall
devolve upon such successor with the same effect as if such successor had been
the person named as original Voting Trustee. The successor of any person acting
as Voting Trustee shall, by written agreement, undertake the performance of this
voting trust in accordance with its terms.
SIXTH: The person acting as Voting Trustee shall not be entitled to any
compensation for his services as such.
SEVENTH: 1. The term "Corporation", for the purposes of this agreement
and of all rights hereunder, including the issue and delivery of stock
certificates, shall be taken to mean Ethika Corporation, a Mississippi
corporation, or any corporation successor to it.
2. Each and all of the terms and provisions of this agreement
shall be and are hereby made binding upon the Stockholders, their heirs,
personal representatives, guardians and assigns.
3. Voting Trustee shall have no duty to hold meetings of
Stockholders who are signatories to this Agreement but he shall be entitled to
do so if he wishes. Ten days' written notice of every meeting of the
Stockholders who are signatories shall be given and such notice shall state the
place, day and hour and the purpose, if any, of such meeting, but any
<PAGE>
Stockholder may waive such notice in writing, either before or after the holding
of the meeting. No notice of any adjourned meeting need be given. Every such
meeting shall be held in the State of Colorado at a place designated by Voting
Trustee. The failure to hold meetings shall not in any manner or degree impair
or reduce the authority of Voting Trustee hereunder.
4. All notices to be given to the Stockholders who are
signatories may be given by mailing the same at their addresses as the same last
given to the Voting Trustee, and any notice, mailed as herein provided, shall be
taken as though personally served on all the Stockholders who are signatories,
and such mailing shall be the only notice required to be given under any
provisions of this agreement.
5. This agreement shall be filed with Voting Trustee, and a
duplicate hereof shall be filed in the principal office of Corporation.
EIGHTH: Philip F. Grey, as Voting Trustee, hereby accepts the above
trust, subject to all of the terms, conditions and reservations herein
contained, and agrees that he will exercise the powers and perform the duties of
Voting Trustee as herein set forth, according to his best judgment.
<PAGE>
IN WITNESS WHEREOF, this agreement is executed as of the day and year
first above mentioned.
WITNESS:
(SEAL)
Philip F. Grey, Voting Trustee
ARGERE HOLDINGS, S.A.
420,000 Shares
Alfred Peeper, Director
EUR-AM, B.V.
461,000 Shares
Alfred Peeper, Director
LA ROCHE HOLDINGS, S.A.
902,500 Shares
Jacques Benzeno, Director
and or Alfred Peeper, pursuant to Power of Attorney
LA SALLE INVESTMENT, LTD.
7,997,829 Shares
Jean Claude Roder, Director
RIAL EQUITY GROUP, S.A.
600,000 Shares
Beverly Y. Hunt, Director
and or Alfred Peeper, pursuant to Power of Attorney
<PAGE>
(4)(2)(4)
Financial Statements and Report
of
Independent Certified Public Accountants
North American
Digicom Corporation
December 31, 1997,
June 30, 1997 and 1996
<PAGE>
Board of Directors
North American Digicom Corporation
We have audited the accompanying consolidated balance sheets of North American
Digicom Corporation and subsidiaries as of December 31, 1997, June 30, 1997 and
1996, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the periods ended December 31, 1997, June 30,
1997 and 1996. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits with generally accepted audited 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 referred to above present
fairly, in all material respects, the financial position of North American
Digicom Corporation and subsidiaries as of December 31, 1997, June 30, 1997 and
1996, and the results of their operations and their cash flows for each of the
periods ended December 31, 1997, June 30, 1997 and 1996, in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note K to the
consolidated financial statements, the Company has incurred a loss of $1,526,791
for the six months ended December 31, 1997, and has a working capital deficit of
approximately $2,500,000. As a result, sufficient equity and debt financing must
be obtained to fund obligations until successful operations are attained. These
matters raise substantial doubt about the Company's ability to continue as a
going concern. The consolidated financial statements do not include any
adjustments that might result from the outcome of this certainty.
Englewood, Colorado
February 14, 1998
<PAGE>
<TABLE>
<CAPTION>
North American Digicom Corporation
Consolidated Balance Sheets
December 31, June 30,
------------- ------------------------------
1997 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Assets
Current assets:
Cash $ 250,538 $ 45,650 $ 4,683
Accounts receivable, net of allowance for doubtful
Accounts of $30,000 at December 31, 1997 6,200,784 89,044 --
Receivables from related parties 1,761,037 -- --
Prepaid expenses 1,039,276 85,069 --
------------ ------------ ------------
Total Current Assets 9,251,635 219,763 4,683
------------ ------------ ------------
Property, Plant and Equipment, at cost:
Telephony equipment 1,723,293 1,306,789 --
Furniture and other equipment 691,284 81,880 47,292
------------ ------------ ------------
2,414,577 1,388,669 47,292
Accumulated depreciation 253,683 35,639 --
------------ ------------ ------------
2,160,894 1,353,030 47,292
------------ ------------ ------------
Other Assets:
Computer software under development 56,146 31,333 --
Excess of purchase price over net assets of businesses
Acquired, net of accumulated amortization of
$226,878 at December 31, 1997 6,604,796 753,552 --
------------ ------------ ------------
6,660,942 784,885 --
------------ ------------ ------------
Total Assets $ 18,073,471 $ 2,357,678 $ 51,975
============ ============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
North American Digicom Corporation
Consolidated Balance Sheets
(continued)
December 31, June 30,
------------- ------------------------------
1997 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 1,493,524 $ 294,896 $ --
Payables to related parties 3,802,674 300,289 55,000
Note payable line of credit 49,900 49,900 --
Current maturities of long-term obligations 380,646 203,001 --
Deferred revenue 5,823,983 -- --
Accrued expenses 221,834 83,522 --
------------ ------------ ------------
Total Current Liabilities 11,772,561 931,608 55,000
------------ ------------ ------------
Long-term Obligations, less current maturities 1,242,938 994,806 --
------------ ------------ ------------
Stockholders' Equity
Preferred stock, $100 par value; authorized
10,000,000 shares 435,000 -- --
Common stock, no par value; authorized
50,000,000 shares 6,891,969 1,173,470 5,000
Accumulated deficit (2,268,997) (742,206) (8,025)
------------ ------------ ------------
Total Stockholders' Equity 5,057,972 431,264 (3,025)
Total Liabilities and Stockholders Equity $ 18,073,471 $ 2,357,678 $ 51,975
============ ============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
North American Digicom Corporation
Consolidated Statements of Operations
Six months Year Inception
period ended Ended (December 27,
1995)
December 31, June 30, through June 30,
1997 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Revenue $ 2,467,540 $ 134,309 $ --
----------- ---------- ----------
Costs and Expenses:
Cost of sales 1,652,394 185,380 --
Selling and development expenses 283,261 52,093 --
General and administrative expenses 1,824,778 537,281 8,025
---------- ---------- ----------
Total Costs and Expenses 3,760,433 774,754 8,025
---------- ---------- ----------
Operating loss (1,292,893) (640,445) (8,025)
---------- ---------- ----------
Other income (expense)
Interest expense (235,746) (98,880) --
Other income 1,848 5,144 --
---------- ---------- ----------
(233,898) (93,736) --
---------- ---------- ----------
Income taxes -- -- --
---------- ---------- ----------
Net Loss $(1,526,791) $ (734,181) $ (8,025)
=========== ========== ==========
</TABLE>
The Accompanying notes are an integral part of these statements.
<PAGE>
<TABLE>
<CAPTION>
North American Digicom Corporation
Consolidated Statements of Cash Flows
Six months Year Inception
period ended Ended (December 27,
1995)
December 31, June 30, through June 30,
1997 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss $(1,526,791) $ (734,181) $ (8,025)
Adjustments to reconcile net
cash provided (used) by
operating activities:
Depreciation and amortization 410,610 35,639 --
Common stock issued for services,
interest and other expenses 470,876 53,720 5,000
Payment of interest and other
expenses by increase in note payable -- 53,834 --
Changes in assets and liabilities:
Increase in accounts receivable (6,107,951) (88,829) --
Increase in receivables from
related parties (21,324)
Increase in prepaid expenses (317,067) (56,200) --
Increase in accounts payable 735,883 286,183 --
Increase in payables to related parties 664,639 -- --
Increase in deferred revenue 4,894,955 -- --
Increase in accrued expenses 114,988 83,522 --
----------- ----------- -----------
Net cash used by operating activities (681,182) (366,312) (3,025)
----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures (221,363) (89,388) (47,292)
----------- ----------- -----------
Net cash used by investing activities (221,363) (89,388) (47,292)
----------- ----------- -----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
North American Digicom Corporation
Consolidated Statements of Cash Flows
(continued)
Six months Year Inception
period ended Ended (December 27,
1995)
December 31, June 30, through June 30,
1997 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from financing activities:
Issuance of preferred stock 435,000 -- --
Issuance of common stock 105,500 242,250 --
Proceeds from line of credit -- 49,900 --
Loans from related parties 1,308,809 438,165 55,000
Repayments to related parties (669,234) (200,712) --
Payments on capital lease obligations (72,984) (51,738) --
Prepayment on capital lease obligation -- (26,845) --
Cash balance of business acquired by
issuance of common stock 342 45,647 --
----------- ----------- -----------
Net cash provided by financing activities 1,107,433 496,667 55,000
----------- ----------- -----------
Increase in cash 204,888 40,967 4,683
Cash
Beginning of period 45,650 4,683 --
----------- ----------- -----------
End of period $ 250,538 $ 45,650 $ 4,683
=========== =========== ===========
</TABLE>
<PAGE>
North American Digicom Corporation
Notes to Financial Statements
December 31, 1997, June 30 1997 and 1996
Note A----Organization and Summary of Significant Accounting
Policies
Nature of Operations
NAD develops, markets and sells nationwide long distance telephone services,
primarily to business customers and wholesalers. The Company's products include
long distance telephone service and prepaid calling cards. UOL develops, markets
and sells nationwide Internet services. The Company's products include Internet
dial-up connections and virtual marketplace shopping. KTV develops, markets and
sells nationwide television and Internet programming directed towards meeting
the needs of parents and children for nonviolent, safe, educational and
entertaining programming. KTV has sold licenses to companies (eighty markets
nationwide) to allow for the broadcasting of their programming.
Principles of Consolidation
The consolidated financial statements of North American Digicom Corporation and
subsidiaries ("the Company") include the accounts of its two wholly-owned
subsidiaries United Online, Inc.("UOL") and Kidztime TV, Inc. ("KTV"). All
significant intercompany accounts and transactions have been eliminated. As
described in Note B, UOL was acquired on June 30, 1997 and KTV was acquired on
October 20, 1997.
Revenue Recognition
Revenues are recognized when earned. For telephone operations, deferred revenue
represents amounts billed to customers for prepaid calling cards which have not
yet been used. Revenue is recognized based on usage by customers. A portion of
television license revenue is deferred to properly match programming costs with
revenue. For other products and services, revenue is recognized when products
are delivered or services are rendered to customers.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is provided using the straight-line method. Estimated useful lives
are five years for telephony equipment, and seven years for furniture and other
equipment.
Other Assets
Excess of purchase price over net assets of businesses acquired ("goodwill") is
amortized on the straight-line method over the estimated periods of future
demand for the products acquired. Goodwill related to the acquisition of UOL is
being amortized over three years and goodwill related to the acquisition of KTV
is being amortized over ten years.
<PAGE>
North American Digicom Corporation
Notes to Financial Statements
December 31, 1997, June 30, 1997 and 1996
Note A----Organization and Summary of Significant Accounting
Policies, continued
The Company capitalizes certain software development and production costs once
technological feasibility has been achieved pursuant to Statement of Financial
Accounting Standards No. 86, Accounting for the Costs of Computer Software to be
Sold, Leased or Otherwise Marketed. Software costs were capitalized in the
amount of $31,333 during the year ended June 30, 1997 and in the amount of
$24,861 during the six month period ended December 31, 1997. The software is
expected to be placed in service during the first quarter of 1998 and will be
amortized based upon the straight-line method over an estimated life of three
years.
Income Taxes
Income taxes include provisions for temporary differences between earnings for
financial reporting purposes and earnings for income tax purposes under the
guidelines of Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes.
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.
Advertising
The Company expenses advertising costs as they are incurred. Advertising
expenses were $91,517, $127,472 and $7,470 for the periods ending December 31,
1997, June 30, 1997 and June 30, 1996, respectively.
Statement of Cash Flows
For purposes of the statement of cash flows, the Company considers all highly
liquid debt instruments purchased with a maturity of three months or less to be
cash equivalents.
Note B----Business Acquisitions
Both acquisitions recognized in these financial statements have been accounted
for under the purchase method. The results of operations of the acquired
businesses are included in the consolidated financial statements from the dates
of acquisition. These acquisitions have been structured to qualify as tax-free
reorganizations.
<PAGE>
North American Digicom Corporation
Notes to Financial Statements
December 31, 1997, June 30, 1997 and 1996
Note B----Business Acquisitions, continued
On June 30, 1997, the Company acquired 100% of the outstanding stock of UOL by
issuance of 1,675,000 shares of common stock. The purchase price of $837,500
plus the liabilities assumed exceeded the fair value of the tangible assets and
identifiable intangible assets by $753,552 which is being amortized over a
period of three years.
On October 20, 1997, the Company acquired 100% of the outstanding capital stock
of KTV by issuance of 5,142,123 share of common stock. The purchase price of
$5,142,123 plus the liabilities assumed exceeded the fair value of the tangible
assets and identifiable intangible assets by $6,078,122 which is being amortized
over a period of ten years.
The following unaudited pro forma consolidated results of operations are
presented as if the acquisition of UOL had occurred on July 1, 1995 and the
acquisition of KTV on July 1, 1996. The unaudited pro forma information is not
necessarily indicative of either the results of operations that would have been
made during the periods presented or the future results of the combined
operations.
<TABLE>
<CAPTION>
Six month period ended
ended December 31, Year ended June 30,
1997 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net sales $4,525,172 $6,093,255 $ 42,071
Net loss 1,732,468 2,203,718 333,452
</TABLE>
Note C----Line of Credit
The Company has a line of credit for $50,000 with a local bank. The outstanding
balance at December 31, 1997, and June 30, 1997 was $49,900 and interest at 1.5%
over prime rate (10.5% effective rate at December 31, 1997 and June 30, 1997) is
paid monthly. The line of credit expires on January 8, 1998, and the Company has
applied for renewal. The line of credit is collateralized by assets of one of
the officer/shareholders.
<PAGE>
North American Digicom Corporation
Notes to Financial Statements
December 31, 1997, June 30, 1997 and 1996
Note D---Long Term Obligations
The following is an analysis of the leased equipment under capital leases by
major classes.
<TABLE>
<CAPTION>
December 31, June 30,
1997 1997 1996
----------- ----------- -------
<S> <C> <C> <C>
Telephone equipment $1,695,748 $1,249,545 $ --
Less: Accumulated depreciation 182,785 31,841 --
----------- ----------- -------
$1,512,963 $1,217,704 $ --
========== ========== =======
</TABLE>
Amortization of leased equipment is included in general and administrative
expense.
The following is a schedule by years of future minimum lease payments under
capital leases together with the present value of the net minimum lease
payments:
<TABLE>
<CAPTION>
December 31, June 30,
Due Within 1997 1997 1996
---------- ----------- ------------ ------
<S> <C> <C> <C>
1 year $ 579,650 $ 335,441 $ --
2 years 508,007 334,129 --
3 years 440,263 332,162 --
4 years 420,714 326,257 --
5 years 121,982 244,693 --
---------- ------------ -----
Total minimum lease payments 2,070,616 1,572,682 --
Less: Amounts representing interest 451,590 374,875 --
---------- ------------ -----
Present value of net minimum
lease payments $1,619,026 $ 1,197,807 $ --
========== ============ =====
</TABLE>
<PAGE>
North American Digicom Corporation
Notes to Financial Statements
December 31, 1997, June 30, 1997 and 1996
Note D---Long Term Obligations, continued
(A) Imputed interest rates of 12% were used to calculate the present value of
the leases. (B) Reflected in the balance sheet as:
<TABLE>
<CAPTION>
December 31, June 30,
1997 1997 1996
---------- ---------- --------
<S> <C> <C> <C>
Current maturities of long-term $ 380,646 $ 203,001 $ --
obligations
Long-term obligations, net of
current portion 1,238,380 994,806 --
---------- ---------- --------
Total $1,619,026 $1,197,807 $ --
========== ========== ========
</TABLE>
Note E----Related Party Transactions
The Company has loans from shareholders, directors and officers who have
assisted the company in meeting its financial commitments, as follows:
<TABLE>
<CAPTION>
December 31, June 30,
Loans 1997 1997 1996
----- ---- ---- ----
<S> <C> <C> <C>
Loans $1,290,809 $ 391,350 $55,000
Repayments 595,214 148,763 --
Payables to related parties 641,385 297,587 55,000
Interest expense:
Paid in cash 36,388 3,163 --
Stock issued in lieu 18,546 23,475 --
</TABLE>
<PAGE>
North American Digicom Corporation
Notes to Financial Statements
December 31, 1997, June 30, 1997 and 1996
Note E----Related Party Transactions, continued
The Company has had transactions with other companies related through common
ownership as follows:
<TABLE>
<CAPTION>
December 31,
1997
-------------
<S> <C>
Capital Funding and Financing Group, Inc.:
Purchase of furniture and equipment $ 215,376
Loans 637,500
Repayments 249,772
Balance with KTV at date of acquisition 1,836,966
Receivables from related parties at December 31, 1997 $ 1,233,882
Kidztime TV Management Group, Inc.:
Sale of furniture and equipment $ 88,150
Due for development of promotional program 250,000
Loans 5,000
Repayments 97,500
Balance with KTV at date of acquisition (2,080,000)
Payables to related parties at December 31, 1997 $ (2,323,650)
</TABLE>
The receivable from Capital Funding has been collateralized by former
shareholders of Kidztime TV, Inc., with their stock in the Company.
<PAGE>
North American Digicom Corporation
Notes to Financial Statements
December 31, 1997, June 30, 1997 and 1996
Note E----Related Party Transactions, continued
KTV has eighty affiliates (formed as LLC's) nationwide who are licensed to air
KTV's programming on local cable channels. These affiliates were organized
through efforts of Capital Funding and Financing Group, Inc. and participate in
promotional programs such as the Kidztime Challenge. The license agreement
provides that programming is provided free to the affiliates, but they must pay
for their own local access costs and satellite transmission. KTV contracts for
these services on behalf of these affiliates. As a result, funds are advanced
for the affiliates and advances to KTV occur, as follows:
December 31,
1997
------------
Kidztime Affiliate LLC's
Billings for renewal license fees $440,000
Payments to affiliates 114,914
Charges for satellite transmission 89,160
Amounts received from related parties 559,071
Balances with KTV at December 31, 1997
Receivables from related parties $527,155
Payables to related parties 837,639
Note F----Income Taxes
The Company files a consolidated federal and state income tax returns as
required by the applicable income tax laws.
Net deferred tax assets from continuing operations consist of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1997 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Deferred tax assets
Amortization of goodwill $ 33,571 $ -- $ --
Allowance for bad debts 7,500 -- --
Net operating loss carryforwards 515,345 186,345 2,006
--------- --------- ---------
556,416 186,345 2,006
Valuation allowance (556,416) (186,345) (2,006)
--------- --------- ---------
Net deferred tax asset $ -- $ -- $ --
========= ========= =========
</TABLE>
<PAGE>
North American Digicom Corporation
Notes to Financial Statements
December 31, 1997, June 30, 1997 and 1996
Note F----Income Taxes, continued
The Company recorded a valuation allowance due to the uncertainty of the
Company's ability to realize future benefits of net operating loss carryforwards
or other future tax deductions.
The benefit from income taxes is summarized as follows:
<TABLE>
<CAPTION>
December 31, June 30,
1997 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current $ -- $ -- $ --
Deferred -- -- --
------ ------ ------
$ -- $ -- $ --
====== ====== ======
</TABLE>
The Company has net operating loss carryforwards of approximately $2,063,000
which expire in 2011 through 2013. Acquired subsidiaries have another $352,000
available to apply to their separate taxable earnings through 2011.
Note G----Stockholders' Equity
The Series A Preferred Stock accrues dividends of $9.25 per share per annum.
Dividends are cumulative and payable semi-annually on January 1 and July 1. At
any time on or before January 1, 2000, each share of Preferred Stock is
convertible into 25 shares of common stock. The liquidation preference of
Preferred Stock is the par value of $100 per share plus any unpaid dividends
whether or not declared.
The Company has issued common stock to officers, key employees and consultants
as follows:
<TABLE>
<CAPTION>
December 31, June 30,
1997 1997 1996
---- ---- ----
<S> <C> <C> <C>
Number of shares granted 450,830 12,201,660 5,000,000
Estimated weighted average fair
market value at date of grant $ .782 $ .003 $ .001
Compensation cost recognized $ 352,330 $ 35,245 $ 5,000
</TABLE>
<PAGE>
North American Digicom Corporation
Notes to Financial Statements
December 31, 1997, June 30, 1997 and 1996
Note G----Stockholders' Equity, continued
In addition, common stock has been issued to notes payable holders as incentive
to loan funds to the Company, and to other persons and entities who have acted
as finders in identifying equity investors.
These transactions have been recognized as follows:
<TABLE>
<CAPTION>
December 31, June 30,
1997 1997
---- ----
<S> <C> <C>
Number of shares issued to notes
payable holders 190,000 313,000
Interest expense recognized $ 18,546 $ 23,475
Number of shares issued to finders 815,100 158,000
Stock issuance costs recognized $252,650 $ 15,800
</TABLE>
Note H----Backlog
Backlog represents the amount of revenue the Company expects to realize from
executed long-term contracts for future sales of prepaid calling cards. At
December 31, 1997, the Company had a backlog of $24,500,000 through February
2001, as follows:
Year
1 $19,300,000
2 2,400,000
3 2,400,000
4 400,000
-----------
$24,500,000
===========
Note I----Commitments and Contingencies
Purchase Contracts
The Company has contracts with companies who provide various services. These
contracts provide for minimum purchases over the term of the contract. Internet
services are contracted for at a minimum of $5,845 monthly through September
1999. Long distance services are contracted for at $250,000 minimum monthly
through March 2000.
<PAGE>
North American Digicom Corporation
Notes to Financial Statements
December 31, 1997, June 30, 1997 and 1996
Note I----Commitments and Contingencies, continued
Regulatory Agency Administrative Proceedings
Certain state regulatory agencies have requested administrative hearings against
Capital Funding and Financial Group, Inc. (Capital Funding) and the Company's
subsidiary, Kidztime TV, Inc. (KTV) involving the solicitation and sale of
partnership interests in Kidztime TV territorial affiliates, Regulators have
asserted that the partnership interests were offered and sold as unregistered
securities.
In addition, in late 1997 the Securities and Exchange Commission (SEC) commenced
a formal investigation on the same matter.
The Company and KTV believe that there will not be any material financial impact
on these financial statements as a result of the following:
o KTV sold its licenses to Capital Funding who assigned the licenses to
each Kidztime TV territorial affiliate at the time of formation.
o KTV took no part in the sale of partnership interests.
o The license agreement between KTV and Capital Funding includes an
indemnification provision requiring Capital Funding to defend any
actions and absorb all losses, claims, damages, liabilities and
expenses.
Concentrations of Risk
For the six months ended December 31, 1997, the company had sales of prepaid
cards to one customer representing 58% of prepaid card revenues ($1,584,364).
The Company maintains cash deposits in several banks, and deposits at each bank
are insured by the Federal Deposit Insurance Corporation up to $100,000. At
December 31, 1997, the uninsured portion of the balance at one bank was
approximately $130,000.
<PAGE>
North American Digicom Corporation
Notes to Financial Statements
December 31, 1997, June 30, 1997 and 1996
Note J----Business Segments Information
The Company's operations have been classified into three business segments:
Long-distance telephone services including prepaid calling cards, licensing and
television programming and Internet services.
Summarized financial information by business segment is as follows:
<TABLE>
<CAPTION>
December 31, June 30,
1997 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net sales
Long distance $ 1,844,609 $ 134,309 $ --
Television 610,688 -- --
Internet 12,243 -- --
------------ ------------ ------------
2,467,540 134,309 --
------------ ------------ ------------
Operating income (loss)
Long distance (789,091) (640,445) (8,025)
Television (289,598) -- --
Internet (214,204) -- --
------------ ------------ ------------
(1,292,893) (640,445) (8,025)
------------ ------------ ------------
Total Assets
Long distance 7,967,713 1,522,462 51,975
Television 9,414,338 -- --
Internet 691,420 -- --
------------ ------------ ------------
18,073,471 2,357,678 51,975
------------ ------------ ------------
Depreciation and amortization
Long distance 179,144 34,592 --
Television 106,114 -- --
Internet 126,114 -- --
------------ ------------ ------------
411,285 34,592 --
------------ ------------ ------------
Capital expenditures
Long distance 938,497 1,341,377 47,292
Television 1,000 -- --
Internet 5,436 -- --
------------ ------------ ------------
$ 944,933 $ 1,341,377 $ 7,292
------------ ------------ ------------
</TABLE>
<PAGE>
North American Digicom Corporation
Notes to Financial Statements
December 31, 1997, and June 30, 1997 and 1996
Note K----Financial Developments
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. For the six months ended December
31, 1997, the Company incurred a loss of $1,526,791, and used cash in operations
of $681,182. In addition, the Company at December 31, 1997 had a working capital
deficit of approximately $2,500,000. Significant liquidity demands exist in the
short term including approximately $550,000 to fund anticipated equipment
additions for capacity requirements.
The Company believes through its preferred stock private offering and related
party sources, it can raise sufficient funds to fund operations until they begin
generating cash and successful operations can be attained.
Note L----Subsequent Events
Subsequent to December 31, 1997, proceeds have been received aggregating
$559,000 from the sale of an additional 5,590 shares of Series A preferred
stock.
During January 1998, the Company issued 250,000 shares of common stock pursuant
to an asset purchase agreement. The assets acquired had an estimated fair market
value of $500,000.
On January 26, 1998, the Company agreed to exchange all of its outstanding
shares for a 95% interest in the stock of Ethika Corporation. Upon approval of
the merger by Ethika's shareholders, but no later than March 31, 1998, the
closing will occur. Ethika will then change its name to North American Digicom
Corporation. The merger is intended to be a reverse acquisition.
<PAGE>
North American Digicom Corporation
Notes to Financial Statements
December 31, 1997, and June 30, 1997 and 1996
Note M----Supplemental Cash flow Information
<TABLE>
<CAPTION>
Six months Year Inception
period ended Ended (December 27, 1995)
December 31, June 30, through June 30,
1997 1997 1996
---- ---- ----
<S> <C> <C> <C>
Supplemental Cash Flow Information:
Cash payments for interest $ 16,957 $ 28,973 $ --
Cash refunds for income taxes 90,000 -- --
Supplemental Schedule of Non-Cash
Investing and Financing Activities:
Equipment financed by capital
lease obligations $ 446,203 $1,249,545 $ --
Common stock issued for note
payable conversion -- 35,000 --
Common stock issued for common
stock of business acquired 5,141,781 791,853 --
Repayment of short-term borrowings
by issuance of note -- 88,928 --
</TABLE>
<PAGE>
(4)(2)(5)
Ethika Corporation
Pro Forma Financial Statements
As of December 31, 1997
(Unaudited)
On January 8, 1998, Ethika Corporation ("Corporation") signed a letter of intent
with North American Digicom Corporation ("NADC"), a privately owned company
headquartered in Lakewood, Colorado, to acquire 100% of the outstanding common
stock of NADC. On January 26, 1998, the parties signed an Agreement and Plan of
Reorganization (the "Reorganization Agreement"), to complete the transaction.
The Reorganization Agreement requires that the Corporation's common stock be
reverse split on the basis of one (1) new share for every twenty-two and one
half (22.5) shares presently outstanding with all fractional shares being
rounded up to the next highest multiple of fifty (50) shares. Then the
shareholders of NADC will exchange their common stock for Ethika common stock at
the rate of three (3) shares of Ethika common stock for four (4) shares of NADC
stock. The NADC shareholders will receive approximately 19.6 million post-split
shares of Ethika, which will represent approximately 95% of the then outstanding
shares. The Reorganization Agreement also requires that the Corporation's
Articles of Incorporation be amended to eliminate the par value of the
Corporation's common stock, authorize a class of preferred stock whose rights
and preferences can be set by the Board of Directors and authorize a name change
of the Corporation to North American Digicom Corporation. The Reorganization
Agreement also calls for the Corporation's shareholders to approve a re-domicile
of the Corporation to Colorado. This transaction is a reverse acquisition,
whereby NADC will become the historical reporting company and is treated as the
acquirer for accounting purposes.
Basis of Presentation:
Ethika Corporation's fiscal year end is December 31, while NADC currently has a
fiscal year end of June 30. So that the proforma financial statements closely
reflect the combined operations as prepared from audited financial statements,
we have utilized the audited December 31, 1997 balance sheets of both Ethika and
NADC to prepare the combined proforma balance sheet. We have utilized Ethika's
audited Statement of Operations for the twelve months ended December 31, 1997
and the NADC Audited Statement of Operations for the six months ended December
31, 1997 to prepare the combined proforma Statement of Operations. Since during
the year ended June 30, 1997, NADC's operations were primarily start up in
nature, recasting of the December 31, 1997, NADC statement of operations to
include prior months was determined to be immaterial to the presentation. The
NADC audited statement of operations for the twelve months ended June 30, 1997
recorded sales of $134,309 and a net loss of $734,181.
Purchase Price Consideration:
APB 16, paragraph 70 state in part "... that presumptive evidence of the
acquiring corporation combinations effected by an exchange of stock is obtained
by identifying the former common stockholder interests of a combining company
which ether retain or receive the larger portion of the voting rights in the
combined corporation. That corporation should be treated as the acquirer unless
other evidence clearly indicates that another corporation is the acquirer..."
(SEC 4220.52)
<PAGE>
SEC 4220.52 continues, "Consideration in a Reverse Acquisition is determined no
differently than in a normal acquisition, (i.e., fair value of stock issued or
the fair value of assets received and liabilities assumed, whichever is more
indicative of the accounting acquirer. However, in a Reverse Acquisition the
stock issued goes to the accounting acquirer (NADC). Accordingly, since the
accounting is the reverse of normal, it is the fair market value of issuer's net
assets depending on whether the stock is trading in excess (less than) book
value respectively."
Where the issuer is public, cost would normally be based on the aggregate fair
market value of the issuer's stock outstanding at date of acquisition. Such cost
would be allocated to the fair market value of net assets acquired and any
resultant goodwill would be recognized. Since the Corporation became delisted
from NASDAQ on February 13, 1998, and is currently being traded in the "pink
sheets", it is appropriate to use the net asset value $1,701,091 of Ethika at
December 31, 1997 as the purchase price for this transaction and in preparing
all of the proforma financial statements. At February 13, 1998, the total market
capitalization was $2.84 million and the market value of public float was $2.15
million.
Proforma earnings per share has been calculated as though the 22.5 reverse split
and the 4 for 3 exchange of NADC stock for Ethika stock occurred at January 1,
1997.
<PAGE>
<TABLE>
<CAPTION>
Ethika Corporation
Pro Forma worksheet
As of December 31, 1997
Unaudited
------------------------------- Combined
DESCRIPTION Audited Audited Adjustments Unaudited
Ethika NAD Dr. Cr. Pro Forma
------ --- --- --- ---------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents 535,651 250,538 - 786,189
Marketable security 549,281 549,281
Accounts receivable, net 6,200,784 6,200,784
Receivables from related parties 1,761,037 1,761,037
Lease receivable 112,763 112,763
Prepaid and Other assets - 1,039,276 1,039,276
Net assets held for sale 739,545 739,545
----------- ----------- ---------- ----------- -----------
Total Current Assets 1,937,240 9,251,635 - - 11,188,875
Property, plant and equipment- net 45,097 2,160,894 2,205,991
Other Assets:
Software development costs 56,146 56,146
-
Deferred Income Tax -
Goodwill 6,604,796 6,604,796
Lease receivable, non-current 166,746 166,746
----------- ----------- ---------- ----------- -----------
Total Assets 2,149,083 18,073,471 - - 20,222,554
=========== =========== ========== =========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable and accrued expenses (367,992) (1,493,524) (1,861,516)
Accrued expenses (221,834) (221,834)
Payable to related parties - (3,802,674) (3,802,674)
Notes payable (LOC) - (49,900) (49,900)
Deferred revenue (5,823,983) (5,823,983)
Current portio of Long-term debt - (380,646) (380,646)
Accrued loss on discontinued operations (80,000) (80,000)
----------- ----------- ---------- ----------- -----------
Total current liabilities (447,992) (11,772,561) - - (12,220,553)
Notes payable (1,242,938) (1,242,938)
----------- ----------- ---------- ----------- -----------
Total liabilities (447,992) (13,015,499) - - (13,463,491)
----------- ----------- ---------- ----------- -----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Ethika Corporation
Pro Forma worksheet
As of December 31, 1997
Unaudited
(continued)
------------------------------- Combined
DESCRIPTION Audited Audited Adjustments Unaudited
Ethika NAD Dr. Cr. Pro Forma
------ --- --- --- ---------
<S> <C> <C> <C> <C> <C>
Shareholder's Equity:
Common Stock (20,361,458) (6,891,969) 20,361,458 (1,701,091) (8,593,060)
Preferred stock (435,000) (435,000)
Discount on Common Stock 8,123,528 (8,123,528) -
Treasury Stock 1,112 (1,112) -
Accumulated deficits 10,535,727 2,268,997 (10,535,727) 2,268,997
----------- ----------- ---------- ----------- -----------
(1,701,091) (5,057,972) 20,361,458 (20,361,458) (6,759,063)
----------- ----------- ---------- ----------- -----------
Total liabilities and equity (2,149,083) (18,073,471) 20,361,458 (20,361,458) (20,222,554)
=========== =========== ========== =========== ===========
</TABLE>
See accompaning notes to Pro Forma Financial Statements
<PAGE>
(4)(2)(6)
MEMORANDUM OF UNDERSTANDING
The various litigants in the Complain styled Eur. Am. Et al. vs. Ethika et al.,
Cause No. 3:96CV688LN have agreed that it is in the best interests of all
parties to settle all litigation, present and future, and to work harmoniously
together to ensure the future of Ethika and any company with which it merges,
purchases, or otherwise creates an association. Therefore, the litigant agrees
as follows:
1. To withdraw and dismiss any present or future lawsuits among the parties,
and to execute the Agreement and Release which follows.
2. In recognition of the agreement to work together in the best interest of
Ethika, as witnessed by the dismissal of the subject suit and covenants to
refrain from future litigation, the Plaintiffs or any one of them, or such
entity chosen by them, shall within three business days purchase not less
than seven million shares of Ethika stock, at 9 cents per share for cash or
marketable securities acceptable to Nasdaq.
3. To work together to maintain the Nasdaq listing of Ethika, or of any
company formed with Ethika.
4. All parties realize that time is of the essence, with a meting with Nasdaq
already scheduled for December 15, 1997, relative to maintaining the Nasdaq
listing of Ethika.
5. This agreement shall be signed by all parties, including a majority of the
present Board Members of Ethika, and entities, such as Rial Equity Group or
Arjon Enterprises controlled by any of the Plaintiffs, either by a Power of
Attorney or other similar authority, and holding Ethika stock.
<PAGE>
AGREEMENT AND RELEASE
THIS AGREEMENT AND RELEASE ("Agreement") made and entered into as of this the
12th day of December , 1997, by and among three groups of individuals and
corporations, the first of which is hereinafter referred to collectively as "The
Peeper Group" and is composed of (I) EUR AM B.V., (ii) RICHARD JONES, (iii)
ALFRED PEEPER, (iv) AMARANTE FINANCIAL, S.A., (v) ARGERE HOLDINGS, S.A., (vi)
LAROCHE HOLDINGS, S.A., and (vii) LASALLE INVESTMENT LTD.; the second of which
groups of corporation and individuals is hereinafter collectively referred to as
"The PMM Group" and is composed of (I) PHOENIX MEDICAL MANAGEMENT, INC., (ii)
LARRY NELSON, and (iii) AUGUST J. RANTZ, III; and the third of which groups is
composed of ETHIKA CORPORATION ("Ethika") and S. LEROY REED, JR. ("Reed").
RECITALS
1. The Peeper Group has heretofore filed its Complaint and First
Amended Complaint in Civil Action No. 3:96CV688LN (now known as Civil Action No.
3:96CV688WN) on the docket of the United States District Court for the Southern
District of Mississippi, Jackson Division ("The Litigation"), in which certain
claims were set forth against Ethika and Reed.
2. Ethika filed its Counterclaim and First Amended Counterclaim against
the Peeper Group, the PMM Group, and Alanco Environmental Resources Corporation
("Alanco"), wherein certain claims were set forth.
3. Ethika has heretofore reached a settlement with Alanco, and Alanco
has been dismissed as a party to the Litigation.
4. The Peeper Group, Ethika, and Reed have resolved the litigation and
wish to reduce said Agreement to writing.
5. The PMM Group joins the Peeper Group, Ethika, and Reed in desiring
to see the Litigation resolved short of trial.
COVENANTS
NOW, THEREFORE, FOR AND IN CONSIDERATION of the mutual promises, undertaking and
covenants herein contained, and other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the parties agree,
covenant, and stipulate as follows:
1. Ethika will call a special meeting of its shareholders for the
purpose of electing directors of the corporation and voting on any other
proposals to be brought before the meeting. The referenced special shareholders
meeting will be held at the earliest date permitted after execution of the
Agreement and Release and Memorandum of Understanding, subject to Sec
regulations, but no later than February 20, 1998. This meeting shall fill the
purpose of the letters received by Ethika, requesting a special shareholders
meeting.
2. The Complaint, First Amended Complaint, Counterclaim, and First
Amended Counterclaim shall be dismissed with prejudiced, and the Peeper Group,
Ethika, Reed, and the PMM Group hereby authorize their attorneys of record to
take any and all actions reasonably necessary to accomplish such dismissal
pursuant to an in accordance with the terms of this Agreement. Each group shall
bear its own costs and attorney's fees. Each group, together with the officers,
shareholders, directors, and employees of the corporations in each group, and
the heirs, and representatives of the individuals in each group, hereby
<PAGE>
releases, acquits and discharges the other groups (and the officers, directors,
shareholders, employees, agents and attorneys of the corporations in each group,
and the employees, agents and attorneys of the individuals in each group) from
any and all present or future claims, demands, actions or causes of action for
all wrongful acts alleged or which could have been alleged in The Litigation and
for any conduct, statement, or writing related to or connected directly or
indirectly with the filing of any Complaint, Amended Complaint, Answer,
Counterclaim, Amended Counterclaim, or other pleading in the initiation,
prosecution or defenses of The Litigation.
The foregoing notwithstanding the parties acknowledge and agree that no
action shall be taken relative to any legal proceedings against Universal
Management Services, a revoked Nevada Corporation.
3. In the event a board of directors is elected at the referenced
special shareholders meeting friendly to The Peeper Group, then, and in such
event, this Agreement shall be ratified by the said board.
4. Each party represents and warrants that it/he is acting voluntarily
and of he/its free will, and that in executing this Agreement and Memorandum of
Understanding attached hereto and incorporated by reference hereby, he/it was
not induced by any representation whatsoever other than these stated herein, and
that he/it is in no manner relying upon any promise, warranty, representation or
agreement of any kind whatsoever.
5. This Agreement is to be construed according to the laws of the State
of Mississippi effective this date.
6. This Agreement contains a full and complete understanding of the
parties and may not be modified except in writing and signed by both parties.
7. It is expressly understood, agreed, covenanted and stipulated that
this Agreement constitutes a compromise between the parties of disputed claims
and no covenant imposed hereby or activity pursuant hereto shall be construed as
an admission of liability in the premises, liability being expressly denied by
all parties.
8. There are presently 1,050,000 shares of Ethika stock, being either
held by Ethika, or having been placed in the registry of the Court, which, after
execution of this Agreement, will be returned to the Plaintiffs, after first
being reissued according to Schedule A, attached.
9. There are presently certain other shares of Ethika in the possession
of Alfred Peeper, which need to be reissued in other names. Ethika will assist
Alfred Peeper is having these shares reissued in the proper form and correctly
registered.
10. After execution of the Memorandum of Understanding and the
Agreement and Release, not less than three members of the present Board will
resign within 3 days, or at a date thereafter that is agreeable to the
Plaintiff. Upon such resignation, the Ethika Board shall appoint Dennis
Brovarone, Russell Burk, and Dennis Nielsen to serve the unexpired terms in
accordance with the corporation's bylaws.
11. The terms of this Agreement are contractual and not mere recitals.
12. This Agreement may not be modified except in writing signed by all
parties.
<PAGE>
13. This Agreement may be executed in counterparts.
WITNESS THE SIGNATURE OF the corporation of Eur Am B.V., by its duly authorized
officer, this the ___ day of December, 1997.
EUR AM B.V.
/s/
Its:
WITNESS THE SIGNATURE OF Richard Jones, this the ___ day of December, 1997.
RICHARD JONES
- -------------
/s/ Richard Jones
WITNESS THE SIGNATURE OF Alfred Peeper, this the ___ day of December, 1997.
ALFRED PEEPER
- -------------
/s/ Alfred Peeper
WITNESS THE SIGNATURE OF the corporation of Amarante Financial, S.A.., by its
duly authorized officer, this the ___ day of December, 1997.
AMARANTE FINANCIAL, SA.
/s/
Its:
WITNESS THE SIGNATURE OF the corporation of Argere Holding, S.A., by its duly
authorized officer, this the ___ day of December, 1997.
ARGERE HOLDING, S.A.
/s/
Its:
WITNESS THE SIGNATURE OF the corporation of LaRoche Holding, S.A.., by its duly
authorized officer, this the ___ day of December, 1997.
LAROCHE HOLDING, S.A.
/s/
Its:
WITNESS THE SIGNATURE OF the corporation of LaSalle Investment Ltd.., by its
duly authorized officer, this the ___ day of December, 1997.
LASALLE INVESTMENT LTD.
/s/
Its:
WITNESS THE SIGNATURE OF the corporation of Phoenix Medical Management, Inc., by
its duly authorized officer, this the ___ day of December, 1997.
PHOENIX MEDICAL MANAGEMENT, INC.
/s/
Its:
<PAGE>
WITNESS THE SIGNATURE OF Larry Nelson, this the ___ day of December, 1997.
LARRY NELSON
/s/ Larry Nelson
WITNESS THE SIGNATURE OF August J. Rantz, III, this the ___ day of December,
1997.
AUGUST J. RANTZ, III
/s/ August J. Rantz, III
WITNESS THE SIGNATURE OF the corporation of Ethika Corporation, by its duly
authorized officer, this the ___ day of December, 1997.
ETHIKA CORPORATION
/s/ G. Thomas Reed
Its: President
WITNESS THE SIGNATURE OF S. Leroy Reed, Jr., this the ___ day of December, 1997.
S. LEROY REED, Jr.
/s/ S. Leroy Reed, Jr.
WITNESS THE SIGNATURE OF the corporation of Rial., by its duly authorized
officer, this the ___ day of December, 1997.
RIAL
/s/
Its:
WITNESS THE SIGNATURE OF the corporation of Arjon, by its duly authorized
officer, this the ___ day of December, 1997.
ARJON
/s/
Its:
Witness the signatures of the Board of Directors of Ethika Corporation to the
Memorandum of Understanding and the Agreement and Release between Ethika and the
"Peeper Group."
/s/ Marcia C. Cohen /s/ S. Leroy Reed, Jr.
- ------------------- ----------------------
Marcia C. Cohen, Director S. Leroy Reed, Jr. Chairman
/s/ Robert B. Neal /s/ Anthony J. Spuria
- ------------------ ----------------------
Robert B. Neal, Director Anthony J. Spuria, Director
/s/ Joseph D. Pegram, Esq. /s/ William D Stubblefield
- -------------------------- ---------------------------
Joseph D. Pegram, Esq., Director William D. Stubblefield, Director
/s/ Herbert G. Rogers, III
- --------------------------
Herbert G. Rogers, III, Director
<PAGE>
(4)(2)(7)
PURCHASE AGREEMENT
BETWEEN
Ethika Corporation
AND
TEXT RETRIEVAL SYSTEMS, INC.
AND
TRS ACQUISITION CORP.
Dated as of February 10, 1998
<PAGE>
SCHEDULES
1. All Required Disclosures of Sellers.
2. All Required Disclosures of Buyer.
3. TRS Assets & Contracts Conveyed to Buyer Except As Noted.
4. TRS Liabilities Assumed by Buyer.
5. Material Contracts Conveyed With Stock of TRS Purchased by Buyer.
<PAGE>
PURCHASE AGREEMENT
This PURCHASE AGREEMENT (the "Agreement"), dated as of February 9,
1998, is made between ETHIKA CORPORATION, a Mississippi corporation ("ETHIKA"),
its wholly owned subsidiary, Text Retrieval Systems, Inc., a Florida corporation
("TRS") hereinafter collectively referred to as "Sellers", and individually as
"Ethika" and "TRS", and TRS Acquisition Corp., a Florida Corporation, or its
assigns, hereinafter referred to as "Buyer".
INTRODUCTION
Sellers desire to sell all of the assets of TRS and Buyer desires to
purchase such assets, with the exception of its contract with the American
Medical Association and any accounts receivable or expenses relating thereto, on
the terms and conditions set forth in this Agreement. After Closing Ethika has
agreed that it or its successors or assigns shall retain and be exclusively
responsible for all liabilities of TRS not disclosed on Schedule 1 and assumed
by Buyer on Schedule 4; provided, however that Ethika's responsibility therefore
will be governed by the conditions set forth in Article XI.
NOW, THEREFORE, in consideration of the foregoing and the
representations, warranties and agreements herein contained, the parties agree
as follows:
Article I
Definitions
The following terms, as used herein, have the following meanings:
"Closing" has the meaning set forth in Article X.
"Closing Date" has the meaning se2t forth in Article X.
"Equipment" has the meaning set forth in Article II.1.
"TRS" has the meaning set forth in the Introduction.
"Encumbrances" has the meaning set forth in Article III.14.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Excluded Assets" has the meaning set forth on Schedule 3.
"Intellectual Property" has the meaning set forth in Article II.1.
"Interim TRS Financial Statements" has the meaning set forth in Section
III.11.
"Internal Revenue Code" means the Internal Revenue Code of 1986, as
amended.
"Inventory" has the meaning set forth in Article II.1.
"Legal Action" has the meaning set forth in Article XI.2(ii).
"Licenses and Permits" has the meaning set forth in Article II.1.
<PAGE>
"Material Contracts" has the meaning set forth in Article III.16.
"Materially or Material Adverse" means involving an amount per occurrence
in excess of $2,000.
"Person" means an individual, a corporation, a partnership, an association,
a labor union, a trust or any other entity or organization, including a
government, a governmental body, a political subdivision or an agency of
instrumentality thereof.
"Purchased Assets" has the meaning set forth in Article II.1.
"Purchase Price" has the meaning set forth in Article II.4.
"Sellers Disclosure Schedule" means the disclosure schedule delivered by
Sellers to Buyer simultaneously with the execution of this Agreement, which
schedule contains certain information constituting an integral part of this
Agreement attached hereto as Schedule 1.
"Survival Date" has the meaning set forth in Article XI.4.
"Transferred Employees" has the meaning set forth in Article VI.
<PAGE>
ARTICLE II
PURCHASE AND SALE OF ASSETS
II.1. Purchase and Sale of Assets. At the Closing, Sellers agree to
sell to Buyer, and Buyer agrees to purchase from Sellers, all of the assets,
properties and rights of Sellers necessary to conduct, or used by Sellers in the
conduct of, the business of TRS (the "Purchased Assets") including, without
limitation, (i) the "Equipment" which includes machinery, furniture, vehicles,
tools, supplies and other miscellaneous tangible property as set forth on
Schedule 3 (ii) the "Inventory" which includes raw materials, work in process
and finished goods, (iii) the "Licenses and Permits" which are licenses and
permits issued by governmental agencies that are required to operate the
business of TRS and are assignable, (iv) the "Intellectual Property" which
includes tradenames, trademarks, service marks, proprietary software set forth
on Schedule 3, patents, copyrights and proprietary processes and formulae, (v)
the rights of Sellers under all contracts and leases provided that Buyer assumes
the related liabilities pertaining thereto as set forth in the attached
Schedules, (vi) the books and records, whether or not computerized, (vii) all
prepaid expenses and (viii) all other tangible and intangible assets which
historically have been reflected in the records of Sellers as assets of TRS and
are not set forth on Schedule 3.
II.2Excluded Assets. Schedule 3 notes all TRS assets not conveyed from
Sellers to Buyer and they are excluded from transfer under this Agreement.
II.3Assumed Liabilities. At the Closing, Buyer will assume the liabilities
and obligations of Sellers set forth on Schedule 4.
II.4Purchase Price. The amounts to be paid for the Purchased Assets ("the
Purchase Price") buyer will be $150,000, payable as follows:
(a). At the Closing, Buyer will pay Sellers $150,000, of which $40,000
shall be placed in an interest bearing depository account at the Northern Trust
Bank of Chicago for 18 months, subject to withdrawal only to pay claims made
against Buyer or an assignee or affiliate of Buyer which constitute a breach of
Sellers representations and warranties or other undertakings pursuant to this
Agreement. Buyer and Dennis Brovarone, as agent for Seller shall have joint
signature authority over such account for any disbursement over $2,000. Buyer
can sign and disburse amounts up to $2,000 per claim. Regardless of amount of
disbursement, funds from this account will only be used to pay such claims in
accordance with the terms of Article XI. After the expiration of said 18-month
period, Sellers shall be paid all funds remaining in said account including all
accrued interest.
(b). In addition, Buyer shall pay the continuing payments described in
Article III.
<PAGE>
Article III
Continuing Payments
III.1 By September 30 of each year, beginning with the twelve month
period comprised of July 1, 1998 to June 30, 1999 (the "Annual Payment Period")
and ending on June 30, 2008, Buyer shall pay Ethika Corporation or its
successors or assigns an annual amount equal to $10 per subscriber who paid all
or a portion of its subscription invoices in the prior Annual Payment Period and
who purchased or renewed a subscription to HR/Comply after the Closing Date and
was solicited by Buyer due to the fact that he or she was a member of the
Society for Human Resource Management ("SHRM"). The ten-year period from July 1,
1998 to June 30, 2008 is hereinafter referred to as the "Subsequent Payment
Period."
The intention of the preceding qualification as to SHRM membership at
the time of subscription purchase is to exclude sales to corporations or other
entities which are not the result of sales made pursuant to leads generated
through the contract with the Society for Human Resource Management being
purchased by Buyer pursuant to this Agreement, including any renewals,
extensions or amendments of the agreement with SHRM made during the Subsequent
Payment Period. For example, a blanket sale to a large corporation originating
from a sales presentation made by a sales agent of Buyer which did not originate
from a solicitation using information provided from SHRM and having nothing to
do with the customer's SHRM membership (it should be noted that only
individuals, not entities can be SHRM members) would not be included as a
subscription subject to continuing payments.
Buyer shall pay a pro rata amount of such $10 for each such subscriber
who paid only a portion of the applicable year's total subscription invoices in
any given Annual Payment Period during the Subsequent Payment Period.
III.2 Limitation on Continuing Payments. When the cumulative paid
amount called for in III.1 above reaches $1,500,000, Buyer's obligations to make
such payments shall terminate.
III.3 Right to Offset. Any payments required pursuant to these Articles
II and III shall be offset by any unpaid indemnities due Buyer from Seller
resulting from a breach of any of Sellers obligations or representations or
warranties made pursuant hereto to the extent that the cost to cure any such
breach has not been paid from the aforementioned $40,000 trust account described
in Article II.4 above.
III.4 Right to Audit. Buyer agrees to keep records showing gross sales
and collections of all sales in sufficient detail to enable the payments
required hereunder to be determined, and Buyer further agrees to permit its
books and records with respect to such gross sales and collections to be
examined once per calendar year, upon forty eight (48) hours written notice, to
the extent necessary to verify the correctness of the payments made to Sellers
for the prior Annual Payment Period.
Such examination will be made during normal business hours at Buyer's
place of business at the expense of Sellers by an auditor appointed by Sellers
(and who may be an employee or agent of seller or an independent accountant, at
Seller's choice) who shall report to Sellers on the amount of payments owed for
the period under audit.
<PAGE>
Any deficiency in the amount paid by Buyer versus the audited payments
required of Buyer as determined by such audit shall be paid by Buyer with 10%
simple interest on the amount underpaid within thirty (30) days of receipt by
Buyer of a copy of the auditor's report and a notice from Seller of the
additional amounts due, unless disputed by Buyer.
If Buyer does dispute the auditor's report, Buyer shall provide to
Seller a detailed justification of its dispute. If Seller and Seller's auditor
still feel an underpayment has occurred and further work is required to
reconcile the disputed amount, Seller shall appoint an independent auditor
different from the prior auditor to re-examine the books and records of Buyer,
and report to Seller the results of this second audit, which shall be
independent of the first audit.
If Seller, based upon the results of both audits feels there is still
an amount underpaid and due from Buyer, then Seller shall notify Buyer within 30
days of the date of the independent auditor's report of the amount underpaid.
Buyer shall remit the audited deficiency to Sellers within 30 days from
Buyer's receipt of said notice of the results of such audits plus 10% simple
interest on the deficiency unless Buyer still disputes the auditor's reports. If
so, Buyer shall provide to Seller a detailed justification for its dispute.
Buyer shall then retain its own independent auditor which shall audit the amount
due versus the amount paid for the applicable period, and the result of Buyer's
auditor's findings shall be averaged with the average result of the Seller's
auditors.
Buyer shall remit the averaged deficiency to Sellers within 30 days
from Buyer's receipt of notice of the results of such averaged deficiency plus
10% simple interest on the deficiency. If the amount ultimately determined due
to Sellers (exclusive of interest) is greater than 10% of the amount previously
paid to Sellers, then Buyer shall pay for the costs of the Seller's audit, and
if there is a second audit and it does not confirm the validity of Buyer's
dispute, Buyer shall pay the costs of the second audit.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SELLERS
Sellers represent and warrant to Buyer the following:
IV.1 Organization; Qualification. Sellers are corporations duly
organized, validly existing and in good standing under the laws of their
respective states of incorporation and have corporate power and authority to own
the assets and carry on the business of TRS as it is presently being conducted.
Sellers are duly qualified and in good standing to do business in each
jurisdiction in which the business of TRS makes such qualification necessary
except in those jurisdictions where the failure to be duly qualified and in good
standing does not and cannot reasonably be expected to have, individually or in
the aggregate, a material adverse effect on the Purchased Assets or the business
of TRS.
IV.2 Authority Relative to this Agreement. Sellers have corporate power
and authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery by Sellers of this
Agreement, and the consummation by them of the transactions contemplated hereby,
have been duly authorized by the Board of Directors of Sellers and no other
corporate proceedings on the part of Sellers are necessary with respect thereto.
This Agreement has been duly executed and delivered by Sellers and this
Agreement will constitute valid and binding obligations of Sellers.
<PAGE>
IV.3 No Violation. The execution and delivery by Sellers of this
Agreement does not, and the consummation of the transactions contemplated
hereby, will not (i) violate or result in a breach of any provision of the
Certificate of Incorporation or Bylaws of Sellers, (ii) result in a default, or
give rise to any right of termination, modification or acceleration, or the
imposition of an Encumbrance on any of the Purchased Assets, under the terms or
provisions of any agreement or other instrument or obligation to which Sellers
are a party or by which Sellers, any of the Purchased Assets or the business of
TRS may be bound, or (iii) violate any law or regulation, or any judgment, order
or decree of any court, governmental body, commission, agency or arbitrator
applicable to Sellers, any of the Purchased Assets or the business of TRS (other
than applicable "bulk sales" laws), excluding from the foregoing clauses (ii)
and (iii) such defaults and violations which do not and cannot reasonably be
expected to have a material adverse effect on the Purchased Assets or the
business of TRS.
IV.4 Consents and Approvals. Except as set forth in the attached
Schedules and subject to Paragraph VII.1 hereof, is no requirement applicable to
Sellers to make any filing with, or to obtain any consent or approval from any
Person, as a condition to the consummation of the transactions contemplated by
this Agreement (other than as may be required by any applicable "bulk sales"
laws).
IV.5 Compliance with Laws. Sellers have operated the business of TRS in
compliance with all laws and regulations, federal, state or local applicable to
the Purchased Assets or the business of TRS, including, without limitation,
those related to (i) civil rights, (ii) zoning and building codes, (iii) public
health and safety, (iv) worker health and safety, (v) labor, employment and
discrimination in employment and (vi) environmental matters, except for such
violations thereof as do not and cannot reasonably be expected to have a
material adverse effect on the Purchased Assets or the business of TRS.
IV.6 Licenses and Permits. Sellers have and have complied with all
Licenses and Permits and Environmental Permits required to conduct the business
of TRS as it is presently being conducted.
IV.7 Financial Statements. Sellers have previously furnished Buyer with
true and complete copies of unaudited financial statements for TRS for the
twelve month period ending December 31, 1997 (the "TRS Financial Statements")
and interim statements for the period from January 1, 1998 to January 31, 1998
(the "Interim TRS Financial Statements") in conformity with what was given by
Sellers to their auditors with respect to TRS for the year ending December 31,
1997.
Auditing adjustments have yet to be made, so Buyer understands that
said financial statements have not been "closed" due to the necessity of journal
entries that will have to be made by Sellers to reflect adjustments for year-end
closing purposes of the consolidated financial statements of Ethika and its
subsidiaries. Buyer agrees that any inaccuracy due to the absence of such
year-end journal entries shall not constitute a breach of any representation or
warranty hereunder, provided that they do not involve the failure to disclose
any material liability of TRS incurred in the normal course of business or any
asset known to Sellers rightfully belonging to TRS which should have been
conveyed to Buyer as the result of the closing of this Agreement.
<PAGE>
IV.8 Absence of Change. Since December 31, 1997 there has not been any
change, or development involving a prospective change, including, without
limitation, any damage, destruction or loss (whether or not covered by
insurance), which affects or can reasonably be expected to affect, materially
and adversely, the Purchased Assets or business of TRS, and Sellers have not
entered into any contract which can reasonably be expected to have any such
effect. Sellers have continued to operate TRS in accord with prior and normal
business practices, and have not used cash from TRS for purposes other than the
payment of TRS expenses incurred in the normal conduct of its business.
IV.9 Undisclosed Liabilities. Except as set forth in the attached
Schedules since December 31, 1997, Sellers have not incurred, with respect to
the Purchased Assets or the operations of the business of the TRS, any
liabilities which are not reflected in the Interim TRS Financial Statements,
other than those which were incurred subsequent to such date in the ordinary
course of business and consistent with past practices and which have not and
cannot reasonably be expected to have a material adverse effect on the Purchased
Assets or the business of the TRS.
IV.10 Labor and Employment Matters. The attached Schedule sets forth a
complete and correct list of each collective bargaining agreement and each
employment agreement covering employees of TRS. There are no controversies,
claims or grievances pending, or, to the knowledge of Sellers, threatened
between Sellers and any employees of TRS, or labor unions representing employees
of Sellers, which have, or can reasonably be expected to have, directly or
indirectly, a material adverse effect on the Purchased Assets or the business of
TRS. Copies of each of the aforementioned agreements have been delivered to
Buyer.
IV.11 Litigation. Except as set forth in the Schedules there are no
actions, suits, claims, investigations or proceedings pending or, to the
knowledge of Sellers, threatened against Sellers, before any court, governmental
body, commission, agency or arbitrator, which have or can reasonably be expected
to have a material adverse effect on the Purchased Assets or the business of TRS
which seek to limit, in any manner, the right of Buyer to control the business
of TRS after the consummation of the transactions contemplated by this
Agreement. Furthermore, there are no judgments, orders or decrees of any such
court, governmental body, commission, agency or arbitrator which have or can
reasonably be expected to have any such effect.
IV.12 Titles to Properties. Sellers hold good and marketable title to
all of the Purchased Assets, free and clear of liens, mortgages, changes,
security interests or other defects in title ("Encumbrances"), except for such
imperfections of title which are of the kind normally found relating to such
assets and, in the aggregate, cannot be expected to affect, materially and
adversely, the Purchased Assets or the business of the Buyer in its utilization
of the Assets. All assets held or utilized by Sellers and conveyed to Buyer
which are held under lease by Sellers are held under valid, enforceable and
assignable leases, the terms of which shall be unchanged upon assignment.
IV.13 Material Contracts. Schedule 5 contains a list of all contracts,
leases and other obligations of Sellers relating to the business of TRS which
involve amounts greater than $1,000 or which cannot be terminated on 30 days'
written notice, all of which are referred to collectively as "Material
Contracts." Sellers have complied in all material respects with all of its
obligations under all of the Material Contracts and, subject to Paragraph VI.1
hereof, to the knowledge of Sellers, no event has occurred or condition exists
which constitutes or can reasonably be expected to constitute a breach of any
such contract by any party thereto.
<PAGE>
IV.14 Intellectual Property. Schedule 1 sets forth a complete list of
all of the Intellectual Property Sellers own or have the right to use in the
conduct of the business of the TRS. Sellers are not infringing upon any rights
of any third party and, to the knowledge of Sellers no third party is infringing
upon the rights of Sellers in the Intellectual Property.
IV.15 Sufficiency of Purchased Assets. The Purchased Assets set forth
on Schedule 3 include all of the material assets of Sellers used by Sellers in
the conduct of the business of TRS as it is presently being conducted.
IV.16 Employee Benefit Plans.
(a) The attached Schedule 1 lists all of the employee benefit plans and
programs including, without limitation, all retirement, savings and other
pension plans, all health, severance, insurance, disability and other employee
welfare plans and all incentive, unfunded deferred compensation, vacation and
other plans that are maintained by Sellers with respect to employees of TRS or
to which Sellers have contributed or are now contributing on behalf of the
employees of the TRS.
(b) As to each such plan, Sellers have complied, in all material
respects, with all applicable laws and regulations, including specifically the
applicable provisions of ERISA and the qualification provisions of the Internal
Revenue Code.
IV.17 Full Disclosure. None of the representations and warranties made
in this Article contains any untrue statement of a material fact or omits to
state a material fact necessary to make the statements therein not misleading.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to Sellers the following:
V.1 Organization; Authority. Buyer is a Florida Corporation, duly
organized, validly existing and in good standing under the laws of the State of
Florida. Buyer has full power and authority to execute and deliver this
Agreement and to consummate the transactions contemplated hereby and thereby.
The execution and delivery by Buyer of this Agreement and the consummation of
the transactions contemplated hereby have been duly authorized and no other
proceedings on the part of Buyer are necessary with respect thereto. This
Agreement has been duly executed and delivered by Buyer, and this Agreement,
when executed and delivered by Buyer, will constitute valid and binding
obligations of Buyer.
V.2 Consents and Approvals. There is no requirement applicable to Buyer
to make any filing with, or to obtain any consent or approval of any Person as a
condition to the consummation of the transactions contemplated by this
Agreement.
V.3 No Violation. The execution and delivery by Buyer of this Agreement
does not and will not violate any law or regulation, or judgment, order or
decree of any court, governmental body, commission, agency or arbitrator
applicable to Buyer.
<PAGE>
ARTICLE VI
ADDITIONAL AGREEMENTS
VI.1 Conduct of Business of TRS. From the date hereof until the
Closing, Sellers will conduct the business of TRS only in the ordinary and usual
course and in a manner consistent with past practices and will notify Buyer of
any emergency or material change in the normal conduct of the business of TRS or
of the initiation or threat of any litigation against, or investigation of
Sellers which relates to the Purchased Assets or the business of TRS.
(i) Contracts With SHRM, SSF&G and AIG. Sellers shall immediately
notify Buyer of any termination or threatened termination of any contract
between TRS and either the Society for Human Resource Management ("SHRM"), the
law firm of Seyfarth, Shaw, Fairweather & Geraldson ("SSF&G") or the American
International Group ("AIG"). Each of the aforesaid agreements is a Material
Contract. Should any such termination occur or be threatened prior to Closing
and remain uncured to Buyer's satisfaction, this Agreement shall automatically
and immediately terminate and become null and void and neither party shall have
any obligation to the other whatsoever.
(ii) Purchase of TRS Stock. Buyer understands that the agreements noted
above may not be assignable without the consent of the other parties thereto.
Buyer has notified SHRM, SSF&G and AIG of its purchase of the assets of TRS,
including the above contracts and each has verbally agreed to the transfer of
the contracts to Buyer. However, there is insufficient time for Seller and Buyer
to obtain written confirmation from SHRM, SSF&G and AIG prior to Closing.
Therefore, to assure that Seller commits no innocent breach of this Agreement
due to any failure to obtain written approval of the assignment of the above
contracts, Buyer has agreed to purchase all of the outstanding stock of TRS from
Sellers at the Closing for $10.
The stock of TRS is being conveyed to Buyer exclusively for this
limited purpose, and shall not be construed as implying assumption of any
liabilities on Buyer's part beyond those set forth on Schedule 4. Therefore,
Ethika shall remain liable to Buyer for the consequences of Sellers'
undertakings hereunder, including the accuracy all representations and
warranties set forth herein as if transfer of TRS's stock never occurred.
VI.2 Forbearances by Sellers. From the date hereof until the Closing,
Sellers will not, without the written consent of Buyer, (i) sell, lease,
transfer or encumber any of the Purchased Assets except in the ordinary course
of business, (ii) amend, cancel or assign any Material Contract, (iii) enter
into any Material Contract, (iv) make any commitments for capital expenditures
related to TRS other than in the normal course of business, or (v) increase in
any manner, directly or indirectly, the compensation of any employee or former
employee of TRS.
VI.3 Bulk Sales Laws. Notwithstanding any other provision of this
Agreement, Sellers will indemnify and hold harmless Buyer from any and all
claims made by creditors of Sellers relating to any "bulk sales laws" and from
all costs (including reasonable attorney"'s fees) incurred in the defense of any
claims made under such laws.
<PAGE>
VI.4 Investigation of Business and Properties. From the date hereof
until the Closing, Sellers will afford Buyer and its authorized representatives,
including, without limitation, its attorneys, accountants and financial
advisors, full access at all reasonable times to its officers, employees,
properties, contracts and books and records in order to enable Buyer to make a
full investigation of the Purchased Assets and the business of TRS. Sellers will
also furnish Buyer with such financial, operating and other information as Buyer
may reasonably request in making such investigation.
VI.5 Confidentiality.
(a) The information which Buyer acquires about Sellers as a result of
the investigations permitted by this Agreement is termed "Evaluation Material."
Buyer agrees that neither it, nor any of its representatives will (i) use any
such material for any purpose not related to the transactions contemplated by
this Agreement or (ii) disclose any such material to anyone except its
representatives who may need such information to perform their respective duties
and have been informed of its confidential nature and who have agreed to treat
it confidentially. If the transactions contemplated by this Agreement are not
consummated, Buyer agrees that it and its representatives will return any
written Evaluation Material in their possession, or will destroy and will not
retain any such material, any copies thereof or any notes or memoranda made
using such material.
(b) The confidentiality agreement contained herein will terminate upon
the earlier of two years after the date hereof or upon consummation of the
transactions contemplated hereby.
(c) The parties agree that monetary damages alone would not be a
satisfactory remedy for a breach of that portion of the confidentiality
agreement contained herein which relates to Evaluation Material and that if this
confidentiality provision is breached, Sellers are entitled to injunctive relief
as well as monetary damages.
(c) Notwithstanding the foregoing, Buyer and its representatives may
use and disclose Evaluation Material and information obtained from the
Evaluation Material to the extent that (i) they acquired such information on a
non-confidential basis prior to receipt thereof from (ii) such information has
become generally available to the public, or (iii) such information is provided
to the Person using or disclosing it by a Person who obtained such information
other than as a result of a breach of this Agreement. Furthermore, Buyer and its
representatives may disclose such information to the extent that they are
required to do so to comply with a governmental or judicial order or decree, but
upon receiving notice that any such order or decree has been issued or is being
sought, they will promptly notify Sellers and will, at the expense of Sellers,
if Sellers want such information to continue to be treated confidentially,
cooperate with Sellers' efforts to contest the issuance of such order or decree.
VI.6 Subsequent Events. If any event shall occur after the date of this
Agreement and prior to the Closing which, had it occurred prior to the execution
of this Agreement, should have been disclosed by Sellers or Buyer to the other,
in a representation and warranty or otherwise, then, upon the happening of such
event, such party shall promptly make such disclosure.
VI.7 Negotiations with Others. From the date hereof until the Closing,
Sellers will not, directly or indirectly, without the written consent of Buyer,
initiate discussions or engage in negotiations with any Person, other than
Buyer, concerning the sale, other than in the ordinary course of business, of
all or any of the Purchased Assets.
<PAGE>
VI.8 Allocation of Purchase Price. The Purchase Price has been agreed
upon by the parties and the values assigned to the various assets which
constitute the Purchased Assets are listed in the Schedules.
VI.9 Taxes and Recording Fees. All sales and transfer taxes and
recording and filing fees incurred in connection with the acquisition of the
Purchased Assets will be borne by Buyer.
VI.10 Proration of Rent, Utility Charges, etc.. Any installment of rent
due with respect to leases of real or personal property, and any utility or
similar charge payable with respect to any of the Purchased Assets for the
period in which the Closing occurs, shall be prorated between the parties on the
basis of the actual number of days applicable to pre-Closing and post-Closing
occupancy or use.
VI.11 Expenses. Except as otherwise provided in this Agreement, all
costs and expenses incurred in connection with this Agreement and the
transactions contemplated hereby will be paid by the party incurring such costs
and expenses.
VI.12 Public Announcements. The parties will consult with each other
before issuing any press releases or making any public statements with respect
to this Agreement and will not issue any such press release or make any such
public statement without the consent of the other.
VI.13 Efforts to Consummate. Subject to the terms and conditions herein
provided, each of the parties agrees to use its reasonable best efforts to take,
or cause to be taken, all action, and to do, or cause to be done, all things
necessary, proper or advisable to consummate this transaction as promptly as
practicable, including, but not limited to, the obtaining of all necessary
consents, waivers or approvals of third parties, whether private or
governmental, required of it to enable it to comply with the conditions
precedent to consummating the transactions contemplated by this Agreement. Each
party agrees to cooperate fully with the other in assisting it to comply with
the provisions of this Section, and Sellers agree to take such steps as may be
necessary to remove any Encumbrances (other than imperfections of title
permitted by this Agreement) which affect the Purchased Assets. Notwithstanding
the foregoing, no party hereto shall be required to initiate any litigation,
make any substantial payment or incur any material economic burden, except for a
payment otherwise then required of it, to obtain any consent, waiver, or
approval, and if, despite its efforts, any party is unable to obtain any
consent, waiver or approval, the other party may terminate this Agreement and
shall have no liability therefor except as is provided in Article XII.
VI.14 Mutual Covenants Not to Compete or Disclose Proprietary
Information. (I) Within the United States of America, for a period of
twenty-four months from the date of Closing, neither Buyer nor Ethika nor any of
their respective subsidiaries, affiliates, successors or assigns, whether now
owned or hereafter acquired, shall compete with each other in the hypertext or
electronic publishing industry with respect to the creation and/or sale of any
publication presently produces and marketed by any of them as of the date of
Closing.
Specifically, each party and each of Ethika's subsidiaries, as to
themselves, their employees, principals, agents, officer, directors,
stockholders, partners or otherwise, or in conjunction with any other Person,
covenants not to compete with the other unless written permission is granted to
do so during the next twenty-four months after Closing.
<PAGE>
Ethika, as the one-hundred percent stockholder of Compass Data Systems,
Inc., a Utah corporation, and Legislative Information Systems, Inc., a
Washington, DC corporation, executes this agreement on behalf of each of them,
and to binds said companies hereby, and represents and warrants the sufficiency
of its authority to bind them without further signature or action by either of
these subsidiary corporations.
Ethika shall send the President of each of the aforesaid companies a
copy of this Article VIII.7 with a notification of its existence, notifying each
President that the companies are bound by it. Ethika will also send Buyer a copy
of said notices, and Ethika will do whatever is necessary to enforce this
Article VIII.7 so long as Buyer remains in compliance with its obligation not to
compete with Ethika, et al.
(ii) In addition to not competing, and in addition or supplement to the
other restrictions and covenants concerning confidential information contained
herein, none of the above parties or entities will disclose any information
concerning or pertaining in any manner to the business, operations, customers
and assets of another of said parties or entities without their prior written
consent to such disclosure.
(iii) In recognition of the irreparable injury which Sellers, Buyer and
the other entities would incur due to a breach of these covenants, the aggrieved
party shall be entitled to institute and prosecute proceedings in any court of
competent jurisdiction to obtain damages, including interest, court costs and
attorney's fees, for any breach of these covenants, and/or enjoin the breaching
party from violating any of the provisions hereof.
(iv) These covenants shall inure to the benefit of and be binding upon
each of the parties hereto and their respective heirs, successors and assigns.
(v) These covenants shall be severable, and in the event any of them
shall be held to be invalid by any court, the remaining covenants or portions
thereof shall otherwise remain in full force and effect and shall be interpreted
as if such invalid agreement or covenant was not contained herein. If any court
shall determine that the provisions set forth in this Article VIII.7 shall not
be enforceable in accordance with their terms, the parties agree such paragraphs
shall be enforceable to the extent permitted by law.
(vi) To the extent that any agreements not to compete exist between
Bruce W. Grewell, Constance Gamble, or any employee or former employee of TRS,
such covenants shall, upon Closing, become null and void.
(vii). To the extent that any of these covenants become unenforceable
as to any of the entities or Persons covered hereby, the reciprocal obligation
of the other party shall become equally unenforceable without the necessity of
judicial or administrative action.
VI.15 Further Assurances. Sellers will use reasonable efforts to
implement the provisions of this Agreement, and for such purpose, at the request
of Buyer, will, at or after the Closing, without further consideration, promptly
execute and deliver such additional documents as may be necessary to consummate
more effectively the transactions contemplated hereby and to vest in Buyer title
to the Purchased Assets, free and clear of Encumbrances.
VI.16 Reattribution of TRS Tax Losses. Buyer will sign an election
under Section 1.1502-20(g)(1) to reattribute the maximum allowable amount of
losses attributable to TRS as permitted under said section. Buyer agrees to
execute an appropriate election provided by Seller within seven months following
the Closing. Any losses attributable to TRS after Closing shall be and remain
attributable to TRS and shall not be reattributed to Seller.
<PAGE>
ARTICLE VII
EMPLOYEES AND EMPLOYEE MATTERS
VII.1 Transferred Employees. Sellers have delivered to Buyer a list of
all of the employees of Sellers who are employed by TRS as of the most recent
date for which such information is available. Sellers will afford Buyer's
representatives an opportunity, prior to the Closing, to offer employment with
Buyer, after the Closing, to all of such persons. Such employees who elect to
become employees of Buyer are hereinafter referred to as "Transferred Employees"
and shall be deemed to have become employees of Buyer as of the time the Closing
becomes effective.
VII.2 Employee Benefit Plans.
(a) Buyer will permit each Transferred Employee to participate in the
employee benefit plans and programs regularly made available to the employees of
Buyer who hold similar positions, on the same basis that Buyer's employees
participate. Buyer will treat service by any Transferred Employee prior to the
Closing as service with Buyer for purposes of vesting and participating in (but
not for the purpose of the accrual of benefits under) such plans and programs.
The Transferred Employees' accrual of benefits under plans and programs covering
employees of Buyer shall be based solely on their service with Buyer after the
Closing.
(b) No assets or liabilities with respect to Transferred Employees
shall be transferred, as a result of this Agreement, from any of Seller's
employee benefit plans applicable to Transferred Employees to any plan
maintained or established by Buyer, and Sellers shall retain all obligations to
fund or otherwise provide benefits accrued by Transferred Employees under its
benefit plans prior to the Closing.
VII.2 Workers' Compensation. Buyer will assume the responsibility for
all workers' compensation claims made by Transferred Employees arising from
events occurring after the Closing. Sellers will retain the responsibility for
all workers' compensation claims made by its employees or former employees
(whether or not Transferred Employees) that arise from events that occur before
the Closing.
VII.3 Vacation and Bonus Pay. Prior to the Closing Sellers will pay all
unpaid vacation, bonus or any other accrued obligations owed by Sellers to
Transferred Employees. After the Closing, Sellers will have no liability for
vacation or bonus pay for Transferred Employees.
VII.4 Other Liabilities Relating to Employees. Except to the extent set
forth in this Article, Buyer will not assume any liabilities or obligations with
respect to (i) any pension plan, welfare plan or other employee benefit plan or
program relating to any present, former or retired employees of Sellers or (ii)
any severance, separation or other obligation to any of Sellers employees or
affiliated companies or the employees thereof which may result from the
consummation of the transactions contemplated by this Agreement.
<PAGE>
ARTICLE VIII
CONDITIONS TO OBLIGATION OF BUYER
The obligation of Buyer to consummate the transactions contemplated by
this Agreement is subject, to the extent not waived, to the following
conditions:
VIII.1 Representations and Warranties. Except for changes contemplated
by this Agreement each of the representations and warranties of Sellers
contained in this Agreement (which representations and warranties include the
information in the schedules corresponding thereto) shall be true and correct in
all material respects as of the date of this Agreement and as of the Closing,
and Sellers shall have delivered to Buyer a certificate to that effect signed by
their appropriate officers. In addition, but not by way of limitation, Buyer
shall have received confirmation satisfactory to it that the contracts specified
in Paragraph VI 1(i) of Article VI of this Agreement remain enforceable
according to their terms.
VIII.2 Performance of this Agreement. Sellers shall have complied in
all material respects with all of its obligations under this Agreement and shall
have delivered to Buyer a certificate to that effect signed by their appropriate
officers.
VIII.3 Corporate Authorization. All corporate action required to be
taken by Sellers in connection with the transactions contemplated by this
Agreement shall have been taken, all documents incident thereto shall be
reasonably satisfactory in substance and form to Buyer, and Buyer shall have
received such originals or copies of such documents as it may reasonably
request.
VIII.4 Consents and Approvals. The consents and approvals of all
Persons which (i) Sellers must obtain to transfer the Purchased Assets to Buyer;
(ii) Buyer needs in order to be able to conduct the business of TRS after the
Closing, shall have been obtained and all waiting periods specified by law with
respect thereto have passed, and (iii) to the extent necessary, Sellers shall
have obtained all approvals from any parties necessary to make the
non-competition provisions contained in Article VI.14 binding on the parties
mentioned therein.
VIII.5 Estoppel Certificates, etc. Buyer shall have obtained executed
estoppel certificates, satisfactory in form and substance to Buyer, and such
other information with respect to the leases which are part of the Purchased
Assets as Buyer may reasonably request.
ARTICLE IX
CONDITIONS TO OBLIGATION OF SELLERS
The obligation of Sellers to consummate the transactions contemplated
by this Agreement is subject, to the extent not waived, to the following
conditions:
IX.1 Representations and Warranties. Each of the representations and
warranties of Buyer contained in this Agreement shall be true and correct as of
the date of this Agreement and as of the Closing, and Buyer shall have delivered
to Sellers a certificate to that effect signed by their appropriate officers.
IX.2 Corporate Authorization. All corporate action required to be taken
by Buyer in connection with the transactions contemplated by this Agreement
shall have been taken, all documents incident thereto shall be reasonably
satisfactory in substance and form to Sellers, and Sellers shall have received
such originals or copies of such documents as they may reasonably request.
<PAGE>
ARTICLE X
CLOSING
X.1 Time and Place of Closing. The closing (the "Closing") shall take
place on the latter of (i) February 17, 1998 or (ii) such other date as may be
agreed upon by the parties (either of which dates is referred to in this
Agreement as the "Closing Date"). The Closing can also be accomplished by mail
at the parties discretion, provided that all conditions to Closing for all
parties are met and that the Purchase Price is in the hands of the Sellers'
escrow agent in form satisfactory to Sellers prior thereto. Otherwise, the
parties can choose a physical location mutually acceptable to them. If the
Closing takes place, the Closing and all of the transactions contemplated by
this Agreement shall be deemed to have occurred simultaneously and become
effective as of 12:01 AM on the Closing Date.
X.2 Deliveries by Sellers. At the Closing Sellers shall deliver to
Buyer the following:
(i) A Bill of Sale and Assignment and such other documents as may be
necessary to transfer to Buyer the remainder of the Purchased Assets,
all of which shall be in form satisfactory to Buyer and suitable for
filing, registration or recording.
(ii) the Certificates of the officers of Sellers required by this
Agreement; (iii) evidence that the corporate action described in
Article VIII has been taken; (iv) copies of any consents required by
this Agreement; (v) the estoppel certificates required by this
Agreement, if any; (vi) such additional documents as Buyer may
reasonably request. (vii) the TRS Stock, and all corporate records in
the possession of Seller. X.3 Deliveries by Buyer. At the Closing Buyer
shall deliver to Sellers the following:
(i) the Purchase Price in immediately available funds;
(ii) an instrument of assumption of liabilities, in form satisfactory
to Sellers, pursuant to which Buyer assumes all of the liabilities and
obligations of Sellers required by this Agreement;
(iiiii) such additional documents as Sellers may reasonably request.
ARTICLE XI
INDEMNIFICATION
XI.1 Indemnification by Sellers. Subject to the limitations contained
in this Article, Sellers will indemnify and hold Buyer harmless from any damage,
loss, liability or expense (including, without limitation, reasonable expenses
of investigation and litigation and reasonable attorneys"', accountants"' and
other professional fees) arising out of:
(i) a breach of any representation or warranty made by Sellers in this
Agreement; (ii) a breach of any agreement of Sellers contained in this
Agreement; (iii) any liability or obligation of Sellers not assumed by Buyer; or
XI.2 Third Party Claims. The obligation of Sellers to indemnify Buyer under the
provisions of this Article with respect to claims resulting from the assertion
of liability by those not parties to this Agreement (including governmental
claims for penalties, fines and assessments) shall be subject to the following
terms and conditions:
<PAGE>
(i) Buyer shall give prompt written notice to Sellers of any assertion
of liability by a third party which might give rise to a claim for
indemnification, which notice shall state the nature and basis of the assertion
and the amount thereof, to the extent known; provided, however, that no delay on
the part of Buyer in giving notice shall relieve Sellers of any obligation to
indemnify unless (and then solely to the extent that) Sellers are prejudiced by
such delay.
(ii) To the extent that the claim for indemnification does not exceed a
Material Adverse Amount, unless within 30 days of receipt by Seller of Buyer's
notice of such claim Seller notifies Buyer of Seller's desire to dispute the
claim with the claimant prior to any payment to the claimant, Buyer may pay and
settle any such claim and Seller shall be obliged to reimburse Buyer for such
payment. If Seller does wish to dispute the claim and notifies Buyer within the
aforesaid 30 day period, the claim shall be treated and handled according to the
terms of the remainder of this Article XI.
(ii) If any action, suit or proceeding (a "Legal Action") is brought
against Buyer with respect to which Sellers may have an obligation to indemnify
Buyer, the Legal Action shall be defended by Sellers and such defense to include
all proceedings for appeal or review which counsel for Buyer shall reasonably
deem appropriate.
(iv) Notwithstanding the provisions of the previous subsection of this
Article, until Sellers shall have assumed the defense of any such Legal Action,
the defense shall be handled by Buyer. Furthermore, (A) if Buyer shall have
reasonably concluded that there are likely to be defenses available to it that
are different from or in addition to those available to Sellers; (B) if Sellers
fail to provide the Buyer with evidence reasonably acceptable to the Buyer that
the Sellers have sufficient financial resources to defend and fulfill its
indemnification obligation with respect to the Legal Action; (C) if the Legal
Action involves other than money damages and seeks injunctive or other equitable
relief; or (D) if a judgment against Buyer will, in the good faith opinion of
Buyer, establish a custom or precedent which will be materially adverse to the
best interests of its continuing business, Sellers shall not be entitled to
assume the defense of the Legal Action and the defense shall be handled by the
Buyer. If the defense of the Legal Action is handled by Buyer under the
provisions of this subsection, Sellers shall pay all legal and other expenses
reasonably incurred by Buyer in conducting such defense.
(v) In any Legal Action initiated by a third party and defended by
Sellers (A) Buyer shall have the right to be represented by advisory counsel and
accountants, at its own expense, (B) Sellers shall keep Buyer fully informed as
to the status of such Legal Action at all stages thereof, whether or not Buyer
is represented by its own counsel, (C) Sellers shall make available to Buyer and
its attorneys, accountants and other representatives, all books and records of
Sellers relating to such Legal Action and (D) the parties shall render to each
other such assistance as may be reasonably required in order to ensure the
proper and adequate defense of the Legal Action.
(iiii) In any Legal Action initiated by a third party and defended by
Sellers, Sellers shall not make settlement of any claim without the written
consent of Buyer, which consent shall not be unreasonably withheld. Without
limiting the generality of the foregoing, it shall not be deemed unreasonable to
withhold consent to a settlement involving injunctive or other equitable relief
against Buyer or its assets, employees or business, or relief which Buyer
reasonably believes could establish a custom or precedent which will be
materially adverse to the best interests of its continuing business.
<PAGE>
XI.3 Limitations on Indemnification.
(a) Notwithstanding the foregoing provisions of this Article, except
for any liability for unpaid government levies or taxes of any nature, where
liability shall begin from dollar one, Sellers shall not be liable to Buyer
under this Article unless and until the aggregate amount of its liability
exceeds $7,500, and thereafter Buyer shall be entitled to indemnification
thereunder only for the aggregate amount of such liability in excess of $7,500.
The $40,000 trust fund set aside at Closing to cover undisclosed liabilities or
claims shall be the first source for payments that may become due as a result
this Article XI.
(b) All damages to which Buyer may be entitled pursuant to the
provisions of this Article shall be net of any insurance coverage with respect
thereto.
XI.4 Survival; Investigation. The representations and warranties of
Sellers contained in this Agreement shall survive any investigation by Buyer and
shall not terminate until the second anniversary of the Closing (the "Survival
Date") at which time they shall lapse. Notwithstanding the provisions of the
preceding sentence, any representation or warranty in respect of which
indemnification may be sought under this Article shall survive the Survival Date
if written notice, given in good faith, of a specific breach thereof is given to
Sellers prior to the Survival Date, whether or not liability has actually been
incurred.
ARTICLE XII
TERMINATION, AMENDMENT AND WAIVER
XII.1 Termination. This Agreement may be terminated at any time prior
to the Closing:
(i) by mutual consent of the Boards of Directors of Sellers and Buyer's
appropriate officials;
(ii) by Buyer if any condition to Buyer's closing has not been
fulfilled (unless such failure is the result of action by Buyer);
(iii) by Buyer if any change has occurred since the date of this
Agreement which has or can reasonably be expected to have a material adverse
effect upon the Purchased Assets or the business of TRS;
(iv) by Sellers or Buyer if the Closing has not occurred by 11:59PM
Central Standard Time on February 28th, 1998.
XII.2 Effect of Termination. If this Agreement is terminated as
provided above, it shall become wholly void and of no further force and effect,
and there shall be no further liability or obligation on the part of either
party except to pay such expenses as are required of it and to comply with the
confidentiality provisions of Section 6.6, but such termination shall not
constitute a waiver by either party of any claim it may have for damages caused
by reason of a material breach of a representation, warranty or agreement made
by the other party.
XII.3 Amendment. This Agreement and the Schedules hereto may be amended
at any time prior to the Closing provided that any such amendment is approved in
writing by each of the parties. All representations and warranties which are
true and correct, as modified and approved, shall be deemed true and correct for
the purposes this Agreement.
<PAGE>
XII.4 Extension; Waiver. At any time prior to the Closing either party
which is entitled to the benefits thereof may (i) extend the time for the
performance of any of the obligations of the other party, (ii) waive a breach of
a representation or warranty by the other party, or (iii) waive compliance by
the other party with any of the agreements or conditions contained herein. Any
such extension or waiver shall be valid if set forth in a written instrument
signed by the party giving the extension or waiver.
ARTICLE XIII
GENERAL PROVISIONS
XIII.1 Notices. All notices and other communications given hereunder
shall be in writing. Notices shall be effective when delivered, if delivered
personally. Otherwise, they shall be effective when sent to the parties at the
addresses or numbers listed below, as follows: (i) on the business day delivered
(or the next business day following delivery if not delivered on a business day)
if sent by a local or long distance courier, prepaid telegram, telefax or other
facsimile means, or (ii) three days after mailing if mailed by registered or
certified U.S. mail, postage prepaid and return receipt requested.
If to Sellers to:
Dennis Brovarone
11249 West 103rd Drive
Westminster, CO 80021
Fax Number: 303-466-4826
with a copy to:
Attention: __________________
Telefax No.:__________________
If to Buyer to:
David Julian
580 Washington
Glencoe IL, 60022
Fax - 847-835-0529
with a copy to:
Bruce W. Grewell
200 Executive Way
Ponte Vedra Beach, FL 32082
Fax - 904-285-1002
Any Person may change the address or number to which notices are to be
delivered to him, her or it by giving the other Persons named above notice of
the change in the manner set forth above.
XIII.2 Governing Law. This Agreement shall be governed in all respects
by the laws of the State of Florida without regard to its choice of law rules.
XIII.3 Schedules. The information contained in any schedule which is
referred to in any section of this Agreement with is by its terms specific to
that section only shall be deemed to have been disclosed in connection with, and
to be incorporated into, that particular section only, and shall not be deemed a
part of any other section.
XIII.4 Headings. The headings contained in this Agreement are for
reference purposes only and shall not affect the meaning or interpretation of
the Agreement.
<PAGE>
XIII.5 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
XIII.6 Miscellaneous. This Agreement (i) constitutes the entire
agreement and supersedes all other prior agreements and understandings, both
written and oral, between the parties with respect to the subject matter hereof;
(ii) is not intended to and shall not confer upon any Person, other than the
parties hereto, any rights or remedies; and (iii) shall not be assigned by
operation of law or otherwise (except that Buyer may assign its rights hereunder
to an affiliated company or entity).
IN WITNESS WHEREOF the parties hereto have caused this Agreement to be
executed and their corporate seals to be hereto affixed and attested by their
duly authorized officers. Ethika Corporation
By_________________________________
Title______________________________
[Corporate Seal]
ATTEST:________________________
Secretary
Text Retrieval Systems, Inc.
By_________________________________
Title______________________________ [Corporate Seal]
ATTEST:_____________________________
Secretary
TRS Acquisition Corp.
By_________________________________
Title______________________________[Corporate Seal]
ATTEST:_____________________________
Secretary
<PAGE>
(4)(2)(8)
STOCK PURCHASE AGREEMENT
Compass Data Systems, Inc., a Utah corporation ("Company"),
Ethika Corporation, a Mississippi corporation ("Seller") and Ben Ezra Weinstein
& Company, Inc., a New Mexico corporation ("Buyer") agree:
1. Recitals. Company owns and operates an electronic
publishing company in Salt Lake City, Utah ("Business"). Seller is the only
shareholder of Company. Seller wants to sell and Buyer wants to purchase the
stock of Company as provided in this Purchase Agreement ("Agreement").
2. Sale of Stock. Seller will sell and transfer to Buyer, and
Buyer, in reliance on the terms of this Agreement, will buy and accept from
Seller at the time of consummation of the transactions contemplated by this
Agreement ("Closing"), subject to this Agreement, all of the outstanding shares
of stock of Company ("Stock").
3. Purchase Price. The purchase price for the Stock ("Purchase
Price") will be paid by Buyer to Seller by the delivery of 565,000 shares of
Buyer's convertible Preferred B class stock from Buyer to Seller at Closing.
4. Excluded Assets and Liabilities. Buyer is not assuming or
accepting any obligations or duties unless specifically described in this
Agreement ("Assumed Obligations").
5. Warranties and Representations Of Seller. Seller warrants
and represents to Buyer that the following are true on the date of this
Agreement and at Closing:
A. Organization and Standing of Company. Company is a
duly organized and validly existing Utah corporation in good standing and duly
qualified to transact its business under the laws of Utah. Company has no
subsidiaries or partners, is not a member of any joint venture and is not
required to be qualified to transact business as a foreign corporation in any
state because of the nature of its property owned or the nature of its business
transacted, has current minute books and stock books and has full power and
authority to carry on the Business as it is now being conducted and to own and
operate its assets, property and business.
B. Organization and Standing of Seller; Ownership
Approval. Seller is a duly organized and validly existing Mississippi
corporation in good standing and duly qualified to transact its business under
the laws of Mississippi. Seller's ownership interest in Company constitutes a
100% ownership interest in Company and no other person or entity has any right
or claim to ownership in Company or from which approval of the transactions
contemplated by this Agreement would be required. Seller has approved the
execution of this Agreement and consummation of the transactions contemplated by
this Agreement and has authorized Seller's officers to take all action and to
execute, acknowledge and deliver all documents appropriate to consummate the
transaction contemplated by this Agreement. No other corporate or shareholder
approval or consents are necessary.
<PAGE>
C. Capitalization. Company is authorized to issue
20,000,000 shares of $0.01 par value common stock. Seller owns 100% of the
shares of Stock which represent the entire ownership interest of Company. The
Stock is all the issued and outstanding shares of Company. A copy of the stock
certificate representing the Stock is attached as Exhibit 5.C. Company holds
none of its shares as treasury shares. The Stock has been validly issued and is
fully paid and non-assessable. There are no outstanding subscriptions, options,
warrants, calls, commitments, or agreements relating to the authorized or issued
shares of Company.
D. Stock Ownership. Seller owns and will transfer to
Buyer, at Closing, good title to the Stock, free from encumbrance or any
contractual or other restrictions on its transfer or encumbrance, and has full
power, right and authority to transfer the Stock to Buyer pursuant to this
Agreement.
E. Absence of Changes. Subsequent to the date of the
Financial Statements (as "Financial Statements" are defined below), there has
not been (i) any material adverse change in the financial condition, business,
or operation of Company, or any material obligation or liability incurred, (ii)
any damage, destruction, or loss, whether or not covered by insurance, adversely
affecting Company's properties or the Business, (iii) any declaration or payment
of any cash, property, or stock dividend or distribution, or any redemption, or
acquisition in lieu of redemption, of Company's securities, or (iv) any increase
in compensation, bonus payment or employment arrangement made to or with any
officer or director. Subsequent to the date of the Financial Statements, Company
has not merged, consolidated or amalgamated with any other form of business
entity, changed its form of organization, articles of incorporation, bylaws or
authorized shares, granted any rights, warrants, options, or commitments
relating to its shares, redeemed, issued, purchased or acquired any of its
shares, or declared or paid any cash, property or stock dividend or
distribution.
F. Absence of Liabilities. No shareholder, officer or
director owns any asset, tangible or intangible, which is used in the Business.
Company will not have at Closing any liabilities, obligations, liens or
encumbrances whether accrued, absolute, contingent, or otherwise, arising out of
transactions entered into, or any state of facts existing, prior to Closing,
except (i) those disclosed by the Financial Statements, and (ii) non-material
obligations incurred in the ordinary course of Company's business from the date
of the Financial Statements to Closing. Seller and Company presently know of no
assertion or basis for assertion against Company of any liability, including any
liability arising out of the employment of present and former employees or
independent contractors, except as disclosed in this Agreement, and Seller and
Company will promptly disclose to Buyer any assertion or facts or circumstances
from which an assertion of any liability might arise, which they become aware of
prior to or at Closing. The searches of the records of the County Clerk of Salt
Lake County and the Uniform Commercial Code records of the Department of
Commerce of the State of Utah covering the personal property of Company, showing
the existence of any liens, encumbrances, restrictions or reservations thereon,
copies of which are attached as Exhibit 7.E., are true, accurate and complete.
The professional fees of Seller and Company, including without limitation the
lawyer, accounting and broker commission fees, if any, incurred in connection
with services relating to this transaction or otherwise arising prior to Closing
will be assumed by and paid directly by the Seller.
<PAGE>
G. Absence of Claims. There are no judgments,
actions, suits, claims, proceedings, or investigations, pending, or threatened,
against or affecting Company in any court, or before any governmental department
or agency, and no basis for any such action, suit, claim, proceeding or
investigation is known to Seller and Company.
H. Absence of Restrictions. There are no restrictions
in the articles of incorporation, bylaws, stock certificates, stock books or
minute books of Company, or in any other documents, which make the execution of
this Agreement, or the consummation of the transaction contemplated hereby
invalid, or a default under or breach of any agreement by which Seller or
Company are bound. Seller has not entered into any stock restriction or
shareholder agreements. Company and Seller have not executed or entered into any
non-competition or other agreements which could restrict the ability of Company
to compete in any line of business or would obligate Company to continue in any
line of business.
I. Insurance. Company has in force, and has had in
force during the last five years, adequate public liability and property damage
insurance and has provided Buyer with copies of all applicable insurance
documents. Company is not in default with respect to any provision contained in
any policy of insurance maintained by Company on its property, assets, business
or personnel, or covering its liability, nor has it failed to give any notice or
present any claim thereunder in timely fashion.
J. Licenses and Permits. Company has all federal,
state and local licenses, permits and authorizations necessary to conduct its
business, and such licenses, permits and authorizations are in effect. Exhibit
5.J. lists all permits, licenses, franchises, zoning and land use authorizations
and other regulatory approvals or filings material to ownership and operation of
the Business ("Permits"), plus the names of any third party from whom consent
must be obtained to effect a transfer of the Permits to Buyer (or substitution
of Buyer), as a result of the transactions contemplated by this Agreement. All
copies attached to Exhibit 5.J. are true, accurate and complete. Copies of all
other records, notifications, reports, permit and license applications, studies
and environmental impact reports or assessments that relate or contain
information relating to the operation of the Business or Company filed with or
submitted to appropriate governmental agencies or lenders or prospective lenders
by or on behalf of the Business or Company, and of all material notifications or
responses from such governmental agencies, have been delivered to Buyer.
K. Financial Statements. Company or Seller have
delivered to Buyer financial statements of Company, copies of which will be
attached at Closing as Exhibit 5.K. ("Financial Statements"), and other
information described in this Agreement, including without limitation all items
described on the exhibits and schedules attached to this Agreement
("Information"). The Financial Statements are true and correct in all material
respects, were prepared in accordance with generally accepted accounting
principles applied on a basis consistent with prior periods, set forth all
assets and liabilities, contingent or otherwise, and the results of operations
of Company and fairly present the financial condition of Company as of their
dates. The Information is true, accurate, complete and correct in all material
respects.
<PAGE>
L. Taxes. Seller and Company have paid or made
adequate provision for the payment of all federal, state, and local taxes,
including but not limited to gross receipts, sales and compensating or other
taxes payable by Company. Seller and Company have accurately and correctly
prepared and filed, on a timely basis, all required federal, state, and local
taxes, including but not limited to gross receipts, sales, compensating and
other tax and information returns due for all fiscal periods ended on or before
Closing. There are no tax examinations in progress or claims against Company for
federal, state, local or other taxes (including penalties and interest) for any
period or periods prior to Closing. Company has not entered into any agreement
or other document extending the period for assessment or collection of any taxes
or any statute of limitations or any closing agreement under any provision of
foreign, state or local tax law that relates to the Business or operations of
Company. Seller is obligated for and is responsible for all tax liabilities,
penalties, premiums, and the like relating to the affairs and operations of
Company prior to and including the date of Closing, whether assessed or accruing
before or after Closing. Copies of all federal, state, local, and other tax and
information returns for Company for years prior to Closing will be made
available to Buyer upon reasonable request and are among the records of Company.
The parties will furnish or cause to be furnished to each other, upon request,
as promptly as practicable, such information (including access to books and
records) and assistance relating to Company as may be reasonably necessary for
preparation of the filing of any return, for the preparation of any audit, and
for the prosecution or defense of any claim, suit or proceeding relating to any
proposed adjustment of taxes. The parties will cooperate with each other in the
conduct of any audit or other proceedings involving Company or any entity with
which it is consolidated or combined for any tax purposes, provided that, Buyer
has the right to control the resolution of such audit or settlement proceeding
for which Buyer or Seller is to bear the cost of any resulting tax, interest or
penalties. There are no sales, use or other transfer taxes payable by Company in
connection with the transactions described in this Agreement, except sales or
transfer taxes regarding vehicles transferred under this Agreement. Buyer
intends to submit an application for issuance of a certificate of tax clearance
to the applicable Utah authorities contemporaneously with execution of this
Agreement; Seller consents to and authorizes such submission.
M. Contracts. Company has no contracts, agreements,
leases, licenses, licensing agreements or commitments not terminable at will
without penalty, except (1) for contracts with various companies as specifically
itemized and described on attached Exhibit 5.M (1), to which copies are
attached, and (2) for debt obligations as specifically itemized and described on
attached Exhibit 5.M (2), to which copies are attached. Company has no
significant or material oral contracts or commitments. Company has performed all
its contracts, agreements, leases or commitments and is not in default under any
of them nor has any person or third party claimed a default exists under any of
them. All contracts and other agreements, leases, licenses and commitments to
which Company is a party are in effect, and no consent of any third party with
respect to this transaction is required. Any disclosure in this paragraph does
not waive or discharge the obligations of Seller and Company to properly deliver
releases, consents or waivers to Buyer on or before Closing of any contract
which is not assignable or transferable without the consent of a third-party.
Company has not received notice of the termination of any current contract,
agreement, lease, license or commitment, and has no reason to believe any such
termination is pending or threatened.
<PAGE>
N. Assets and Title. A list of all assets of Company
showing, for tangible assets where each is physically located, are described on
attached Exhibit 5.N. To the extent that any specific asset of Company is not
properly titled as being owned by Company, Seller and Company will take all
action and execute all documents, instruments and certificates necessary to
properly reflect Company ownership. Company owns and has good and marketable
title to all of its assets subject to no liens or encumbrances other than those
described on attached Exhibit 5.M.(2). Company's assets conform to federal,
state and local fire, building, zoning, health and safety codes, regulations and
rules, and no default or violation exists with respect to them. Company has not
sold, transferred, licensed, leased, or encumbered any assets other than in the
ordinary course of business.
O. Intellectual Property. The term "Intellectual
Property" means: (i) the name Compass Data Systems, Inc., fictional business
names, trading names, registered and unregistered trademarks, service marks, and
applications (collectively, "Marks"), (ii) patents, patent applications, and
improvements, inventions and discoveries whether or not patentable
(collectively, "Patents"), (iii) copyrights in both published works and
unpublished works (collectively, "Copyrights") and (iv) know-how, trade secrets,
confidential or proprietary information and material, including without
limitation customer lists, technical information, data, process, technology,
plans, drawings and blue prints, algorithms and flow charts relating to items
(i), (ii), and (iii) (collectively, "Proprietary Information").
(1) Company owns all its Intellectual
Property, including without limitation the items listed in paragraphs 5(O)(2)
through 5(O)(4) below and any other Intellectual Property that is necessary for
or used in the operation of Company free and clear of all liens, security
interests, charges, encumbrances, equities, and other adverse claims, and has
the right to use, without payment to a third party, all of the Intellectual
Property in development by Company.
(2) Exhibit 5.0(1). contains a complete and
accurate list and summary description of all Patents and patent applications
used by Company. All of the issued Patents are currently in compliance with
formal legal requirements (including payment of filing, examination, and
maintenance fees and proofs of working or use), are valid and enforceable, and
are not subject to any fees or taxes or actions falling due within ninety days
of Closing. No Patent has been or is now involved in any interference, reissue,
reexamination, or opposition proceeding. To Seller's knowledge, there is no
potentially interfering patent or patent application of any third party. No
Patent is infringed or, to Seller's knowledge, has been challenged or threatened
in any way, and to Seller's knowledge, no basis exists for such a challenge.
None of the products manufactured and sold, nor any process or know-how used by
Company infringes or is alleged to infringe any patent or other proprietary
right of any person. All products made, used, or sold under the Patents have
been marked with the proper patent notice.
(3) Exhibit 5.0(2) contains a complete and
accurate list and summary description of all Marks used or owned by Company. All
Marks that have been registered with the United States Patent and Trademark
Office are currently in compliance with all formal legal requirements (including
the timely post-registration filing of affidavits of use and incontestability
and renewal applications), are valid and enforceable, and are not subject to any
fees or taxes or actions falling due within ninety days of Closing. No Mark has
been or is now involved in any opposition, invalidation, cancellation or
<PAGE>
concurrent use proceeding, and to Seller's and Company's knowledge, no such
proceeding is threatened with the respect to any of the Marks, and there is no
basis for any such proceeding. To Seller's knowledge, there is no potentially
interfering trademark or trademark application of any third party. No Mark is
infringed or, to Seller's knowledge, has been challenged or threatened in any
way. None of the Marks used by Company infringes or is alleged to infringe any
trade name, trademark, or service mark of any third party. All products and
materials relating to services that are identified by a federally registered
Mark bear the proper federal registration notice.
(4) Exhibit 5.0(3). Contains a complete and
accurate list and summary description of all Copyrights used or owned by
Company. All the Copyrights have been registered and are currently in compliance
with formal legal requirements, are valid and enforceable, and are not subject
to any fees or taxes or actions falling due within ninety days of Closing. No
Copyright is infringed or, to Seller's and Company's knowledge, has been
challenged or threatened in any way. None of the subject matter of any of the
Copyrights infringes or is alleged to infringe any copyright of any third party
or is a derivative work based on the work of a third party. All works
encompassed by the Copyrights have been marked with the proper copyright notice.
(5) With respect to the Proprietary
Information, the documentation relating to such Proprietary Information is
current, accurate, and sufficient in detail and content to identify and explain
it and to allow its full and proper use without reliance on the knowledge or
memory of any individual. Seller and Company have taken all reasonable
precautions to protect the secrecy, confidentiality, and value of Company's
Proprietary Information. Company has good title and absolute right to use the
Proprietary Information.
(6) The Company's trade secrets are not part
of the public knowledge or literature, and, to Seller's knowledge, have not been
used, divulged, or appropriated either for the benefit of any person or to the
detriment of Company. Company's trade secrets are not subject to any adverse
claim nor have they been challenged or threatened in any way.
(7) Company has not licensed any of its
Intellectual Property.
P. Compliance With Laws. Company has complied and is
in compliance with all applicable federal, state, local and Indian laws, or laws
of any other governmental authority or any ordinances, rules, regulations,
orders, judgments, awards, decrees, consent judgments, consent orders and
requirements, including without limitation any zoning and health statutes,
ordinances and regulations, and all Environmental Laws (defined below),
(collectively, "Laws") applicable to Seller and Company, and no material default
or violation under any Laws exists with respect to Company or Seller. Company
and Seller are not subject to and have not received notice from any third party
or governmental authority of any alleged environmental, employment, zoning,
building, fire, safety or health code violations with respect to Company. No
WARN Act notices are required. Company presently holds all the permits, licenses
and franchises that are necessary for its current and future use, occupancy or
operation of its assets or properties or the conduct of the Business. No basis
for any such action, suit or proceeding or investigation is known.
<PAGE>
Q. Environmental Matters.
(1) "Hazardous Material" means the
substances (i) defined as "Hazardous Waste" in 40 CFR 261, and substances
defined in any comparable New Mexico or Utah statute or regulation; (ii) any
substance, the presence of which requires remediation pursuant to any
Environmental Laws; and (iii) any substance disposed of in a manner not in
compliance with Environmental Laws.
(2) "Environmental Laws" means the Hazardous
Waste Act, Sections 74-4-1 through 74-4-13 NMSA 1978, as amended, and the
Federal Hazardous Waste Act, 40 CFR et seq., the Resource Conservation and
Recovery 24Act, 42 U.S.C. Sections 6901, et seq., the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C.
Sections 9600, et seq. as amended, the Toxic Substances Control Act, 15 U.S.C.
Sections 2601, et seq., the Clear Air Act, 42 U.S.C. Sections 7401, et seq., the
Clean Water Act, 33 U.S.C. Sections 1251, et seq., the Occupational Safety and
Health Act of 1970, as amended and any regulations promulgated from time to time
as provided in any of those Acts, together with all other laws (including rules,
regulations, codes, plans, injunctions, judgments, orders, decrees, rulings, and
charges thereunder) of federal, state, local and Indian law, and foreign
governments (and all agencies thereof) concerning pollution or protection of the
environment, public health and safety, or employee health and safety, including
laws relating to emissions, discharges, releases, or threatened releases of
pollutants, contaminants, or chemical, industrial, hazardous, or toxic
materials, substances or wastes into ambient air, surface water, ground water,
or lands or otherwise relating to the manufacture, processing, distribution,
use, treatment, storage, disposal, transport, or handling of pollutants,
contaminants, or chemical, industrial, hazardous, or toxic materials, substances
or wastes.
(3) Except as permitted under applicable
Environmental Laws, no Hazardous Materials have been accepted, processed,
handled, transferred, generated, treated, stored or disposed of at, in, on,
within or under the surface of Sellers' assets, properties or facilities.
Company has not accepted, processed, handled, transferred, generated, treated,
stored or disposed of any asbestos, medical waste, radioactive waste or
municipal waste, except in compliance with all applicable Environmental Laws.
(4) Company and Seller have never been
subject to nor received any notice of any private, administrative or judicial
action, or notice of any intended private, administrative or judicial action
relating to the presence or alleged presence of Hazardous Material in, under,
upon or emanating from Company. There are no pending and, to the knowledge of
Company and Seller, no threatened actions or proceedings from any governmental
agency or any other entity involving remediation of any condition (including
without limitation petroleum contamination) of Company pursuant to any
Environmental Laws.
(5) Except as allowed under applicable
Environmental Laws, Company has not sent, transported or arranged for the
transportation or disposal of any Hazardous Material, to any site, location or
facility.
(6) Except as allowed under applicable
Environmental Laws, Company employees, in the course and scope of their
employment, have not been exposed to Hazardous Waste.
<PAGE>
(7) Except as allowed under applicable
Environmental Laws, underground storage tanks containing petroleum products or
wastes or other hazardous substances regulated by Environmental Laws have never
been located on Company's assets, properties or facilities.
R. Benefit Plans. Except for the employee benefit
plans, copies of which will be attached at Closing as Exhibit 5.R., Company does
not maintain, contribute to or have an obligation to contribute to any "employee
benefit plan" (as defined in Section 3(3) of the Employee Retirement Income
Security Act of 1974 ("ERISA")), or any other severance, bonus, stock option,
stock appreciation, stock purchase, retirement, insurance, health, welfare,
vacation, pension, profit-sharing or deferred compensation plan, agreement or
arrangement providing benefits for employees or former employees of Company (the
"Employee Plans"), nor has Company or any officer or director of Company taken
any action directly or indirectly to obligate Company to establish any Employee
Plan. The attached copies of the Company's current Employee Plans are true,
complete and accurate. With respect to any Employee Plan, Company has no
liability which would have a material adverse effect upon the assets,
liabilities, business, operations, conditions (financial or otherwise) or
properties of the Business or Company. All Employee Plans are or were adequately
and properly funded as required by law. There are no insurance policies
providing benefits under any Employee Plan. Company has not participated in or
made contributions to any "multi-employer plan" as defined in ERISA. Company is
under no obligation or liability to provide former employees, retirees or their
dependents with any benefits. Company has properly complied with COBRA.
S. Employees. No Worker Adjustment and Retraining
Notification Act ("WARN") compliance or notices are required as a result of this
transaction. No employee of Company ("Employee" or "Employees") is part of a
union or collective bargaining group and no union organizational activity is
pending affecting Employees. Company and Seller have provided Buyer with true,
complete and accurate census information and compensation information about the
Employees. All Employees are employees at will. Seller will cause Company to
terminate the employment of all its Employees. Seller will be solely responsible
for all damages resulting from or related to the termination of the Employees.
Seller and Company will permit Buyer to offer employment to some or all of the
Employees prior to or after Closing. Buyer will provide Company with the names
of any Employees who are offered employment and who actually become employed by
Buyer through Company after Closing. Buyer will have absolute discretion in
determining the terms, conditions and benefits relating to any such employment.
Nothing contained in this Agreement will obligate Buyer to offer to employ any
of the Employees. The names and addresses of the officers, directors, the
registered agent of Company, the address of the registered office of Company,
and the names of all employees or independent contractors whose compensation
from Company for the current calendar year will exceed $5,000.00, showing the
full amount paid or payable to each such person for services rendered in the
current and prior calendar years, are described on attached Exhibit 5.S. Company
has not participated in or made contributions to any "multi-employer plan" as
defined in the ERISA. Company has experienced no material work stoppage or labor
difficulty. Company has no vacation time owed or accruing. Company has no
employee handbook, employment and/or human resources policies.
T. Customers' Billings and Current Receipts. A
current list of the customers Company serves on an ongoing basis, including name
and location as of the date of this Agreement is attached as Exhibit 5.T.(1).
None of the customers as of the date of this Agreement have canceled or
substantially reduced service or are currently attempting or threatening to
cancel or substantially reduce service. A copy of the standard form of customer
contract used by Company is attached as Exhibit 5.T(2), along with copies of all
executed customer contracts.
<PAGE>
U. Bank Accounts. Company's bank account is with Key
Bank of Salt Lake City,UT.
V. Accounts Receivable. Company has delivered to
Buyer an accurate list of Company's accounts receivable, which list is attached
as Exhibit 5.V., which statements are true, accurate and complete as of their
dates. All accounts receivable of Company are reflected properly on its books
and records, all receivables of Company are valid receivables, subject to no
setoffs or counterclaims, and to the knowledge of Seller are collectible, and
all accounts receivable of Company are collectable in accordance with their
terms at their valued amounts.
W. Disclosure. No representation or warranty by
Seller in this Agreement or its exhibits and schedules, or in any document,
statement or certificate furnished or to be furnished to Buyer pursuant hereto
or in connection with the transaction contemplated hereby, contains or will
contain any untrue statement of a material fact, or omits or will omit to state
a material fact necessary to make the statements contained therein not
misleading.
X. No Registration. Seller is aware that no federal
or state agency has made any finding or determination as to the fairness for
public investment, nor any recommendation or endorsement, of the Buyer's shares
to be issued to Seller in payment of the Purchase Price ("Shares") and the
Shares will not be registered under the Securities Act of 1933 (the "1933 Act"),
the Securities Act of New Mexico or the securities act of any other state.
Y. Investigation. Seller understands that in order to
ensure that the issuance of the Shares to Seller is exempt from registration
under the securities laws of New Mexico, Buyer is required to have reasonable
grounds to believe, and must actually believe, the transaction involves the
distribution of securities in connection with a merger, consolidation, exchange
of securities, sale of assets or other reorganization. Seller has sufficient
knowledge and experience in financial and business matters in general, and
investments in particular, to be fully capable of evaluating the merits and
risks of accepting the Shares in payment of the Purchase Price. Seller has been
furnished, has read, and understands certain information ("Information") about
the formation and prospects of Buyer. Seller has no questions concerning Buyer,
the Shares or the business of Buyer which have not been answered and has
obtained all the information concerning these matters which the Seller desires.
Seller is able to bear the economic risk of accepting the Shares in payment of
the Purchase Price, including the possible complete loss of their value and
possible inability to sell or transfer the Shares for an indefinite period of
time.
Z. No Transfer. Seller is accepting the Shares for
its own account in complete payment of the Purchase Price and not with a view
to, or for sale in connection with, the distribution or transfer thereof, and
the Seller is not participating directly or indirectly in a distribution or
transfer of the Shares, or in the underwriting of any such distribution or
transfer of the Shares, or in the underwriting of any such distribution or
transfer of the Shares, nor will the Seller act in any way that would constitute
the Seller as an underwriter, within the meaning of the 1933 Act, of the Shares.
Seller understands that in order for the Shares to be qualified for an exemption
from registration, Seller must represent and warrant that Seller will not
transfer or sell the Shares in the absence of registration under the 1933 Act or
<PAGE>
an exemption therefrom. Seller will, before any proposed sale, pledge, gift or
other transfer, for value or otherwise, of any or all of the Shares or any
interest or interests therein (a "Transfer"), give written notice to Buyer
expressing Seller's desire to effect the Transfer and describing the Transfer in
detail, accompanied by an opinion of the Seller's counsel, satisfactory in all
respects to Buyer's counsel, to the effect that the proposed Transfer may be
conducted in the manner set forth in the notice without violation of the 1933
Act or pursuant to an exemption from registration under the 1933 Act, the
availability of which is to be established to the satisfaction of Buyer. Seller
understands that Buyer will make, or will advise the transfer agent of the
Shares to make, stop transfer notations on its records relating to the Shares
and the certificates representing the Shares will have an appropriate legend
imprinted or typed on the face of the Certificate.
6. Warranties and Representations of Buyer. Buyer warrants and
represents to Seller that the following are true on the date of this Agreement
and at Closing:
A. Organization and Standing of Buyer. Buyer is a
duly organized and validly existing corporation in good standing under the laws
of the State of New Mexico, is duly authorized to transact business in every
state in which the character of its property owned, or the nature of its
business transacted requires it to be licensed or qualified to do business, and
has full power and authority to carry on its business as it is now being
conducted, to own and operate its assets, property, and business, and to
consummate the transaction contemplated by this Agreement.
B. Restrictions. There are no restrictions in the
articles of incorporation, bylaws, stock certificates, stock records or minute
books of the Buyer, or other documents which make the execution of this
Agreement, or the consummation of the transaction hereby contemplated by the
Buyer invalid.
C. Directors' Action. The Board of Directors of the
Buyer has approved the execution of this Agreement, and has authorized its
officers to take all actions and to execute, acknowledge and deliver all
instruments necessary or proper to consummate the transaction contemplated in
this Agreement.
7. Conduct of Business Until Closing. After
execution of this Agreement and until Closing:
A. Access. Seller and Company will give Buyer and its
counsel, accountants, and other representatives (i) reasonable access during
normal business hours to all of Company's properties, offices, books, contracts,
commitments, and records relating to the Business, and (ii) all information
concerning Company's affairs reasonably requested by Buyer.
B. No Merger. Company will not merge, consolidate or
amalgamate with any other form of business entity, change its form of
organization, articles of incorporation, bylaws, grant any rights, warrants,
options, or commitments relating to any interest in Company and will not redeem,
issue, purchase or acquire any interest in Company, or declare or pay any cash,
property or other dividend or distribution to any shareholder of Company.
<PAGE>
C. Ordinary Course. Company will conduct business
only in the ordinary course, keep all insurance policies, or renewals thereof,
in force, and give all notices or claims to be made thereunder in timely
fashion, and maintain its physical property in good operating condition and
repair. Company will not sell, transfer, license, lease, or encumber any assets
other than in the ordinary and historic course of business.
D. Relationships. Company will use its best efforts,
without making any commitments on Buyer's behalf, to preserve Company's business
organization intact, to keep available the services of present employees, and to
preserve the goodwill of the customers and others having business relations with
Company. Company will not increase the compensation payable by Company to any
officer, director, or employee.
E. Possession. Buyer will take possession of the
Company's assets at Closing. Seller and Company have risk of loss before
Closing.
8. Seller's Conditions Precedent. Seller will have no
obligation to consummate the transactions contemplated by this Agreement unless
each of the following conditions have been fulfilled by Buyer, or waived by
Seller, prior to or at Closing:
A. Representations and Warranties True at Closing.
Buyer's representations and warranties are true at the time of Closing as though
such representations and warranties were made at such time.
B. Performance. Buyer has performed and complied with
all agreements and conditions required by this Agreement to be performed or
complied with by Buyer prior to or at Closing.
9. Buyer's Conditions Precedent. Buyer will have no obligation
to consummate the transactions contemplated by this Agreement unless each of the
following conditions have been fulfilled by Seller and Company, or waived by
Buyer, prior to or at Closing:
A. Representations and Warranties True at Closing.
The representations and warranties of Seller and Company are true at the time of
Closing as though such representations and warranties were made at such time.
B. Performance. Seller and Company have performed and
complied with all agreements and conditions required by this Agreement to be
performed or complied with by Seller or Company prior to or at Closing.
C. Consents and Approvals. All necessary consents and
approvals to the transactions contemplated by this Agreement from any person or
entity have been attained in form and on terms acceptable to Buyer including
without limitation any consents, approvals or expirations of any waiting or
notice periods required under the New Mexico Securities Act. ("Consents").
D. Employment Agreement. Buyer and Eric Frederickson
have executed an Employment Agreement substantially in the form of attached
Exhibit 9.D.
E. Noncompetition Agreement. Seller has executed a
non-competition agreement substantially in the form of attached Exhibit 9.E.
<PAGE>
F. Exhibits and Schedules. All schedules and Exhibits
described in this Agreement or any related document, are acceptable to Buyer in
its sole discretion.
10. Closing. Closing will occur no later than Tuesday, March
31, 1998, unless extended in writing by mutual consent of Buyer and Seller. If
the conditions precedent have been performed or waived, the transaction
contemplated by this Agreement will be consummated. If the conditions precedent
have not been performed or waived, Closing may be extended by mutual written
agreement of Buyer and Seller, or if not, the parties will have the rights and
remedies described in paragraph 11 below. Closing will occur and will be
consummated upon full execution and delivery of this Agreement and of all
related documents, instruments and certificates necessary to consummate the
transactions contemplated by this Agreement, and upon completion of the stock
transfer Purchase Price as described in this Agreement. The parties will execute
and deliver all documents, certificates and instruments and will make all
payments necessary to consummate Closing. At Closing, the parties have or will
execute, deliver and perform all documents, instruments and certificates
necessary to consummate the transactions contemplated by this Agreement.
11. Failure to Close. If at Closing Seller determines not to
close because Seller's Conditions Precedent have not been performed by Buyer, or
waived by Seller, then this transaction will not be closed and the rights,
duties and obligations between the parties to this Agreement will be terminated
without further liability. If Seller fails to close for any other reason, and if
Buyer has fully performed or tendered performance of all of the obligations of
Buyer as provided in this Agreement, then Buyer may elect to specifically
enforce performance of this Agreement, or to elect to terminate this Agreement,
in which event, this Agreement will terminate, and Seller, Seller and Buyer will
have no further rights, obligations or liabilities to each other as provided in
this Agreement. If Buyer determines not to close because Buyer's Conditions
Precedent have not been performed by Seller or Company, or waived by Buyer, then
this transaction will not be closed and this Agreement will terminate, and the
rights, duties and obligations between the parties to this Agreement will be
terminated without further liability. If Buyer fails to close this transaction
for any other reason, and if Seller has fully performed or tendered performance
of all of its obligations as provided in this Agreement, then the Seller may
elect to specifically enforce performance of this Agreement, or to elect to
terminate this Agreement, in which event this Agreement will terminate and
Seller and Buyer will have no further rights, obligations or liabilities to each
as provided in this Agreement.
12. Duties After Closing. Buyer and Seller
will take whatever action is reasonably necessary to carry out the terms of this
Agreement.
13. Indemnification. The following
indemnifications are made:
A. Seller's Indemnity. Seller will indemnify and
defend Buyer against:
(1) All liabilities and obligations of
Seller and Company of any kind, whether accrued, absolute, contingent, or
otherwise, as of the date of Closing, except the Assumed Obligations.
<PAGE>
(2) Any damage or deficiency resulting from
any misrepresentation, omission, breach of warranty, or nonfulfillment of any
agreement on the part of Seller under this Agreement or from any
misrepresentation in or omission from any other instrument furnished or to be
furnished to Buyer hereunder.
(3) All actions, suits, proceedings,
demands, assessments, judgments, costs and expenses incident to any of the
foregoing.
(4) Any abatement order, compliance order,
consent order, clean-up order or exhumation order or "Potentially Responsible
Party" notification against the Company arising out of any act of the Company or
any stockholder, officer, director, employee, consultant, predecessor or agent
of the Company occurring on or prior to the Closing Date.
Buyer's Indemnity. Buyer will indemnify Sellers
against:
(1) All liabilities and obligations of
Sellers under the Assumed Obligations.
(2) Any damage resulting from any
misrepresentation, omission, breach of
warranty or nonfulfillment of any agreement by Buyer under this Agreement.
(3) All actions, suits, proceedings,
demands, assessments, judgments, costs or expenses incident to any of the
foregoing.
C. Reimbursement. Seller and Buyer will reimburse the
other for the amount of any damage incurred at any time in respect of any
liability, obligation, or claim to which the foregoing indemnity relates, upon
demand made. Seller or Buyer may offset any amount owed to the other against any
amount owed by the other as a result of this indemnity.
D. Limitation on Indemnity. Because Buyer is a New
Mexico corporation, to the extent, if at all, section 56-7-1 NMSA 1978 is
applicable to this Agreement, no indemnity obligation provided in this Agreement
will extend to liability, claims, damages, losses or expenses, including
attorneys' fees, relating to the construction, installation, alteration,
modification, repair, maintenance, servicing, demolition, excavation, drilling,
reworking, grading, paving, clearing, site preparation or development of any
real property or of any improvement on, above or under real property arising out
of (i) the preparation or approval of maps, drawings, opinions, reports,
surveys, change orders, designs, or specification by the indemnitee, or the
agents or employees of the indemnitee, or (ii) the giving of or the failure to
give directions or instructions by the indemnitee where the giving or failure to
give directions or instructions by the indemnitee, or the agents or employees of
the indemnitee where the giving or failure to give directions or instructions is
the primary cause of bodily injury to persons or damage to property.
14. Cooperation. After Closing, Seller will not take any
material affirmative action that fails to preserve Company's business
organization intact, to keep available the services of present employees, and to
preserve the good will of the investors, customers, and others having business
relations with Company. Buyer may open all mail received by Buyer and addressed
to Seller unless such mail clearly has no connection with operation of the
<PAGE>
Business, in which event it will be promptly forwarded to Seller. All mail
received by Seller relating to the Business will be promptly forwarded to Buyer.
Seller and Buyer will cooperate before and after Closing to insure as speedy and
simple a changeover in operations and management as is possible. Seller and
Buyer will, without additional consideration, execute any other documents and
take any other action necessary to carry out the purposes of this Agreement.
15. Nature and Survival of Warranties and Representations. All
statements in this Agreement, and its exhibits, and in any document delivered in
connection with the transaction contemplated hereby, will be deemed
representations and warranties hereunder. All such representations and
warranties will survive the consummation of the transaction contemplated hereby.
16. Notices. All notices, requests, demands and other
communications provided for by this Agreement will be in writing and will be
deemed to have been given when hand delivered, or when received if sent by
telecopier, or by same day or overnight recognized commercial courier service,
or three business days after being mailed in any general or branch office of the
United States Postal Service, enclosed in a registered or certified postpaid
envelope, addressed to the address of the parties stated below or to such
changed address as such party may have fixed by notice:
To Buyer:
Ben Ezra Weinstein & Company, Inc.
6301 Indian School Road, N.E.
Albuquerque, New Mexico 87110
with a copy to:
Sutin, Thayer & Browne A Professional Corporation
6565 Americas Parkway N.E., Suite 1000
Albuquerque, New Mexico 87110
Attention: Stephen Charnas
Telecopier: (505) 888-6565
To Seller:
Ethika Corporation
107 The Executive Center
Hilton Head Island, South Carolina 29928
with a copy to:
Dennis Brovarone, Esq.
11249 West 103rd Drive
Westminster, Colorado 80021
provided, that any notice of change of address will be effective only upon
receipt.
17. Miscellaneous.
A. Expenses. Seller and Buyer will each pay their own
expenses incident to this Agreement and the transactions contemplated by this
Agreement, including all fees and expenses of their counsel.
<PAGE>
B. Binding Effect. This Agreement binds and benefits
the parties, their successors, assignees and transferees, is specifically
enforceable and may be modified only in writing.
C. Applicable Law. This Agreement will be subject to
and governed under the laws of the State of New Mexico.
D. No Waiver. The waiver of any breach of any
provision of this Agreement, or failure to enforce any provision of this
Agreement will not operate or be construed as a waiver of any subsequent breach
by any party. Any waiver must be in writing and signed by the parties.
E. Counterparts. This Agreement may be executed in
two or more counterparts, each of which together will be considered an original
but all of which together will constitute one and the same instrument.
F. Entire Agreement. This Agreement sets forth the
entire agreement among the parties on the matters set forth in this Agreement
and supersedes all prior agreements, whether written or oral, among any of the
parties to this Agreement relating to the transactions described herein.
G. Attorneys' Fees. In any suit, proceeding or action
to enforce any term, condition or covenant of this Agreement or to procure an
adjudication or determination of the rights of any party hereto, the prevailing
party will be entitled to recover from the other party to the proceeding
reasonable sums as attorneys' fees and costs and expenses in connection with
such suit, proceeding or action, including appeal, which sums may be included in
any judgment or decree entered therein.
H. Negotiated Agreement. The parties to this
Agreement have been represented by counsel of their own choosing throughout this
transaction who have carefully negotiated the provisions of this Agreement.
Accordingly, the parties do not believe that any presumptions relating to the
interpretation of contracts against the drafter should be applied in this case
and therefor waive its effects.
I. No Shopping. Unless and until this Agreement has
been terminated in accordance with its terms, Seller will not directly, or
through an agent or third party acting directly or indirectly on behalf of
Seller, solicit or negotiate any offers or indications of interest from anyone
other than Buyer or enter into any contract or agreement with anyone other than
Buyer regarding the sale of Company. Seller will promptly notify Buyer of any
such offer or any inquiry that might reasonably be expected to lead to any such
offer received by Seller prior to Closing.
J. Assignment. This Agreement and the interest of
Buyer may be assigned, transferred and conveyed to an affiliate of Buyer,
without the consent of Seller. Additionally, this Agreement and the obligations
due under this Agreement are assignable to other third parties subject to
Seller's approval of the third party assignee's prior proof of financial
responsibility, including without limitation any credit history of such
assignee. Seller's approval of the assignment will not be unreasonably withheld.
<PAGE>
K. Time of Essence. Time is of the essence in
performance of all of the terms of
this Agreement.
DATED: _________________, 1998.
COMPANY:
COMPASS DATA SYSTEM, INC., a
Utah corporation
By
Its President
SELLER:
ETHIKA CORPORATION, a
Mississippi corporation.
By
Its President
BUYER:
BEN EZRA WEINSTEIN &
COMPANY, INC., a New
Mexico corporation.
By
Its President
EXHIBIT (21 )
Ethika Corporation
Form 10K
List of Subsidiaries At
December 31, 1998
Name: Percent of Ownership
----- --------------------
Text Retrieval Systems, Inc. 100%
200 Executive Way
Ponte Vedra Beach, Florida 32082
Compass Data Systems, Inc. 100%
967 East Murray Holladay Road
Salt Lake City, Utah 84117
Legislative Information Systems, Inc. 100%
7535 Little River Turnpike
Suite 210
Annandale, Virginia 22003
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 535,651
<SECURITIES> 549,281
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,937,240
<PP&E> 64,797
<DEPRECIATION> 19,700
<TOTAL-ASSETS> 2,149,083
<CURRENT-LIABILITIES> 447,992
<BONDS> 0
0
0
<COMMON> 20,360,346
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1,701,091
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,123,195
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 134,381
<INCOME-PRETAX> (721,552)
<INCOME-TAX> 45,500
<INCOME-CONTINUING> (676,052)
<DISCONTINUED> (1,317,925)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,993,977)
<EPS-PRIMARY> (.151)
<EPS-DILUTED> (.151)
</TABLE>
