SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
{X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For Three Months Ended March 31, 1998
Commission File Number 0-3296
ETHIKA CORPORATION
(Exact name of registrant as specified in its charter)
MISSISSIPPI 64-0440887
(State of other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
107 The Executive Center
Hilton Head Island, South Carolina 29928
(Address of Principal Executive Office)
Registrant's telephone number including area code: (803) 785-7850
NONE
Former name, former address, and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
CLASS Outstanding at May 8, 1998
Common Stock, $1.00 par value 20,360,346
<PAGE>
ETHIKA CORPORATION
INDEX
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated balance sheets - March 31, 1998 and
December 31, 1997 ...................................
Consolidated statements of operations for the three
months ended March 31, 1998 and 1997 ................
Consolidated statements of cash flows for the three
months ended March 31, 1998 and 1997 ................
Notes to consolidated financial statements ..........
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .................
PART II. OTHER INFORMATION
None
SIGNATURES .....................................................................
<PAGE>
<TABLE>
<CAPTION>
Ethika Corporation and Subsidiaries
Consolidated Balance Sheet March 31, 1998 and December 31, 1997
(Unaudited)
March 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 123,619 $ 535,651
Accounts receivable, net of allowance for doubtful accounts -- --
Leases receivable 112,762 112,763
Investment securities- Trading 440,000 549,281
Note Receivable 450,000 0
Net assets held for sale 562,723 739,545
------------ ------------
Total Current Assets 1,689,104 1,937,240
Property and equipment , net of accumulated depreciation 43,895 45,097
Leases receivable 138,114 166,746
------------ ------------
Total Assets $ 1,871,113 $ 2,149,083
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 267,898 $ 367,992
Accrued loss on discontinued operations 6,743 80,000
------------ ------------
Total Current Liabilities
274,641 447,992
------------ ------------
Total Liabilities 274,641 447,992
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 20,360,346
Discount on Common Stock (8,123,528) (8,123,528)
Accumulated Deficit (10,640,346) (10,535,727)
------------ ------------
Total Stockholders' Equity 1,596,472 1,701,091
------------ ------------
Contingencies
Total Liabilities and Stockholders' Equity $ 1,871,113 $ 2,149,083
============ ============
</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 three months ended March 31,
1998 and 1997
(Unaudited)
March 31, 1998 March 31, 1997
<S> <C> <C>
General and administrative expenses $ 129,991 $ 134,263
Interest income 17,715 36,488
Gain (loss) on disposal of fixed Assets 2,402
Gain (loss) from investment securities 5,255
Interest expense -- (7,765)
--------- ---------
Income tax benefit -- --
--------- ---------
Loss from continuing operations (104,619) (105,540)
Discontinued operations:
Loss from operations -0- (433,714)
Loss on disposals -- --
--------- ---------
Net loss ($104,619) ($539,254)
========= =========
Basic and diluted earnings per share:
Loss from continuing operations $ (.005) $ (.008)
========= =========
Loss from discontinued operations $ (.000) $ (.035)
========= =========
Basic and diluted net loss per share $ (.005) $ (.045)
========= =========
</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 three months ended March 31, 1998 and 1997
March 31, 1998 March 31, 1997
----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss ($ 104,619) ($ 539,254)
Adjustments to reconcile net (loss)
to net cash provided by operating activities
Depreciation and Amortization 1,202 128,836
Realized and unrealized (gain)loss on
investment securities (4,059)
Changes in balance sheet accounts:
(Increase) decrease in accounts receivable 83,276
(Increase) decrease in inventory (1,718)
Decrease in Assets held for sale 176,822
Increase ( decrease) in accounts payable (173,351) (286,397)
and other liabilities 62,475
Increase ( decrease) in deferred revenue
Sales of investment securities - trading 113,340 0
----------- -----------
Net cash provided by (used from)
Operating activities 9,335 (552,782)
----------- -----------
Cash flows from investing activities:
Purchases of equipment (1,102)
Payments received from leases 28,632 25,158
Note Receivable (450,000) 0
----------- -----------
Net cash (used from) provided by (421,368) 24,056
----------- -----------
Investing activities
Cash flows from financing activities:
Net cash used from financing activities NONE NONE
----------- -----------
Net increase (decrease) in cash and cash
Equivalents (412,033) (528,726)
Cash and cash equivalents - beginning of
Period 535,651 1,906,085
----------- -----------
Cash and cash equivalents - end of period $ 123,618 $ 1,377,359
=========== ===========
Supplemental Cash Flow Information:
Cash payments for interest 0 $ 7,765
=========== ===========
Supplemental Schedule of Non-Cash
Investing and Financing Activities: NONE NONE
=========== ===========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ETHIKA CORPORATION (Unaudited)
MARCH 31, 1998
NOTE 1 - BUSINESS COMBINATION
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 31, 1998, $450,000 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.
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"). 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. 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 March 31, 1998 and December 31, 1997, 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.
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 20,360,346
at March 31, 1998 and 12,567,706, for the three months ended March 31, 1997.
Restatement and Reclassifications: Certain 1997 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 - 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 was
recorded in the December 31, 1997 financial statements related to anticipated
losses from the operations of the Segment through the actual disposal dates. A
$10,132 change was recorded against this accrual at March 31, 1998 to recognize
the effect of the sale of TRS. 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.
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.
NOTE 4 - 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 5 - GOING CONCERN
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. For the three month period ended March
31, 1998, the Company incurred a loss of $104,619 and had an accumulated deficit
of $10,640,346 that raise substantial doubt about its ability to continue as a
going concern. Additionally, Ethika and NADC, the entity that the Corporation
has proposed acquiring, received going concern opinions from their respective
independent accountants with regard to the 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.
<PAGE>
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Liquidity and Capital Resources
Heavy cash drains were placed upon the Corporation as a result of the litigation
activities, 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. In February 1998,
Text Retrieval Systems was sold and on April 2, 1998, Compass Data Systems of
Salt Lake City, Utah was sold. Additionally, a letter of intent has been signed
for the sale of Legislative Information Systems, Inc., pending completion of due
diligence by the buyer.
Results of Operations
Three Months Ended March 31, 1998 Compared to Restated Three Months Ended March
31, 1997
The three months ended March 31, 1998, generated a net loss from continuing
operations of $104,619 ($.005 per share) compared to a loss of $105,540 ($.008
per share) for the comparable period of 1997. This decrease results primarily
from reduction in staffing at the Corporate headquarters. A loss from
discontinued operations of $63,506 ($.003 per share) was offset against amounts
accrued at December 31, 1997 compared to $433,714 ($.035 per share) for the same
period in 1997. This reduction results primarily from the sale of the TRS
division in February and positive earnings reported by the Company's Compass
Data Systems division for the three month period.
Part II Other Information
NONE
Item 6 - Exhibits and Reports on 8K
(a) Exhibits
(27) Financial Data Schedule
(b) NONE
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Ethika Corporation
------------------
(Registrant)
Date: May 8, 1998 /s/Dennis Brovarone
-------------------
President
Date: May 8, 1998 /s/David E. Williams
--------------------
Vice President Finance
And Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 123,619
<SECURITIES> 440,000
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,689,104
<PP&E> 64,797
<DEPRECIATION> (20,900)
<TOTAL-ASSETS> 1,871,113
<CURRENT-LIABILITIES> 274,641
<BONDS> 0
0
0
<COMMON> 20,360,346
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1,871,113
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 129,991
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (104,619)
<INCOME-TAX> 0
<INCOME-CONTINUING> (104,619)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (104,619)
<EPS-PRIMARY> (.005)
<EPS-DILUTED> (.005)
</TABLE>
