SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For Six Months Ended June 30, 1998
Commission File Number 0-3296
ETHIKA CORPORATION
(Exact name of the registrant as specified in its charter)
MISSISSIPPI 64-044887
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
9975 Wadsworth Parkway #220
Westminster, Colorado 80021
(Address of Principal Executive Office)
Registrant's telephone number including area code: (303) 637-2351
107 The Executive Center
Hilton Head Island, South Carolina 29928
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), Yes ( ) No ( )
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 their latest practicable date.
CLASS Outstanding at August 10, 1998
Common Stock, $1.00 par value 20.360.346
<PAGE>
ETHIKA CORPORATION
INDEX
PART 1: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated balance sheets - June 30, 1998 and December 31, 1997......3
Consolidated statements of operations for the three and six months
Ended June 30, 1998 and 1997...........................................4
Consolidated statements of cash flows for the six months
Ended June 30, 1998 and 1997...........................................5
Notes to consolidated financial statements.............................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................8
PART II. OTHER INFORMATION
Termination of Agreement and Plan of Reorganization........................8
Close of Hilton Head Island Headquarters...................................9
Revised Plan of Operation..................................................9
Signatures................................................................10
<PAGE>
ETHIKA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET JUNE 30, 1998 AND DECEMBER 31, 1997
(unaudited)
______________________________________________________________
June 30, 1998 December 31, 1997
_____________ _________________
ASSETS
Current Assets:
Cash and cash equivalents $ 62,020 $ 535,651
Accounts receivable
net of allowance for doubtful accounts 112,764 112,763
Leases receivable 571,242 549,281
Investment securities - Trading 450,000 0
Note receivable 0 739,545
_____________ _________________
Total Current Assets 1,196,026 1,937,240
Property and equipment
net of accumulated depreciation 0 45,097
Leases receivable 112,547 166,746
_____________ _________________
Total Assets $1,308,573 $2,149,083
_____________ _________________
_____________ _________________
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 224,091 367,992
Accrued loss on discontinued operations 0 80,000
_____________ _________________
Total Current Liabilities 224,091 447,992
_____________ _________________
Total Liabilities 224,091 447,992
Stockholders' Equity
Common Stock
$1 par value authorized - 50,000,000 shares;
Issued 20,387,658 shares and
20,387,658;
Outstanding 20,360,346 shares and
20,360,346 shares; 20,360,346 20,360,346
Discount on Common Stock (8,123,528) (8,123,528)
Accumulated Deficit (11,152,336) (10,535,727)
____________ ______________
Total Stockholder's Equity 1,084,482 1,701,091
____________ ______________
Contingencies ______________
Total Liabilities and
Stockholders' Equity $1,308,573 $2,149,083
____________ ______________
____________ ______________
The accompanying notes are an integral part of these Consolidated Financial
Statements
<PAGE>
ETHIKA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
For the three and six months ending
June 30, 1998 and 1997
(unaudited)
Three Months Ended Six Months Ended
June 30 June 30
1998 1997 1998 1997
___________________ _____________________
General and administrative
expenses $ 136,005 $ 636,184 $ 329,127 $ 661,839
Interest Income 10,056 31,994 27,770 68,242
Gain (loss) on disposal
of fixed Assets (35,397) - (32,995) -
Gain (loss) from
Investment Securities (297,518) - (282,263) -
Interest expense - (6,413) - (13,938)
___________________ _____________________
Income tax benefit - - - -
___________________ _____________________
(Loss) from
continuing operations (448,864) (610,603) (616,609) (716,143)
Discontinued operations:
Income (loss) from operations - 59,752 - (373,962)
(Loss) on disposals _ _ _ _
___________________ _____________________
Net loss ($448,864) ($550,851) ($616,609)($1,090,105)
___________________ _____________________
___________________ _____________________
Basic and diluted earnings
per share:
(Loss) from continuing
operations ($.023) ($.048) ($.041) ($.057)
___________________ _____________________
___________________ _____________________
Gain from discontinued
operations - $.004 $.001 ($.057)
___________________ _____________________
___________________ _____________________
Basic and diluted
net (loss) per share $.023 ($.044) ($.041) ($.087)
___________________ _____________________
___________________ _____________________
The accompanying notes are an integral part of these Consolidated Financial
Statements.
<PAGE>
ETHIKA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended June 30, 1998 and 1997
Six Months Ended June 30
1998 1997
_________________________
Cash Flows from Operating Activities:
Net loss ($616,609) ($1,090,105)
Adjustments to reconcile net (loss)
to net cash provided by operating activities
Depreciation and Amortization 0 308,813
Loss on Disposal of Fixed Assets 35,397 0
Realized and unrealized (gain) loss on
investment securities 282,263 0
Changes in balance sheet accounts:
Decrease in accounts receivable 41,748
Decrease in income taxes 135,817
(Increase) decrease in inventory 1,822
Decrease in Assets held for sale 739,545
(Decrease) in accounts payable & other liabilities (233,901) (95,397)
Increase (decrease) in deferred revenue 83,190
Sales of investment securities - trading 171,847 0
_________________________
Net cash provided by (used from)
Operating activities 388,542 (614,112)
__________________________
Cash flows from investing activities:
Purchases of equipment 0 (47,425)
Disposal of fixed assets 9,700
Payments received from leases 54,199 85,251
Proceeds from sales of CDS (476,072) 0
Issuance of Notes Receivable (450,000) (146,370)
_________________________
Net cash (used from) provided by
Investing activities (862,173) (108,544)
_________________________
Cash flows from financing activities:
Net borrowing (payments) on debt 0 27,533
_________________________
Net cash used from financing activities 0 27,533
_________________________
Net increase (decrease) in cash
and cash equivalents (473,631) (695,123)
Cash and cash equivalents -
beginning of period 535,651 1,906,085
_________________________
Cash and cash equivalents -
end of period $ 62,020 $1,210,962
_________________________
_________________________
Supplemental Cash Flow information:
Cash payments for income taxes $ 0 $ 0
_________________________
_________________________
Cash payments for interest $ 0 $ 13,938
_________________________
_________________________
Supplemental Schedule of Non-Cash
Investing and Financing Activities: NONE NONE
_________________________
_________________________
The accompanying notes are an integral part of the Consolidated Financial
Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ETHIKA CORPORATION (Unaudited)
JUNE 30, 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 required 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 outstanding with all fractional shares being rounded up to
the next highest multiple of fifty (50) shares. Then the shareholders of NADC
would 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 would receive approximately 19.6 million post-split shares of
ETHIKA, which would represent approximately 95% of the then outstanding
shares. The Reorganization Agreement also required 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. This
transaction was to be a reverse acquisition, where NADC would become the
historical reporting company and treated as the acquirer for accounting
purposes.
Closing of the Reorganization Agreement was 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 Articles 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 gave the Trustee (Frank Grey, who was 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 were also required to provide
their approval of the terms and conditions of this transaction.
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% had been advanced against this
line of credit.
On July 30, 1998, the Registrant received notification from North American
Digicom Corporation (NADC) that it had abandoned its Reorganization Plan with
the Registrant. Concurrent with this termination, Phillip F. Grey, Wayne
Johnson and Louis Scotti resigned from the Registrant's Board of Directors.
The Registrant and NADC had previously agreed to extend the closing of the
Agreement and Plan of Reorganization until August 31, 1998. However due to the
inability of either party to satisfy the terms of the agreement on or before
such date, NADC chose to terminate the Reorganization Plan.
Repayment of the $450,000 loaned by the Registrant to NADC is in default. The
Registrant is negotiating with NADC to restructure the debt into an equity
investment in NADC or a long term convertible debt. In the absence of a
negotiated restructuring of the notes receivable, the Registrant will take
appropriate legal action to obtain a judgement or otherwise protect its
interest. NADC's latest audited financial statements were for the period ended
December 31, 1997 and included a going concern opinion from their auditor.
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.
As previously disclosed in Form 10 Q for March 31, 1998, on February 17, 1998,
the Corporation completed the sale of Text Retrieval Systems, Inc. to TRS
Acquisition Corporation, a closely held corporation, for $1,500,000 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 Company received preferred stock in BNEZ that was
convertible to $850,000 of common stock from this transaction. The security
was converted to 1,676,000 shares of common stock on August 12, 1998, which
are currently unregistered and the Company is restricted from selling for at
least a one-year period. The fair value of BNEZ common shares currently, based
on traded market prices, is approximately $570,000. Management has not
recorded any gain on the sale and has valued the securities at $476,000 as of
June 30,1998. This lower value reflects management's best estimate of the
discount associated with the restrictions discussed above and other factors.
NOTE 2- 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 v. 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's 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.
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Registrant's plan of operations for the remainder of the fiscal year is to
revise its Preliminary Proxy and hold a shareholders' meeting for the purposes
of electing directors, eliminating the par value of the common stock, a
reverse stock split of the outstanding common stock and any other duly raised
business. As a result of closing the Hilton Head office the Registrant has
reduced its overhead expenses to approximately $6,000 per month and expects to
have sufficient cash resources for its reduced operations.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. Having investment income as its only
source of income, raises substantial doubt about the ability of the Company to
continue as a going concern.
RESULTS OF OPERATIONS
Six Months Ended June 30, 1998, Compared to Restated Six Months Ended June 30,
1997
The six months ended June 30, 1998, generated a net loss from continuing
operations of $842,866 ($.041 per share) compared to a loss of $1,094,788
($.087 per share) for the comparable period of 1997. This decrease results
primarily from reduction in staffing at the Corporate headquarters. A gain
from discontinued operations of $226,255 ($.011 per share) was offset against
amounts accrued at December 31, 1997 compared to $4,683 for the same period in
1997. This increase 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 months ended March 31, 1998 offset by continued losses
from its Legislative Information division.
PART II - OTHER INFORMATION
Termination of Agreement and Plan of Reorganization.
On July 30, 1998 the Registrant received notification from North American
Digicom Corporation (NADC) that it had abandoned its Reorganization Plan with
the Registrant. Concurrent with the termination, Phillip F. Grey, Wayne
Johnson and Louis Scotti resigned from the Registrant's Board of Directors.
The Registrant and NADC had previously agreed to extend the closing of the
Agreement and Plan of Reorganization until August 31, 1998. However due to
the impossibility of closing on or before such date, NADC chose to terminate
the Reorganization Plan.
Repayment of the $450,000 loaned by the Registrant to NADC is in default. The
Registrant is negotiating with NADC to restructure the debt into an equity
investment in NADC or a long term convertible debt. In the absence of a
negotiated restructuring of the notes receivable, the Registrant will take
appropriate legal action to obtain a judgement or otherwise protect its
interest.
Close of Subsidiary Business.
On or about July 1, 1998, the Registrant's Board of Directors acting as the
sole shareholder of its wholly owned subsidiary, Legislative Information
Systems, Inc., a Delaware corporation (LIS) elected Dennis Brovarone as the
sole President and Director of LIS and resolved to close the business of LIS
and take appropriate action to dissolve the LIS corporation pursuant to
Delaware law. The closing of LIS was a result of the resignation of its
president, Donald Withrow on or before May 22,1998. It is the Registrant's
position that Mr. Withrow's resignation was a breach of his employment
agreement as well as a breach of his fiduciary duty to LIS. As LIS has never
been profitable and without the personal services of its founder and chief
executive officer, the Registrant's Board of Directors determined that
profitibility was not possible and that dissolution of LIS is in the best
interest of the Registrant and its shareholders.
Close of Hilton Head Island Headquarters.
The Registrant has also closed its headquarters in Hilton Head, South Carolina
and established its executive office in Westminster, Colorado. Concurrent with
the closing of the Hilton Head office, the Registrant's Board of Directors
have accepted the resignation of David Williams, its chief financial officer.
As yet a new chief financial officer has not been appointed. The Registrant's
new address is 9975 Wadsworth Parkway, #220, Westminster, Colorado 80021,
telephone (303) 637-2351, fax (303) 466-4826.
Revised Plan of Operation.
The Registrant's plan of operations for the remainder of the fiscal year is to
revise its Preliminary Proxy and hold a shareholders' meeting for the purposes
of electing directors, eliminating the par value of the common stock, a
reverse split of the outstanding common stock and any other duly raised
business.
ITEM 6 - EXHIBITS AND REPORTS ON 8K
(a) EXHIBITS
(27) Financial Data Schedule
(b) NONE
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 thereto duly authorized.
ETHIKA CORPORATION (Registrant)
Date: August 17, 1998
/s/ Dennis Brovarone
BY: Dennis Brovarone, President
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE>5
<CIK>0000029322
<PERIOD-START>JAN-01-1998
<PERIOD-TYPE>6-MOS
<FISCAL-YEAR-END>DEC-31-1998
<PERIOD-END>JUN-30-1998
<CASH> 62,020
<SECURITIES> 571,242
<RECEIVABLES> 562,164
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,196,026
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,308,573
<CURRENT-LIABILITIES> 224,091
<BONDS> 0
0
0
<COMMON> 20,387,658
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1,308,573
<SALES> 0
<TOTAL-REVENUES> 27,770
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 329,123
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (616,609)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (616,609)
<EPS-PRIMARY> 0
<EPS-DILUTED> (.041)
</TABLE>
