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, 1999
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.)
11249 W. 103rd Drive
Westminster, Colorado 80021
(Address of Principal Executive Office)
Registrant's telephone number including area code: (303) 637 2351
Former name, former address, and former fiscal year, if changed since last
report: NONE.
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, 1999
Common Stock, $1.00 par value 23,360,346
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ETHIKA CORPORATION
INDEX
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated balance sheets - March 31, 1999
and December 31, 1998......................................3
Consolidated statements of operations for the three
months ended March 31, 1999 and 1998.........................4
Consolidated statements of cash flows for the three months
ended September 30, 1999 and 1998............................5
Notes to consolidated financial statements...................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................13
PART II. OTHER INFORMATION
None
Signatures .......................................................... 15
2
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ETHIKA CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheet March 31, 1999 and December 31, 1998
(Unaudited)
March 31, 1999 December 31, 1998
ASSETS
Current Assets:
Cash and cash equivalents $ 36,483 $ 48,318
Accounts receivable, net of allowance
for doubtful accounts 7,457 7,457
Investment securities- Trading 135,000 135,000
Note Receivable 62,683 74,683
------ ------
Total Current Assets 241,623 265,458
Note Receivable - Non current 69,516 69,515
Total Assets $ 311,139 $ 334,973
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 227,344 $ 233,343
------------ ------------
Total Current Liabilities 227,344 233,343
------------ ------------
Stockholders' Equity
Common Stock, $1 par value authorized 50,000,000 shares;
issued 23,387,658 shares and 14,975,018; outstanding
23,360,346 shares and 14,947,706 shares; 23,361,458 20,361,458
Discount on Common Stock ( 11,108,528) ( 8,123,528)
Accumulated Deficit (12,168,023) (12,135,188)
Less: 27,312 shares of Treasury stock at cost ( 1,112) ( 1,112)
----------- -----------
Total Stockholders' Equity
83,795 101,630
------ -------
Total Liabilities and Stockholders' Equity $ 311,139 $ 334,973
============= =============
The Accompanying notes are an integral part of these Consolidated Financial
Statements
3
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Ethika Corporation and Subsidiaries
Consolidated Statement of Operations
For the three months ended March 31, 1999 and 1998
(Unaudited)
March 31, 1999 March 31, 1998
-------------- --------------
General and administrative expenses $ 32,849 $ 129,991
Interest income 14 17,715
Gain (loss) on disposal of fixed Assets 2,402
Gain (loss) from investment securities 5,255
Interest expense - -
------ -------
Income tax benefit - -
------ -------
Loss from continuing operations ( 32,835) (104,619)
------------ ---------
Net loss ($ 32,835) ($104,619)
=========== ==========
Basic and diluted earnings per share:
Loss from continuing operations $(.001) $(.005)
====== ======
Loss from discontinued operations $(.001) $(.000)
====== ======
Basic and diluted net loss per share $(.001) $(.005)
====== ======
The Accompanying notes are an integral part of these Consolidated Financial
Statements
4
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Ethika Corporation and Subsidiaries Consolidated Statement of Cash Flows
For the three months ended March 31, 1999 and 1998
March 31, 1999 March 31, 1998
Cash Flows from Operating Activities:
Net loss ($ 32,835) ($104,619)
Adjustments to reconcile net (loss)
to net cash provided by operating activities
Depreciation and Amortization - 1,202
Realized and unrealized (gain)loss on
investment securities - (4,059)
Changes in balance sheet accounts:
(Increase) decrease in accounts receivable
(Increase) decrease in inventory
Decrease in Assets held for sale 176,822
Increase ( decrease) in accounts payable ( 6,000) (173,351)
and other liabilities
Increase ( decrease) in deferred revenue
Sales of investment securities - trading 113,340
-------
Net cash provided by (used from)
Operating activities ( 38,835) 9,335
Cash flows from investing activities:
Payments received from leases 28,632
Note Receivable 12,000 (450,000)
------ --------
Net cash (used from) provided by 12,000 (421,368)
------ --------
Investing activities
Cash flows from financing activities:
Stock issued for Directors Fees 15,000 NONE
------- -------
Net increase (decrease) in cash and cash
Equivalents ( 11,835) (412,033)
Cash and cash equivalents - beginning of
Period 48,318 535,651
------ -------
Cash and cash equivalents - end of period $ 36,483 $ 123,618
============= =========
Supplemental Cash Flow Information:
Cash payments for interest 0 0
============= =========
Supplemental Schedule of Non-Cash
Investing and Financing Activities: NONE NONE
============= =========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
5
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ETHIKA CORPORATION
Notes to Unaudited Consolidated Financial
Statements For the three months ended March 31, 1999.
NOTE 1 - BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Ethika Corporation (the "Corporation") had operated as an applied technology
company through its formerly 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. Accordingly, the operations of these segments have been presented as
discontinued operations in the accompanying financial statements.
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 BNEZ which has not resulted in any impairment of the net assets.
The negotiations on or about July 1, 1998, management closed the business of LIS
and have taken appropriate action to dissolve the LIS Corporation.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements of the
Corporation and its wholly owned subsidiaries. All significant intercompany
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.
6
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INVESTMENTS
At December 31, 1998, and 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. During the years ended December 31, 1998, and
1997, the reported unrealized losses of $648,888 and $55,719 and $19,296
realized losses in 1998.
REVENUE RECOGNITION
The Corporation recognized revenue for software sales ratably over the period of
each product's subscription life. The Corporation's various products were
updated annually, quarterly and monthly based on content, availability and/or
specific customer agreements. 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 customer' right of return and
limited history of returns for the product. Revenue associated with customer
programming was recorded, when completed and billed.
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.
6
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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 and
13,161,467, and for the years ended December 31, 1998, and 1997, respectively.
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 year' statements have been reclassified to conform with the current
year financial statements.
NOTE 3 - 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.
7
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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.
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.
8
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NOTE 4 - 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.
Revenues for the Segment approximated $510,767 and $1,641,000 for the years
ended December 31, 1998, and 1997, 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. The
Corporation placed $50,000 in escrow to pay unrecorded liabilities and other
items. As of December 31, 1998, $42,731 of these funds has been disbursed.
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. 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.
NOTE 5 - NOTE RECEIVABLE
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.
At December 31, 1998, the Corporation had a net investment in direct financing
leases of $171,490.
On March 12, 1999, the Corporation entered into an agreement with the Parent
Corporation of the lessee, whereby the Corporation assigned its leases to the
Parent Corporation for a non interest bearing promissory note in the amount of
$128,000 plus a $12,000 cash payment. The note provides for sixteen monthly
installments of $8,000 beginning on April 15, 1999. The Corporation recorded the
note at present value of $144,198 imputing interest at 8.00%. The Corporation
recognized a loss of $27,292 on this transaction.
9
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NOTE 6 - 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.
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.
On September 20, 1998, the Registrant was served with the Third Amended
Complaint in an action entitled Jeffrey Allard, et al. v. Kidztime TV, Inc., et
al in Colorado District Court, Jefferson County, Colorado. The Third Amended
Complaint which named Ethika Corporation as a Defendant alleges that Kidztime
TV, Inc., a subsidiary of North American Digicom Corporation engaged in an
illegal enterprise whereby Kidztime TV and other Defendants obtained
approximately $50,000,000 from more than 3,000 individuals during 1996 and 1997,
including approximately $1,300,000 obtained from the Plaintiffs. The Third
Amended Complaint alleges that Ethika is jointly and severally liable with the
other Defendants in that Ethika was controlled by NADC and acted in continuation
of concealment of the illegal enterprise in violation of the Colorado Organized
Crime Control Act by its execution of a letter of intent and the Agreement and
Plan of Reorganization with NADC and by the joint press releases disseminated by
Ethika Corporation and NADC. The Third Amended Compliant does not allege that
Ethika Corporation sold securities in violation of the Colorado Securities Act
or the Colorado Consumer Protection Act.
10
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The Registrant filed its Answer on October 16, 1998, denying the allegations of
participation in an illegal enterprise contained in the Third Amended Complaint
in that the sale of securities to the Plaintiffs all occurred prior to Ethika
entering into the letter of intent and the Agreement and Plan of Reorganization
with NADC and prior to the joint press releases disseminated by Ethika
Corporation and NADC. In addition the Registrant denied that it was controlled
by NADC or otherwise participated in the illegal enterprise or received any
proceeds thereof. The Registrant believes that it has substantial defenses to
all allegations made against it. While it is not possible at this time to
estimate the potential liability of the allegations, any liability in excess of
$10,000 would have a materially adverse effect upon the Registrant.
On January 6, 1999, the Registrant was served with an Amended Complaint in an
action entitled Romona Chapman et al v. Kidztime TV, Inc., et al in Colorado
District Court, Jefferson County, Colorado. This complaint is virtually
identical to the action described above.
The Registrant also filed a Cross Claim against NADC for the $450,000 of
principal and accrued interest loaned to NADC during the first quarter of 1998.
As of the date of this Report, NADC has not yet answered the Cross Claim.
NOTE 7 - 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.
11
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NOTE 8 - REORGANIZATION AGREEMENT
On January 26, 1998, the Corporation entered into an Agreement and Plan of
Reorganization (the "Reorganization Agreement") with the North American Digicom
Corporation ("NADC"), a privately owned company headquartered in Lakewood,
Colorado, to acquire 100% of the outstanding common stock of NADC in exchange
for Ethika common stock. The NADC shareholders would have received approximately
95% of the then outstanding shares.
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 its 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 and the
Registrant has provided $450,000 allowance against the note.
NOTE 9 - 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, 1998, the Company incurred a loss from operations of $1,599,461 and
had an accumulated deficit of $12,135,188 that raise substantial doubt about its
ability to continue as a going concern.
NOTE 10 - YEAR 2000 COMPLIANCE
The only software program the Company utilizes is a general ledger program. The
Company does not anticipate any compliance problems with its software programs
or vendors.
12
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Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Liquidity and Capital Resources
The Registrant's liquidity is highly dependent upon payments on its note
receivable, which is current to date. The Registrant's plan of operations is to
hold a shareholder's meeting in the first of June 1999 for the purposes of
electing directors, amending the Articles of Incorporation to eliminate the par
value of the common stock, authorizing a reverse stock split of the outstanding
common stock and any other duly raised business. 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
The three months ended March 31, 1999, generated a net loss from continuing
operations of $32,835 ($.001 per share) which includes $15,000 of stock issuance
for shares issued to management compared to a loss of $104,619 ($.005 per share)
for the comparable period of 1998. The decrease in the loss is due to a $112,142
reduction in general and adminstrative expense.
Nine Months Ended September 30, 1998 Compared to Restated Nine Months Ended
September 30, 1997
The nine months ended September 30, 1998, generated a net loss from continuing
operations of $1,158,740 ($.057 per share) compared to a loss of $494,648 ($.034
per share) for the comparable period of 1997. This increase results primarily
from establishing a Reserve for the potential uncollectability of the $450,000
notes receivable from NADC and loses from investment securities of $326,205.
13
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Part II Other Information:
Item 1. Legal Proceedings
On September 20, 1998, the Registrant was served with the Third Amended
Complaint in an action entitled Jeffrey Allard, et al v. Kidztime TV, Inc., et
al in Colorado District Court, Jefferson County, Colorado. The Third Amended
Complaint which named Ethika Corporation as a Defendant alleges that Kidztime
TV, Inc., a subsidiary of North American Digicom Corporation engaged in an
illegal enterprise whereby Kidztime TV and other Defendants obtained
approximately $50,000,000 from more than 3,000 individuals during 1996 and 1997,
including approximately $1,300,000 obtained from the Plaintiffs. The Third
Amended Complaint alleges that Ethika is jointly and severally liable with the
other Defendants in that Ethika was controlled by NADC and acted in continuation
of concealment of the illegal enterprise in violation of the Colorado Organized
Crime Control Act by its execution of a letter of intent and the Agreement and
Plan of Reorganization with NADC and by the joint press releases disseminated by
Ethika Corporation and NADC. The Third Amended Complaint does not allege that
Ethika Corporation sold securities in violation of the Colorado Securities Act
or the Colorado Consumer Protection Act.
The Registrant filed its Answer on October 16, 1998 denying the allegations of
participation in an illegal enterprise contained in the Third Amended Complaint
in that the sale of securities to the Plaintiffs all occurred prior to Ethika
entering into the letter of intent and the Agreement and Plan of Reorganization
with NADC and prior to the joint press releases disseminated by Ethika
Corporation and NADC. In addition the Registrant denied that it was controlled
by NADC or otherwise participated in the illegal enterprise or received any
proceeds thereof. The Registrant believes that it has substantial defenses to
all allegations made against it. While it is not possible at this time to
estimate the potential liability of the allegations, any liability in excess of
$10,000 would have a materially adverse effect upon the Registrant.
The Registrant also filed a Cross Claim against NADC for the $450,000 of
principal and accrued interest loaned to NADC during the first quarter of 1998.
As of the date of this Report, NADC has not yet answered the Cross Claim.
Item 6 - Exhibits and Reports on 8K
Exhibits:
(27) Financial Data Schedule
(b) 8-K-None
14
<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 20, 1999 /s/Dennis Brovarone
-------------------
President
15
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000029322
<NAME> Ethika Corporation
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 36,483
<SECURITIES> 135,000
<RECEIVABLES> 62,683
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 241,623
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 311,139
<CURRENT-LIABILITIES> 227,344
<BONDS> 0
0
0
<COMMON> 83,795
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 311,139
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 17,849
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (17,835)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (17,835)
<EPS-BASIC> (.001)
<EPS-DILUTED> (.001)
</TABLE>
