SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
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, 1998 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.)
11249 W 103rd Drive
Westminster, Colorado 80021
(Address of Principal Executive Office)
Registrant's telephone number, including area code: 303-637-2351
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-B 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-KSB OR ANY AMENDMENT TO
THIS FORM 10-KSB. [ ]
STATE ISSUER'S REVENUES FOR ITS MOST RECENT FISCAL YEAR: $510,767
AS OF MARCH 31 1999, 23,360,346 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 ON APRIL 2, 1999) OF
ETHIKA CORPORATION HELD BY NON-AFFILIATES (10,429,918 shares) WAS APPROXIMATELY
$208,598.
DOCUMENTS INCORPORATED BY REFERENCE
Certain Exhibits
<PAGE>
PART I
ITEM 1 - BUSINESS
General
Ethika Corporation ("Ethika" or the "Corporation"), for the previous two fiscal
years had been primarily engaged in publishing electronic reference libraries.
During the past fiscal year the Company sold two of its subsidiaries and the
third ceased operations. Also during the past fiscal year, the Corporation had
entered into a plan of reorganization with North American Digicom Corporation
("NADC"), a Colorado corporation which was engaged in the tele-communications
industry. In July 1998 NADC terminated the plan of reorganization. Since that
time the Corporation has focused primarily on reducing its operating expenses
and paying its liabilities.
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.
Settlement of Litigation and Change in Control
In December 1997 the Corporation entered into a Settlement Agreement with the
Plaintiffs of the legal action filed in U.S. District Court for the
SouthernDistrict 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.
Agreement and Plan of Reorganization and Termination Thereof
On January 26, 1998, the Corporation entered into an Agreement and Plan
ofReorganization (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. During
February and March of 1998, the Corporation extended loans to NADC in the amount
of $450,000.
Closing of the Reorganization Agreement was conditioned upon the Corporation
holding a Shareholders meeting to approve the Reorganization Agreement and
effect certain amendments to the Corporation's Articles of Incorporation as well
as other conditions. The Corporation was unable to hold the Shareholders Meeting
within a time period acceptable to NADC and in July, 1998 NADC unilaterally
terminated the Reorganization Agreement. Concurrent with the termination,
Phillip F. Grey, Wayne Johnson and Louis Scotti resigned from the
<PAGE>
Corporation's board of directors. NADC defaulted upon the payment of its
indebtedness and the Corporation has filed claim against NADC. (see Legal
Proceedings).
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 experienced since its entry
into this industry, the Board of Directors and management determined it to be in
the best interest of the Corporation to divest itself of its electronic
publishing business unit which was comprised of Text Retrieval Systems, Inc.
Compass Data Systems, Inc. and Legislative Information Systems, Inc.
Accordingly, the accompanying financial statements reflect the decision to
dispose of this segment.
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. TRS published 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. In the fourth quarter of 1996, management
determined that earnings targets would not be met. 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.
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
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.
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.
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,
<PAGE>
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.
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 sale 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. In September 1998, the Corporation converted its
preferred stock into 1,687,000 shares of BNEZ common stock.
Acquisition of Legislative Information Systems, Inc. and Closing Thereof
On June 10, 1997 the Corporation acquired Legislative Information Systems
Corporation ("LIS"). LIS became a wholly owned subsidiary of the Corporation
through the exchange of 1,123,433 shares of the Corporation's common stock for
all of the outstanding stock of LIS. LIS was an electronic publishing company
located in Annandale, Virginia specializing in federal aviation regulations,
banking regulations, and custom service contracts.
In July, 1998, the Corporation's Board of Directors acting as the sole
shareholder of LIS elected Dennis Brovarone as the sole President and Director
of LIS and resolved to close the business of LIS. The closing of LIS was a
result of the resignation of its president, Donald Withrow on or before May 22,
1998. The Corporation believes that Mr. Withrow's resignation was in violation
of his employment agreement with LIS and a breach of his fiduciary duty to LIS
as an officer and director.
Employees
At December 31, 1998, the Corporation had one employee, its President.
ITEM 2 - PROPERTIES
The Corporation's office space is provided by its President without cost to the
Corporation.
ITEM 3 - 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
<PAGE>
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.
On January 6, 1999, the Registrant was served with the Amended Complaint in
an action entitled Ramona Chapman et al v. Kidztime TV, Inc., et al in Colorado
District Court, Jefferson County, Colorado. This Complaint is virtually
identical to the Jeffrey Allard, et al v. Kidztime TV, Inc., et al, action
described above. The Registrant filed its Answer to this action on or above
January 26, 1999. 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.
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 is traded on the OTC Electronic Bulletin Board
under the symbol ETKA. The following table sets forth the reported high and low
sales price as reported by the OTC Electronic Bullentin Board for the quarters
indicated. This information does not include retail markups, markdowns, or
commissions.
1998 1997
--------------- ---------------
High Low High Low
---- --- ---- ---
Quarter
First 0.4375 0.25 0.625 0.40625
Second 0.22 0.07 0.5625 0.25
Third 0.07 0.03 0.5625 0.140625
Fourth 0.06 0.00 0.140625 0.09375
No dividends were paid on the Corporation's common stock during the last two
<PAGE>
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 31, 1999 was approximately 2,400.
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following should be read in conjunction with the Consolidated Financial
Statements and notes thereto appearing elsewhere in this report.
Liquidity and Capital Resources
Following the sales of Compass Data Systems, Inc., and Text Retrieval
Systems, Inc., and the closing of Legislative Information Systems, Inc., the
Corporation's only sources of liquidity during the fiscal year ended December
31, 1998 were the sale proceeds from the sale of Alanco Environmental Resources
Corporation common stock and the Fry Guy equipment lease payments. During the
fiscal year, the Corporation sold all of the Alanco shares ending this source of
liquidity. In March, 1999 the Corporation agreed to restructure the Fry Guy
leases in order to maintain a sufficient level of liquidity to conduct the
Corporation's business plan for the current fiscal year. The Corporation's only
other capital resources and possible sources of liquidity, are its royalty
interest from the sale of Text Retrieval Systems, Inc., and the 1,687,000 shares
of Ben Ezra Weinstein and Company, Inc. (BNEZ) common stock. No royalty payment
is expected for the fiscal year ended 1998. The BNEZ common stock is eligible
for sale and has a present market value of approximately $135,000 though the
Company has no present intention to sell the BNEZ shares.
The Corporation has reduced its overhead expenses to approximately $5,500
per month and expects to have sufficient cash resources for its operations and
to continue paying off the Corporation's outstanding liabilities.
Results of Operations
During the fiscal year ended December 31, 1998, the Corporation completed
the discontinuation of its electronic publishing subsidiaries, closed its
headquarters in Hilton Head, South Carolina and took other measures to
substantially reduce its administrative expenses. Administrative expenses for
the second half of the fiscal year (when all of the above were completed) were
$413,614 as compared to $1,123,195 for the comparable period for the fiscal year
ended December 31, 1997. The fiscal year ended December 31, 1998, generated a
net loss of $1,599,461 ($.079 per share) compared to a loss of $1,993,977 ($.151
per share) for the fiscal year ended December 31, 1997. The loss for the fiscal
year ended December 31, 1998 is primarily from establishing a Reserve for the
potential uncollectability of the $450,000 notes receivable from NADC and loses
from investment securities of $668,262.
Plan of Operations for the Current Fiscal Year
The Corporation's plan of operations for the current fiscal year is to hold
a shareholder's meeting for the purposes of electing directors, amending the
Articles of Incorporation to eliminate the par value of the common stock and
<PAGE>
authorizing a reverse stock split of the outstanding common stock. Management
considers the elimination of the par value to be advisable because Management
believes that par value is an antiquated concept of share value that provides no
realistic measure of value and causes a misleading indication of value.
Management also believes that a reverse split of the outstanding shares is
advisable for the purpose of restructuring the Corporation's capitalization so
as to be more attractive to a potential reorganization candidate. Thereafter the
Corporation shall seek a privately held business, which seeks to become a
publicly held corporation through a change in control reorganization with a
publicly held corporation with little or no operations. As of this date, the
Corporation has no agreement for such a reorganization and has not held any
discussions or negotiations with any party for such a reorganization.
Year 2000 Computer Problems
Many existing computer programs use only two digits to identify a year in
the date field. These programs were designed and developed without considering
the impact of the upcoming change in the century. If not corrected, many
computer applications could fail or create erroneous results by or at the Year
2000. The Year 2000 issue affects virtually all companies and organizations.
Although many companies undertake major projects to address the Year 2000
issue, Management does not believe that its operations are highly dependent upon
computer programs. However, the Corporation has undertaken to ensure that its
associated computer fields were designed and constructed to receive and
manipulate four digit integers instead of only two. The Corporation=s computer
system has been evaluated and found to adequately address the Year 2000 Issue.
As a result, no additional costs are expected to be incurred. The Corporation
does not anticipate any material risk resulting from Year 2000 issues in that
its computer programs are relatively simple word processing and accounting
programs which have been certified as Year 2000 ready. In addition, the
Corporation maintains physical files of all essential documents and data.
<PAGE>
ITEM 7 - FINANCIAL STATEMENTS
MILLER AND McCOLLOM
Certified Public Accountants
Independent Auditors' Report
Board of Directors
Ethika Corporation
We have audited the accompanying consolidated balance sheet of Ethika
Corporation as of December 31, 1998, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the two years in
the period ended December 31, 1998. These financial statements are the
responsibility of the Compan's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit 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 presentations.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Ethika Corporation as of
December 31, 1998, and the results of its operations and its cash flows for each
of the two years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial statements,
the Company incurred a net loss from operations of $1,599,461 for 1998 and it
has incurred substantial net losses for each of the past two years. As of
December 31, 1998, the Company had no source of operating revenues. These
factors and the others discussed in Note 13, raise substantial doubt about the
Company's ability to continue as a going concern. The financial statements do
not include any adjustments relating to the recoverability and classification of
recorded assets, or the amounts and classification of liabilities that might be
necessary in the event the Company cannot continue in existence.
/s/Miller and McCollom
Denver, Colorado
March 31, 1999
2170 South Parker Road Suite 270 * Denver, Colorado 80231 *303 745-2217 *
Fax 303 745-2265
<PAGE>
ETHIKA CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheet
December 31, 1998
ASSETS
Current assets
Cash and cash equivalents $ 43,019
Accounts receivable 7,457
Cash - escrow 5,299
Note receivable 74,683
Investment securities - Trading 135,000
-----------------------
Total current assets 265,458
Note receivable 69,515
-----------------------
Total assets $ 334,973
=======================
LIABILITIES AND STOCKHOLDER' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 233,343
-------------------
Total current liabilities 233,343
Common stock, $1 par value authorized 50,000,000 shares;
issued 20,387,658 shares: outstanding 20,360,346 shares 20,361,458
Discount on common stock (8,123,528)
Accumulated deficit (12,135,188)
-----------------------
102,742
Less: 27,312 shares of treasury stock at cost (1,112)
-----------------------
Total stockholders' equity 101,630
-----------------------
Total liabilities and stockholder' equity $ 334,973
=======================
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
<TABLE>
<CAPTION>
ETHIKA CORPORATION AND SUBSIDIARIES
Consolidated Statement of Operations
For the Years Ended December 31,
-----------------------------------
1998 1997
--------------------------- -------------------------
<S> <C> <C>
General and administrative expenses $ (413,614) $ (1,123,195)
Allowance for bad debts (477,292) -
Interest income 41,651 134,381
Gain (loss) on disposal of fixed assets (35,397) 341,849
Gain (loss) from investment securities (668,262) (55,719)
Interest expense - (18,868)
------------------------- -------------------------
(1,572,914) (721,552)
Income tax benefit 3,158 45,500
------------------------- -------------------------
Loss from continuing operations (1,549,756) (676,052)
Discontinued operations:
Loss from operations (6,974) (1,237,925)
Loss on disposals (42,731) (80,000)
------------------------- -------------------------
Net loss $ (1,599,461) $ (1,993,977)
========================= =========================
Basic and diluted earnings per share:
Loss from continuing operations $ (.076) $ (.051)
========================= =========================
Loss from discontinued operations $ (.003) $ (.100)
========================= =========================
Basic and diluted net loss per share $ (.079) $ (.151)
========================= =========================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
<TABLE>
<CAPTION>
ETHIKA CORPORATION AND SUBSIDIARIES
Statement of Cash Flows
For the Years Ended December 31,
--------------------------------------------
1998 1997
-------------------- -------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,599,461) $ (1,993,977)
Adjustments to reconcile net (loss)
to net cash provided by operating activities
Depreciation and amortization - 672,634
Loss on disposal discontinued operations 42,730 80,000
(Gain) loss on disposal of fixed assets 35,987 (341,849)
Other (13,168) -
Realized and unrealized (gain) loss on
investment securities 668,262 55,719
Provision for bad debts 450,000 -
Changes in balance sheet accounts:
(Increase) decrease in goodwill and other assets - (2,646)
Decrease in assets held for sale 739,545 -
(Increase) decrease in accounts receivable (7,457) (16,173)
Decrease in income taxes - 90,317
Decrease in inventory - 21,672
Increase in accrued investment income - (13,737)
Increase (decrease) in accounts payable
and other liabilities (214,469) (63,395)
Decrease in deferred revenue - (166)
Sales of investment securities - trading 217,792 -
---------------- -----------------
Net cash provided by (used from)
Operating activities: 319,761 (1,511,601)
---------------- -----------------
Cash flows from investing activities:
Note to InfoDynamics - (250,000)
Issuance of notes receivable (450,000) -
Proceeds from sale of building - 644,370
Proceeds from sale of fixed assets 9,109 -
Purchases of equipment - (43,878)
Payments received from leases 108,020 103,626
Proceeds from sale of discontinued operations, net (479,522) -
---------------- -----------------
Net cash (used from) provided by
Investing activities (812,393) 454,118
---------------- -----------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
<TABLE>
<CAPTION>
ETHIKA CORPORATION AND SUBSIDIARIES
Statement of Cash Flows, Continued
For the Years Ended December 31,
--------------------------------------------
1998 1997
-------------------- ------------------
<S> <C> <C>
Cash flows from financing activities:
Net (payments) on debt - (340,008)
Proceeds from issuance of stock - 25,000
-------------------- ------------------
Net cash used from financing activities - (315,008)
-------------------- ------------------
Net increase (decrease) in cash and cash
equivalents (492,632) (1,372,491)
Cash and cash equivalents - beginning of period 535,651 1,908,142
-------------------- ------------------
Cash and cash equivalents - end of period $ 43,019 $ 535,651
==================== ==================
Supplemental cash flow information:
Cash payments for interest $ 89 $ 18,868
==================== ==================
Supplemental schedule of non-cash
Investing and financing activities:
Common stock issued for equity
securities of nonaffiliated company $ - $ 605,000
==================== ==================
Assigned lease receivable for
promissory note $ 144,198 $ -
==================== ==================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
ETHIKA CORPORATION
Statement of Changes in Shareholder' Equity
For the Years Ending December 31, 1998, and 1997
<TABLE>
<CAPTION>
Retained
Discount on Unrealized Earnings/ Total
Common Common Realized Accumulated Shareholders
Stock Shares Amount Stock Losses Deficit Equity
----------------- --------------- -------------- --------------- ---------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 12,447,706 $ 12,448,818 (1,123,709) $ - $ (8,541,750) $ 2,783,359
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) - - 181,571
----------------- --------------- -------------- --------------- ---------------- -------------
Balance at December 31, 1997 20,360,346 20,361,458 (8,123,528) - (10,535,727) 1,702,203
Net loss - - - - (1,599,461) (1,599,461)
----------------- --------------- -------------- --------------- ---------------- -------------
Balance at December 31, 1998 20,360,346 $ 20,361,458 (8,123,528) $ - $ (12,135,188) $ 102,742
================== =============== =============== ================ ================= ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
ETHIKA CORPORATION
Notes to Consolidated Financial Statements
December 31, 1998
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.
7
<PAGE>
ETHIKA CORPORATION
Notes to Consolidated Financial Statements
December 31, 1998
NOTE 2 BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
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.
8
<PAGE>
ETHIKA CORPORATION
Notes to Consolidated Financial Statements
December 31, 1998
NOTE 2 - BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
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 and
13,161,467, and for the years ended December 31, 1998, and 1997, respectively.
9
<PAGE>
ETHIKA CORPORATION
Notes to Consolidated Financial Statements
December 31, 1998
NOTE 2 - BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
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 - PROPERTY AND EQUIPMENT
The Corporatio's former headquarters in Jackson, Mississippi, was sold in July
1997 for a gain of $341,849. The Corporation had 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 years ended December 31, 1998, and
payments on all operating leases were $11,994 and $161,515.
NOTE 4 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
A summary of accounts payable and accrued expenses at December 31, 1998,
follows:
1998
----------------------
Accrued expenses $ 179,573
Accounts payable 53,760
----------------------
$ 233,333
======================
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 repaid the entire note balance. The
Corporation had no debt obligations other than normal accounts payable and
accruals at December 31, 1998.
10
<PAGE>
ETHIKA CORPORATION
Notes to Consolidated Financial Statements
December 31, 1998
NOTE 5 - BUSINESS COMBINATIONS
On April 2, 1996, the Corporation completed the acquisition of Text Retrieval
Systems, Inc. ("TRS"), a privately-held corporation based in Ponte Vedra Beach,
Florida. The transaction has been accounted for as a purchase and accordingly
the results of operations of TRS since April 2, 1996, have been included in the
Corporation's Results of Operations. TRS publishes electronic reference
libraries that link related data sources for convenient access by personal
computers. The Corporation had previously acquired a 35% initial ownership
interest in TRS through the issuance of 100,000 shares of its stock to the TRS
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.
11
<PAGE>
ETHIKA CORPORATION
Notes to Consolidated Financial Statements
December 31, 1998
NOTE 5- BUSINESS COMBINATIONS, CONTINUED
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.
12
<PAGE>
ETHIKA CORPORATION
Notes to Consolidated Financial Statements
December 31, 1998
NOTE 6 - INCOME TAXES
The Corporation files a consolidated federal income tax return and state income
returns in various states as required by the applicable state income tax laws.
Net deferred tax liabilities (assets) from continuing operations consist of the
following components as of December 31:
1998 1997
---------------- ---------------
Deferred tax assets:
Amortization of non-compete $ - $ 12,445
Deferred revenue - 97,165
Unrealized loss on equity investment 357,410 357,410
Allowance for bad debts 153,000 5,199
Net operating loss carry-forward 1,258,003 953,882
Unrealized loss in marketable securities 220,622 18,944
---------------- ---------------
1,989,053 1,445,045
Valuation allowance (1,989,035) (1,445,045)
---------------- ---------------
Deferred tax asset - -
---------------- ---------------
Net deferred tax liability $ - $ -
---------------- ---------------
The Corporation recorded a valuation allowance of $1,989,053 and $1,445,045 as
of December 31, 1998, and 1997 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.
The (provision for) benefit from income taxes for the year ended December 31 is
summarized as follows:
1998 1997
--------------- --------------------
Current $ 402,503 $ 429,138
Deferred (399,345) (383,638)
--------------- --------------------
$ 3,158 $ 45,500
=============== ====================
13
<PAGE>
ETHIKA CORPORATION
Notes to Consolidated Financial Statements
December 31, 1998
NOTE 6 INCOME TAXES, CONTINUED
The Corporation has net operating loss carry-forwards at December 31, 1998, of
approximately $3,700,000 which expire through 2018.
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:
1998 1997
-------------- ----------------
Expected tax benefit $ 543,817 $ 662,482
Non-deductible goodwill - (201,966)
Valuation allowance (543,990) (471,895)
Other 4,331 56,879
-------------- -----------------
Total income tax benefit $ 3,158 $ 45,500
============== =================
NOTE 7 - 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.
14
<PAGE>
ETHIKA CORPORATION
Notes to Consolidated Financial Statements
December 31, 1998
NOTE 7 - DISCONTINUED OPERATIONS, CONTINUED
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. 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 8 - STOCK OPTIONS AND STOCK-BASED COMPENSATION
On May 26, 1995, the Corporation created the 1995 Stock Option Plan (the "Plan")
with a maximum amount of 500,000 common stock shares reserved for options
eligible to be granted under the Plan during its ten-year life. The Corporation
granted various stock options to Employees and Directors during 1998 and 1997.
As of December 31, 1998, there were no remaining common stock shares reserved
for granting and there were 1,500,000 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.
15
<PAGE>
ETHIKA CORPORATION
Notes to Consolidated Financial Statements
December 31, 1998
NOTE 8- STOCK OPTIONS AND STOCK-BASED COMPENSATION, CONTINUED
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:
1998 1997
-------------------- -----------------------
Net loss As reported $ (1,599,461) $ (1,993,977)
Proforma $ (1,608,557) $ (2,040,597)
Loss per share As reported $ (.076) $ (0.151)
Proforma $ (.079) $ (0.155)
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 1998 and 1997:
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 1998, and 1997 was $9,096 and $46,620
respectively.
16
<PAGE>
ETHIKA CORPORATION
Notes to Consolidated Financial Statements
December 31, 1998
NOTE 8 - STOCK OPTIONS AND STOCK-BASED COMPENSATION, CONTINUED
The following table summarized the changes in the number of options included
under the Plan:
Weighted-
Exercise Average
Shares Price Range Exercise
Price
------------- ---------------- ------------
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 $.32 - $.42 $.41
Canceled (20,000) $.68 $.68
-------------
Outstanding at December 31, 1997 355,000 $.35 - $.91 $.60
Granted 500,000 $.02 $.02
Canceled (355,000) $.35 - $.91 $.60
-------------
Outstanding at December 31, 1998 1,500,000 $.02 $.02
=============
As of December 31, 1997, the total number of exercisable stock options were
88,000.
In addition to 1,500,000 exercisable stock options issued to current directors,
on December 30, 1998, the Board of Directors authorized the issuance of
1,000,000 shares of the Corporation's common stock to each current directors.
Such shares shall vest in their entirety in one year from date of issuance or on
the date of closing of any reorganization or merger.
NOTE 9 - 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.
17
<PAGE>
ETHIKA CORPORATION
Notes to Consolidated Financial Statements
December 31, 1998
NOTE 10 - 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 Ethikka 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.
18
<PAGE>
ETHIKA CORPORATION
Notes to Consolidated Financial Statements
December 31, 1998
NOTE 10 - CONTINGENCIES, CONTINUED
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 11 - 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
19
<PAGE>
ETHIKA CORPORATION
Notes to Consolidated Financial Statements
December 31, 1998
NOTE 11 - SALE OF COMMON STOCK - LAWSUIT SETTLEMENT, CONTINUED
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.
NOTE 12 - 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.
20
<PAGE>
ETHIKA CORPORATION
Notes to Consolidated Financial Statements
December 31, 1998
NOTE 13 - 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 14 - 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.
21
<PAGE>
PART III
ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The directors of the Corporation are:
Director
Name Age Since
Russell C. Burk 41 1997
Dennis Brovarone 43 1997
Dennis P. Nielsen 56 1997
Each director holds office until the next annual meeting of shareholders or
until a successor shall be duly elected and qualified.
The executive officer of the Corporation is:
Executive Officer
Name Age Since
Dennis Brovarone 43 1997
Chairman and President,
Chief Executive Officer
The Corporation's officer serves 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 officer of the Corporation are as follows:
Dennis Brovarone - Mr. Brovarone, 43, 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. 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,
a publicly held corporation located in San Diego, California.
Russell C. Burk - Mr. Burk, 41, 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.
Dennis Nielsen - Mr. Nielsen, 56, 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.
<PAGE>
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.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Corporation's
Executive Officers and Directors and persons who own more than 10% of its common
stock to file reports of ownership and changes in ownership with the SEC. Such
persons are required by SEC regulations to furnish the Corporation with copies
of all Section 16(a) forms filed by such person. Based upon a review of the
initial and annual statements of beneficial ownership, the Corporation's
Executive Officer and Directors have timely filed their reports of ownership.
ITEM 10 - EXECUTIVE COMPENSATION
Summary Compensation Table
The following Summary Compensation Table sets forth 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.
Number of
Annual Securities
Name and Compensation Underlying
Principal Position Year Salary Bonus Options
Dennis Brovarone 1998 $60,000 $0 500,000
President and Chairman
Option Grants in 1998
The following table sets forth information concerning options to purchase shares
of common stock which were granted during 1998 to the individuals named in the
Summary Compensation table.
Date Number of Shares Exercise Date
Name Granted Underlying Option(1) Price(1) Exerciseable
- --------------------------------------------------------------------------------
Dennis Brovarone 12/30/98 500,000 $0.02 (2)
Russell Burk 12/30/98 500,000 $0.02 (2)
Dennis Nielsen 12/30/98 500,000 $0.02 (2)
(1) Not subject to adjustment as a result of any reverse split of the
outstanding common stock
<PAGE>
(2) Exercisable ninety days from the date of closing of any reorganization or
merger agreement which results in a change in control of the Corporation
and expiring if unexercised by December 31, 2004.
Fiscal Year End Option Value Table: Omitted as the Options granted have not
vested and are not exercisable
COMPENSATION OF DIRECTORS
Directors who are not employees of the Corporation received no cash compensation
or reimbursement of expenses.
ITEM 11 - 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 March 31, 1999 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 as the holders of 5% or more of such
common stock.
Name and Address Shares
Of Beneficial Owner Beneficially Owned Percent of Class
Alfred Peeper 9,930,328 (1) 42.5%
Calle Hamburg 22
Benidorm, Spain ALC 03500
Argere Holdings, S.A. 420,000 (1)(2) 1.8%
18 Boulevard Royal
L-2449 Luxembourg
Eur-Am B.V. 610,100 (1)(3) 2.6%
Calle Hamburg 22
Benidorm, Spain ALC 03500
La Roche Holdings, S.A. 902,500 (1)(4) 3.9%
18 Boulevard Royal
L-2449 Luxembourg
La Salle Investment, Ltd. 7,997,828 (1)(5) 34.2%
35 Rue De Bains
Geneva, Switzerland 1205
(1) Alfred Peeper is an investment manager headquartered and operating in
Benidorm, Spain. Mr. Peeper holds a power of attorney for each following person
which gives him authority to purchase, sell, and exercise all voting rights
relating to each "Group Member." This Reporting Person represents 42.5% of the
total outstanding shares of Ethika common stock.
<PAGE>
(2) Argere Holdings, S.A. is a corporation organized under the laws of
Luxembourg. Mr. Jacque Benzeno, Mr. Andre Labranche and Ms. Marie-Paule
Mockel are the directors with the power to revoke Mr. Peeper's power of
attorney.
(3) Eur-Am, B.V., is a corporation organized under the laws of the Netherlands.
Mr. Peeper and Mr. Evert Eggink are the directors with the power to revoke
Mr. Peeper's power of attorney.
(4) La Roche Holdings, S.A. is a corporation organized under the laws of
Luxembourg. Jacques Benzeno, Andre LaBranche and Marie-Paule Mockel are the
directors with the power to revoke Mr. Peeper's power of attorney.
(5) La Salle Investment, Ltd., is a corporation organized under the laws of
Ireland. Jean Claude Roder and Claude Oberson are the directors with the
power to revoke Mr. Peeper's power of attorney.
Security Ownership of Management
The following table sets forth information as to the beneficial ownership of the
Corporation's common stock as of March 31, 1999, by each Director, nominee;
Executive Officer named in the Summary Compensation Table and by all Directors
and Executive Officers as a group.
Name of Shares Percent
Beneficial Owner Beneficially Owned of Class
Dennis Brovarone 1,000,000 4.2%
Russell C. Burk 1,000,000 4.2%
Dennis P. Nielsen 1,000,000 4.2%
Directors, nominees, and
Executive Officers as a group 3,000,000 12.6%
(3 persons)
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Corporation did not enter into any reportable relationships or transactions
with its officers, directors or control persons during the fiscal year ended
December 31, 1998, except for the granting of shares and options to the
directors as set forth above.
ITEM 13 - 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-B:
Exhibit
Number Description Incorporation by Reference to
<PAGE>
(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 December 31, 1994. Exhibit
Dated 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 December 31, 1994. Exhibit
Dated 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. Ex. (3(b).
(3)(b)(1) Amendment to Article III Registrants Annual Report on
of Bylaws Effective Form 10-K for the year ended
Jan. 24, 1996 December 31, 1995. Ex.(3)(b)(1)
(3)(b)(2) Amendment to Article IV of Registrants Annual Report on
Bylaws Effective March 24, 1996 Form 10-K for the year ended
December 31, 1995. Ex.(3)(b)(2)
(3)(b)(3) Amended Bylaws at Article III Registrants Annual Report on
Effective September 26, 1996 Form 10-K for the year ended
December 31, 19965. Ex.(3)(b)(3)
(2)(1) Agreement and Plan of Reorganization Registrant's Annual Report of
for Ethika Corporation to acquire Form 10-K for the year ended
North American Digicom Corporation Dec 31, 97 Ex( 2)(1)(4)
(2)(7) Purchase Agreement between Ethika Registrant's Annual Report of Form
Corporation and TRS Acquisition Corp. 10-K for the year ended
Dec 31, 1997 Ex(2)(7)
(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 Exhibit (2)(8)
Compass Data Systems, Inc. to Ben
Ezra Weinstein & Company
(10)(1) Agreement to restructure Fry Guy Equipment Leases
(21) Subsidiaries of the Registrant
(27) Financial Data Schedule
(b) Reports on Form 8-K
The Corporation did not file any reports on Form 8-K during the last quarter of
the year ended December 31, 1998.
<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 14, 1999 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 14, 1999
- ---------------------
Dennis Brovarone
Chairman of the Board & Chief Executive Officer
(Principal Executive Officer)
/s/ Russell Burk April 14, 1999
- ---------------------
Russell Burk, Director
/s/ Dennis Nielsen April 14, 1999
- ---------------------
Dennis Nielsen, Director
<PAGE>
AGREEMENT
This Agreement is by and between Ethika Corporation, (Ethika) and Alanco
Environmental Resources Corporation (Alanco).
WHEREAS, Ethika is the lessor of certain equipment lease wherein Fry Guy, Inc.,
a wholly owned subsidiary of Alanco is the lessee (the Ethika - Fry Guy Leases);
and
WHEREAS, Ethika and Alanco desire that as set forth below, Ethika assign unto
Alanco all right, title and interest it has in the Ethika-Fry Guy Leases in
consideration of the below described payment and promissory note.
THEREFORE, Ethika and Alanco agree as follows:
1. Assignment of Ethika-Fry Guy Leases. Within two days of the execution of this
Agreement by both Parties, Ethika shall tender to Alanco the Assignment of the
Ethika-Fry Guy Leases attached hereto as Exhibit A.
2. Payment and Promissory Note. Within two days of the execution of this
Agreement by both Parties, Alanco shall tender to Ethika $12,000 and the
Promissory Note attached hereto as Exhibit B.
3. Representation and Warranties of Ethika. Ethika represens and warrants to
Alanco that it is and has been the Lessor of the Ethika-Fry Guy Leases and that
said Leases are free and clear of all liens and encumbrances and that the
assignment of said Leases as set forth in this Agreement does not breach or
cause a default upon any contract or agreement to which Ethika is a party.
Furthermore, Ethika represents and warrants that it has all requisite corporate
power and authority to execute and perform this Agreement which have been duly
authorized by the Board of Directors of Ethika.
4. Representations and Warranties of Alanco. Alanco represents and warrants to
Ethika that it has all requisite corporate power and authority to execute and
perform this Agreement which have been duly authorized by the Board of Director
of Alanco.
5. Governing Law. This Agreement and the legal relations among the Parties
hereto shall be governed by and construed in accordance with the laws of the
State or Arizona and that the State or Federal Courts of Arizona shall be the
jurisdiction in which any legal proceedings relative to this Agreement shall be
brought.
6. Entire Agreement. This Agreement, including the other documents referred to
herein, embodies the entire agreement and understanding of the Parties hereto in
respect of the subject matter contained herein. There are no restrictions,
promises, warranties, convenants, or undertakings, other than those expressly
set forth or referred to herein. This Agreement supercedes all prior agreements
and understandings between the Parties with respect to such subject matter.
Executed By the Parties Hereto As of the Dates Indicated:
ETHIKA CORPORATION ALANCO ENVIRONMENTAL
RESOURCES CORPORATION
/s/DENNIS BROVARONE /s/ROBERT R. KAUFFMAN
Dennis Brovarone, President Robert R. Kauffman,
March 12, 1999 Chairman & CEO
March 12, 1999
Page 1 of 1
<PAGE>
EXHIBIT A
ASSIGNMENT
FOR VALUE RECEIVED, Ethika Corporation hereby sells, assigns and conveys to
Alanco Environmental Resources Corporation:
All right, title and interest it has in and to those certain equipment leases by
and between Ethika Corporation and Fry Guy, Inc., including but not limited to
all right, title and interest it has in the equipment subject to said leases.
WITNESS my hand and seal this 12th day of March, 1999.
Ethika Corporation
/s/DENNIS BROVARONE
Dennis Brovarone, President
<PAGE>
Exhibit B
PROMISSORY NOTE
$128,000 March 12, 1999
Alanco Environmental Resources Corporation (the Promisor) for value received
does promise to pay to the order of Ethika Corporation (the Holder) at the
office of its attorney, Dennis Brovarone, 11249 W. 1O3rd Dr., Westminster,
Colorado, ONE HUNDRED TWENTY EIGHT THOUSAND DOLLARS ($128,000.00), in sixteen
monthly installments of EIGHT THOUSAND DOLLARS ($8,000) beginning April 15, 1999
and continuing thereafter on the fifteen day of each month through July 2000.
In the event the fifteen of any month is a weekend or holiday, the payment shall
be due on the next business day. In the event payment is not received on its due
date, the Holder shall promptly notify the Promisor of such non-reciept and the
Promisor shall have three business days in which to tender the payment without
the occurance of a default.
It is further agreed that if any payment is not made when due and remains
uncured following the above notice, a penalty in the amount of THIRTY THOUSAND
DOLLARS $30,000) shall become due and owing, all remaining payments shall become
immediately due and owing and the entire default principal shall thereafter
accrue interest at the rate of eighteen percent (18%) per annum. The Promisor
also agrees to pay all reasonable costs of collection, including reasonable
attorneys fees.
This Promissory Note shall be construed and enforced in accordance with the laws
of the United States and the State of Arizona without regard to conflicts of
law. In the event that any dispute should arise pertaining to this Promissory
Note, the Parties agree that jurisdiction shall vest only in the state or
federal courts located in Scottsdale, Arizona in order to resolve such dispute.
ALANCO ENVIRONMENTAL RESOURCES CORPORATION
(the Promisor)
/s/ROBERT R. KAUFFMAN
By: Robert R. Kauffman, Chairman & CEO
/s/JOHN A. CARLSON
John A, Carlson, Senior V.P. & CFO
<PAGE>
EXHIBIT (21)
Ethika Corporation
Form 10KSB
List of Subsidiaries At
December 31, 1998
Name: Percent of Ownership
----- --------------------
Legislative Information
Services, Inc., a Delaware Corp. 100%
Vanguard, Inc., a Mississippi Corp. 100%
Executive Capital Corporation,
a Mississippi Corp. 100%
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