1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 0-13966
HARISTON CORPORATION
(Exact name of registrant as specified in its charter)
CANADA 33-0645339
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
611 Anton Blvd, Suite 1270 Costa Mesa, California 92626
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(Address of principal executive offices)
(714) 556-1755
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(Registrant's telephone number, including area code)
1500 West Georgia Street, Suite 1555, Vancouver, British Columbia, V6G 2Z6
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes ___ No ___
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Common Stock: 11,463,113 Shares
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
The unaudited Consolidated Statements of Operations and Deficit for
the three month periods ended March 31, 1996 and March 31, 1995, the unaudited
Consolidated Statements of Changes in Financial Position for the three month
periods ended March 31, 1996 and March 31, 1995 and the unaudited Consolidated
Balance Sheets as at March 31, 1996 and December 31, 1995, of Hariston
Corporation ("Hariston" or the "Company") follow.
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HARISTON CORPORATION
PART 1: ITEM 1 -- FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS)
MARCH 31 DECEMBER 31
1996 1995
=======================================================================================================
ASSETS
Current assets
Cash and cash equivalents $ 641 $ 1,419
Receivables 435 457
Inventory 1,171 1,335
Prepayments 187 147
- - -------------------------------------------------------------------------------------------------------
2,434 3,358
Investments 1,956 1,956
Furniture and equipment 206 207
Goodwill, licenses, mailing lists and other intangibles 4,900 4,667
- - -------------------------------------------------------------------------------------------------------
7,062 6,830
- - -------------------------------------------------------------------------------------------------------
$ 9,496 $ 10,188
=======================================================================================================
LIABILITIES
Current
Payables $ 1,048 $ 1,829
Deferred revenues 231 185
Current portion of term debt 3,493 413
- - -------------------------------------------------------------------------------------------------------
4,772 2,427
Term debt 45 3,200
Put option 300 300
- - -------------------------------------------------------------------------------------------------------
345 3,500
- - -------------------------------------------------------------------------------------------------------
5,117 5,927
SHAREHOLDERS' EQUITY
Capital stock 30,800 29,887
Deficit (26,421) (25,626)
- - -------------------------------------------------------------------------------------------------------
4,379 4,261
- - -------------------------------------------------------------------------------------------------------
$ 9,496 $ 10,188
=======================================================================================================
=======================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements
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HARISTON CORPORATION
CONSOLIDATED STATEMENTS OF LOSS AND DEFICIT (UNAUDITED)
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS)
3 MONTHS ENDED MARCH 31 1996 1995
==============================================================================================================
(Note 12)
REVENUES
Software sales $ 1,665 $ --
Book sales 88 --
Software royalties and license fees 79 --
- - --------------------------------------------------------------------------------------------------------------
1,832 --
- - --------------------------------------------------------------------------------------------------------------
COST OF SALES
Direct cost of sales 1,185 --
Royalties 64 --
- - --------------------------------------------------------------------------------------------------------------
1,249 --
- - --------------------------------------------------------------------------------------------------------------
GROSS MARGIN 583 --
- - --------------------------------------------------------------------------------------------------------------
OPERATING AND CORPORATE EXPENSES
Administration, office, and travel 239 74
Consultants and directors fees, salaries and employee benefits 562 146
Accounting, legal and other professional fees 72 92
Marketing, catalog and trade show costs 171 --
Depreciation and amortization 258 5
- - --------------------------------------------------------------------------------------------------------------
1,302 317
- - --------------------------------------------------------------------------------------------------------------
(719) (317)
- - --------------------------------------------------------------------------------------------------------------
OTHER
Net interest income (expense) (83) 9
Net gain on recovery of receivables 7 --
- - --------------------------------------------------------------------------------------------------------------
(76) 9
- - --------------------------------------------------------------------------------------------------------------
NET LOSS FROM CONTINUING OPERATIONS (795) (308)
- - --------------------------------------------------------------------------------------------------------------
RESULTS FROM DISCONTINUED OPERATIONS (Note 11)
Oil and gas working and royalty interests -- 109
Quebec industrial condominium rental property -- 5
- - --------------------------------------------------------------------------------------------------------------
-- 114
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LOSS ON SALE OF MINERALS RECOVERY PROJECT (Note 11) -- (78)
- - --------------------------------------------------------------------------------------------------------------
NET LOSS $ (795) $ (272)
DEFICIT, beginning of period (25,626) (24,802)
- - --------------------------------------------------------------------------------------------------------------
DEFICIT, end of period $ (26,421) $ (25,074)
==============================================================================================================
Loss per share (Note 13) $ (0.07) $ (0.03)
Shares used in computation (weighted average outstanding) 11,281,363 9,226,476
==============================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements
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HARISTON CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION (UNAUDITED)
(EXPRESSED IN THOUSAND OF U.S. DOLLARS)
3 MONTHS ENDED MARCH 31 1996 1995
====================================================================================================================
OPERATING ACTIVITIES
Net loss from continuing operations $ (795) $ ($308)
Non-cash items:
Amortization and depreciation 258 5
Changes in non-cash working capital used in operations (589) (411)
- - --------------------------------------------------------------------------------------------------------------------
Cash used for continuing operations (1,126) (714)
- - --------------------------------------------------------------------------------------------------------------------
Net income (loss) from discontinued operations -- 36
Non-cash items:
Amortization of oil & gas royalty interests -- 77
Provision for costs of disposition of Metanetix Division -- 78
- - --------------------------------------------------------------------------------------------------------------------
Cash provided by discontinued operations -- 191
- - --------------------------------------------------------------------------------------------------------------------
CASH USED FOR OPERATING ACTIVITIES (1,126) (523)
- - --------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net term debt payments (333) (132)
Conversion of debentures -- --
Issue of common stock 913 --
- - --------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 580 (132)
- - --------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Net purchase of assets (232) (12)
Collection of notes receivable -- 137
Minerals recovery project -- (78)
- - --------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES (232) 47
- - --------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash (778) (608)
Cash and cash equivalents, beginning of period 1,419 1,199
- - --------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 641 $ 591
====================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements
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HARISTON CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(EXPRESSED IN U.S. DOLLARS)
3 MONTHS ENDED MARCH 31, 1996
===============================================================================
NOTE 1. OPERATIONS
The Company is incorporated under the Canada Business Corporations Act and has
operated, historically, as a diversified holding company. More recently, the
Company has focused on the multimedia CD-ROM software business. Effective
August 25, 1995, the Company purchased all the assets and assumed certain
liabilities of a group of affiliated companies doing business under the trade
name Educorp. These affiliated companies now operate as part of Educorp
Multimedia, a wholly-owned multimedia software publishing and distribution
subsidiary. Effective January 1, 1996, the Company purchased substantially all
of the assets and assumed certain liabilities of HighText Publications, Inc., a
book and multimedia software developer and publisher. This business now
operates as part of Educorp Multimedia, as well.
NOTE 2. ACCOUNTING POLICIES
BASIS OF PRESENTATION
In accordance with the requirements of the Canada Business Corporations Act,
the Company's accounting and reporting policies conform to Canadian generally
accepted accounting principles ("Canadian GAAP"). Accordingly, these
consolidated financial statements have been prepared in accordance with
Canadian GAAP. These interim statements also conform in all material respects
with United States generally accepted accounting principles ("U.S. GAAP"). A
reconciliation to U.S. GAAP is presented at Note 10. For further information on
the Company's accounting policies, reference should be made to Note 2 of Notes
to Consolidated Financial Statements included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1995.
In the opinion of management, all adjustments necessary to fairly state the
results of operations for the three months ended March 31, 1996, are of a normal
recurring nature and have been made. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with GAAP have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission. These interim consolidated financial
statements should therefore be read in conjunction with the consolidated
financial statements and the notes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1995.
PRINCIPLES OF CONSOLIDATION
These interim consolidated financial statements include the accounts of the
Company, Hariston Corporation, and its wholly-owned subsidiaries, EuroEastern
Investment Corp., Educorp Multimedia, Inc., Educorp Direct, Inc., and High Text
Interactive, Inc. All significant intercompany accounts and transactions have
been eliminated on consolidation.
NOTE 3. PURCHASE OF HIGHTEXT
Effective January 1, 1996, a newly incorporated wholly-owned subsidiary of the
Company acquired substantially all of the assets and assumed certain
liabilities of HighText Publications, Inc., a company engaged in the
development and distribution of books and multimedia CD-ROM software titles.
On January 22, 1996, the subsidiary changed its name to Hightext Interactive,
Inc. ("HighText").
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HARISTON CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(EXPRESSED IN U.S. DOLLARS)
3 MONTHS ENDED MARCH 31, 1996
===============================================================================
The purchase price of $641,421 was satisfied as follows:
166,139 shares of the Company valued at approximately $2.82 per share $469,080
Assumption of current liabilities 172,341
--------
$641,421
========
The purchase price was allocated as follows:
Inventories, accounts receivable, furniture and equipment, prepaids $186,550
Customer and supplier lists 15,000
Goodwill and other intangibles 439,871
--------
$641,421
========
Further consideration may become payable with respect to the purchase of the
book publishing operations. The amount will vary depending on the profitability
of the operations over a five year period commencing with the fiscal year
ending December 31, 1996, and whether these operations are sold in an arm's
length transaction prior to December 31, 2000. The minimum consideration for
the five year period will be 4,000 Hariston shares per year, or an aggregate of
20,000 shares. An estimate of this minimum amount has been booked by the
Company and is reflected in the purchase price. The maximum shares issuable
with respect to each year will be the number of shares equivalent to the
after-tax income, as defined, of the book publishing operations, based on
valuing the Hariston shares at the average closing sale price for the 20
trading days prior to December 31 of each fiscal year.
If the book publishing operations are sold prior to December 31, 2000, the
above obligation for the year of sale and subsequent periods is replaced by an
obligation to issue Hariston shares to the sellers equivalent to the after-tax
sale proceeds, still subject to the 20,000 shares minimum requirement. As
management cannot predict with reasonable assurance the net income of the book
publishing operations within the five year period, nor the selling price if
these operations were sold within that period, additional consideration beyond
an estimate of the value of the 20,000 shares minimum payment has not been
recorded on the Company's books at this time.
Additional consideration, up to a maximum of $60,000, may become payable,
contingent on a U.S. patent being issued no later than December 31, 1998 with
respect to a feature of the seller's multimedia products. As management cannot
predict with reasonable assurance when or if this patent will be issued, the
additional consideration has not been recorded on the Company's books at this
time.
Proforma results of operations, as though the purchase of Hightext had occurred
on January 1, 1995, are not presented in these interim financial statements as
the effect on the Company's 1995 results of operations would not be material.
NOTE 4. SUMMARY OF SECURITIES ISSUED DURING THE FIRST QUARTER
On January 10, 1996, the Company issued 146,139 shares of the Company, valued
at $412,611 or approximately $2.82 per share, for purposes of effecting the
purchase of HighText (Note 3).
By Directors Resolution dated February 20, 1996, Hariston's Board resolved to
reset the exercise price of 250,000 warrants for the purchase of shares from
$3.60 to $2.00 per share. These "A" warrants were issued on November 21, 1994,
pursuant to a private placement of 625,000 units valued at $3.20 per unit.
Each unit consisted of one "A" and one "B" warrant. The "A" warrant was priced
at $3.60 per share,
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HARISTON CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(EXPRESSED IN U.S. DOLLARS)
3 MONTHS ENDED MARCH 31, 1996
===============================================================================
exercisable on or prior to May 21, 1996. The "B" warrant was priced at $2.00
per share, exercisable on or prior to November 21, 1997. On March 1, 1996,
pursuant to the exercise of the repriced "A" warrants, the Company issued
250,000 shares valued at $2.00 per share, for total realized proceeds of
$500,000.
NOTE 5. SUMMARY OF OPTIONS GRANTED DURING THE FIRST QUARTER
Date Option Number of Shares Option Option
Granted under Vested Option Optionee Exercise Price Expiry Date
=================================================================================================================================
February 20, 1996 23,438 Nicholas Mosich 2.50 August 2, 2002
February 20, 1996 23,437 Nicholas Mosich 3.75 August 2, 2002
February 20, 1996 23,438 Nicholas Mosich 5.00 August 2, 2002
February 20, 1996 23,437 Nicholas Mosich 6.25 August 2, 2002
-------
93,750
On July 20, 1995, the Company adopted a Stock Option Plan to be effective from
July 1, 1995. On August 2, 1995, the Board approved the initial grant of
options. As approved, options to acquire a total of 1,000,000 shares were
granted to J.V. McGoodwin, options to acquire a total of 250,000 shares were
granted to L. James Porter, and options to acquire 150,000 shares were granted
to each of the three outside directors. One quarter of these options were
vested effective August 2, 1995. The remaining options vest as follows:
one-third effective August 2, 1996, one-third effective August 2, 1997, and
one-third effective August 2, 1998. On February 20, 1996, the Board approved
the further grant of options to acquire 375,000 shares. These options were
granted to Nicholas Mosich, and are subject to the same vesting provisions as
the previously granted options.
NOTE 6. AUTHORIZED AND ISSUED SHARE CAPITAL AS OF MARCH 31, 1996
Class Par Value Authorized Number Issued Number Amount
=========================================================================================================================
Common None Unlimited 11,463,113 $30,799,167
NOTE 7. SHARES IN ESCROW OR SUBJECT TO POOLING AS OF MARCH 31, 1996
None.
NOTE 8. LIST OF DIRECTORS AS OF MARCH 31, 1996
J.V. McGoodwin James P. Angus Nuno Brandolini Neil S. MacKenzie L. James Porter
(Chairman)
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HARISTON CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(EXPRESSED IN U.S. DOLLARS)
3 MONTHS ENDED MARCH 31, 1996
===============================================================================
NOTE 9. OPTIONS AND WARRANTS OUTSTANDING AS OF MARCH 31, 1996
Number of Shares Exercise Market Price Option
Optionee under Vested Option Price on Date of Grant Expiry Date
=========================================================================================================================
William B. Sharp 35,000 0.93 0.93 September 15, 1996
Yvonne Tremblay 10,000 1.86 2.49 November 30, 1997
William B. Sharp 10,000 3.15 4.57 February 17, 1998
S. David Anfield 20,000 3.53 4.57 March 31, 1998
- - -------------------------------------------------------------------------------------------------------------------------
James P. Angus 9,375 2.50 2.87 August 2, 2002
Nuno Brandolini 9,375 2.50 2.87 August 2, 2002
Neil MacKenzie 9,375 2.50 2.87 August 2, 2002
J.V. McGoodwin 62,500 2.50 2.87 August 2, 2002
Nicholas Mosich 23,438 2.50 2.87 August 2, 2002
L. James Porter 125 2.50 2.87 August 2, 2002
- - -------------------------------------------------------------------------------------------------------------------------
James P. Angus 9,375 3.75 2.87 August 2, 2002
Nuno Brandolini 9,375 3.75 2.87 August 2, 2002
Neil MacKenzie 9,375 3.75 2.87 August 2, 2002
J.V. McGoodwin 62,500 3.75 2.87 August 2, 2002
Nicholas Mosich 23,437 3.75 2.87 August 2, 2002
L. James Porter 15,625 3.75 2.87 August 2, 2002
- - -------------------------------------------------------------------------------------------------------------------------
James P. Angus 9,375 5.00 2.87 August 2, 2002
Nuno Brandolini 9,375 5.00 2.87 August 2, 2002
Neil MacKenzie 9,375 5.00 2.87 August 2, 2002
J.V. McGoodwin 62,500 5.00 2.87 August 2, 2002
Nicholas Mosich 23,438 5.00 2.87 August 2, 2002
L. James Porter 15,625 5.00 2.87 August 2, 2002
- - -------------------------------------------------------------------------------------------------------------------------
James P. Angus 9,375 6.25 2.87 August 2, 2002
Nuno Brandolini 9,375 6.25 2.87 August 2, 2002
Neil MacKenzie 9,375 6.25 2.87 August 2, 2002
J.V. McGoodwin 62,500 6.25 2.87 August 2, 2002
Nicholas Mosich 23,437 6.25 2.87 August 2, 2002
L. James Porter 15,625 6.25 2.87 August 2, 2002
- - -------------------------------------------------------------------------------------------------------------------------
578,250
=======
Warrant Exercise Market Price Option
Holder Number of Shares Price on Date of Grant Expiry Date
=========================================================================================================================
Near East Commercial Bank SAL 375,000 3.60 5.00 May 21,1996
Commonwealth Consulting Corporation 125,000 2.25 2.62 December 31, 1996
Daryl Jamison 125,000 2.25 2.62 December 31, 1996
Near East Commercial Bank SAL 625,000 4.00 5.00 November 21,1997
Kinaro S.A. 250,000 2.50 2.25 August 24, 2000
Neval Management Ltd. 250,000 2.50 2.25 August 24, 2000
Privatim Finaz A.G. 250,000 2.50 2.25 August 24, 2000
Zocal Foundation 250,000 2.50 2.25 August 24, 2000
- - -------------------------------------------------------------------------------------------------------------------------
2,250,000
=========
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HARISTON CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(EXPRESSED IN U.S. DOLLARS)
3 MONTHS ENDED MARCH 31, 1996
===============================================================================
NOTE 10. RECONCILIATION TO U.S. GAAP
In certain respects, Canadian generally accepted accounting principles differ
from U.S. generally accepted accounting principles. If U.S. GAAP were to be
applied, the following difference would exist:
(Expressed in Thousands of U.S. dollars)
Three Months Ended March 31, 1996
Net loss according to Canadian GAAP (795)
Non cash compensation expense (7)
- - -------------------------------------------------------------------------------
Net loss according to U.S. GAAP ($802)
There would be no differences in net assets or shareholders' equity.
The above variance in the net loss figure results from a difference in the
accounting treatment for employee stock options. Options to purchase shares of
the Company were issued to employees and directors at prices below the traded
price of the stock on the measurement date. Under U.S. GAAP, the difference in
value must be recognized as a non-cash compensation expense over the period
during which the options vest, regardless of whether the options expire
unexercised. Under Canadian GAAP, the issuance or exercise of employee stock
options does not affect the reported profitability of the Company.
NOTE 11. DISCONTINUED OPERATIONS
Effective April 29, 1995, the Company sold its Metanetix minerals recovery
operations. On July 20, 1995, the Company sold its Quebec industrial
condominium rental property. Effective August 1, 1995, the Company sold its
Canadian oil and gas working and royalty interests. Accordingly, these
operations are presented as discontinued operations for purposes of the 1995
comparatives in these financial statements.
NOTE 12. FUNCTIONAL CURRENCY
Effective August 25, 1995, the Company's functional currency changed from the
Canadian dollar to the the U.S. dollar. For comparison purposes, all March 31,
1995 amounts have been restated into U.S. dollars.
NOTE 13. LOSS PER SHARE
Loss per share is computed using the weighted average number of shares of
common stock outstanding during the periods presented. Stock options and
warrants outstanding have not been included in the calculations as the impact
on loss per share would be dilutive.
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The following information should be read in conjunction with the
consolidated financial data and the notes thereto included in Item 1.
OVERVIEW
In accordance with management's previously stated strategy to
reposition the Company, Hariston continued its transformation during the first
quarter, 1996. During 1995, the Company divested substantially all of the
businesses and investments which were unrelated to its new focus on multimedia
software publishing and distribution. On August 25, 1995, the Company purchased
substantially all of the assets and assumed certain liabilities of a group of
affiliated businesses operating under the trade name Educorp. These affiliated
businesses now operate under the name Educorp Direct ("Direct"), as part of the
Company's wholly-owned subsidiary Educorp Multimedia. Effective January 1,
1996, the Company acquired substantially all of the assets and selected
liabilities of HighText Publications, Inc. This business now operates under the
name HighText Interactive ("HighText"), also as part of Educorp Multimedia.
Founded in 1984, Direct is a San Diego, California based publisher and
direct mail distributor of CD-ROM multimedia software. Through its catalogs,
Direct offers what is believed to be one of the largest selections of consumer
CD-ROM software titles in the industry. In fiscal 1995, Direct mailed more than
two million catalogs and newsletters to its customer base. Through its
affiliates, Direct is also involved in the development and publishing of
software titles as well as wholesale and international distribution.
Founded in 1990, HighText is a San Diego, California based developer
and publisher of books and educational CD-ROM software titles. HighText's
primary emphasis is on the development of educational multimedia software for
the adult consumer, higher education, and corporate markets. HighText has
developed ten software titles to date as part of its Crash Course and Virtual
MBA product series. These titles are distributed by wholesale dealers to
college and specialty bookstores, computer software stores, and through catalog
retailers direct to end-users.
In the future, the Company's multimedia operations may be expanded
through the acquisition of complementary businesses and through the: (1)
development and/or publishing of new software titles, (2) increased number and
mailing frequency of print catalogs, (3) development of new distribution
channels, and (4) international expansion of the business. Although the Company
is considering all of these alternatives, no assurance can be given that these
or any other activities will be successful.
The company continues to retain its sizable investment, directly and
through a collateral position for a note receivable, in Polish Life Improvement
S.A ("PLI").
-11-
12
CORPORATE STRUCTURE
During June 1995, Hariston incorporated a wholly-owned California
subsidiary, CD-Soft Corporation, to pursue Hariston's strategy of focusing its
investment capital and managerial expertise on the multimedia software
publishing and distribution business. In July 1995, CD-Soft Corporation
incorporated a wholly-owned California subsidiary, for the purpose of acquiring
substantially all of the assets and selected liabilities of a group of
businesses operating under the trade name Educorp. Effective March 8, 1996,
this subsidiary was renamed Educorp Direct, Inc.
In December 1995, CD-Soft Corporation formed a second wholly-owned
California subsidiary, for the purpose of acquiring substantially all of the
assets and selected liabilities of HighText Publications, Inc. Effective
January 22, 1996, this subsidiary was renamed HighText Interactive, Inc.
In March 1996, CD-Soft Corporation was merged into Educorp Multimedia,
Inc. ("Educorp Multimedia"), a wholly-owned Delaware subsidiary of Hariston
formed in January 1996. Upon this merger, Educorp Multimedia, Inc. became the
holding company for all of Hariston's book and multimedia CD-ROM development,
publishing, and distribution operations.
In October 1995, Hariston formed a wholly-owned Delaware subsidiary,
EuroEastern Investment Corp. ("EuroEastern"), for the purpose of pursuing
investment opportunities in central and eastern Europe.
RESULTS OF OPERATIONS
The Company incurred a consolidated net loss of $795,250 for the three
months ended March 31, 1996. Of this loss, $259,431 was attributable to Direct,
$106,379 to HighText and $78,567 to interest expense on debt incurred at the
Hariston legal entity level. The remainder of the loss was primarily due to
corporate administration and overhead costs incurred by Hariston and its
subsidiary, EuroEastern. An analysis of the results is presented below. For
comparative purposes, the analysis of Direct considers the comparable results
during 1995, where available, of the operations of its predecessor, Gazelle
Technologies, Inc. and its affiliates, which had been doing business under the
trade name Educorp.
EDUCORP DIRECT
On August 25, 1995, the Company, through a wholly-owned subsidiary,
acquired substantially all of the assets and assumed certain liabilities of a
group of businesses now operated under the name Educorp Direct for a purchase
price of $6,067,000. This transaction was accounted for as a purchase.
Direct generated revenues of $1,731,636 for the three months ended
March 31, 1996, of which $1,223,556 was from retail sales to end-users,
$429,332 was from sales to dealers, and $78,748 was from software royalties and
license fees. Direct realized gross profit of $532,744
-12-
13
for the quarter. Direct incurred a loss before interest, depreciation and
amortization of $28,038, and a net loss after these items of $259,431.
RETAIL SOFTWARE SALES. Retail software sales for the three months
ended March 31, 1996 of $1,223,556 declined 2% relative to retail software
sales of $1,247,917 for the same period during 1995. The primary reason for the
decline in same period sales was the 10% decline in the average CD-ROM retail
price realized by Direct in 1996, $32.39 as compared to $35.80 for the same
period in 1995. The effect of lower realized prices was somewhat offset by
increased unit sales volume, primarily attributable to an increased number of
catalogs in circulation during the quarter as compared to the same period of
1995.
International retail software sales were $234,541, or 19% of total
retail sales, for the three months ended March 31, 1996, versus $190,937 or 15%
of total retail sales for the comparable prior year period. The 23% increase in
international retail sales was primarily due to the increased number of
catalogs in circulation and the fact that there are fewer distribution sources
available to retail customers internationally than domestically.
DEALER SOFTWARE SALES. Dealer software sales for the three months
ended March 31, 1996 of $429,332 declined 27% relative to dealer software sales
of $589,158 for the same period during 1995. The decline in same period sales
primarily reflects lower unit sales volume due to an increased level of
competition, arising partly from new distribution channels that have opened for
the supply of CD-ROM titles to dealers. These new channels include a trend
towards publishers selling their titles directly to dealers. Additionally,
there was a 7% decrease in the average CD-ROM dealer price realized by Direct.
The average price realized was $29.10 for the first quarter of 1996 as compared
to $31.26 for the first quarter of 1995.
International dealer software sales were $356,839, or 83% of total
software sales to dealers, for the three months ended March 31, 1996, versus
$419,737 or 71% for the comparable prior year period. The 15% decline in
international dealer sales reflected smaller international order sizes due an
increasing number of publishers seeking direct distribution to foreign dealers.
However, international dealer sales represented an increasingly large
percentage of the Company's sales to dealers reflecting the fact that there are
still more distribution sources available to domestic dealers than to foreign
dealers.
HARDWARE SALES. The Company decided in early 1995 to discontinue
selling computer hardware. As a result, there were no retail sales of hardware
for the three months ended March 31, 1996. During the comparable period of
1995, retail hardware sales were $101,182. The decision to terminate this
product line was based on the relatively low gross profit margins realized by
hardware relative to CD-ROM software, and the relatively high inventory
maintenance costs as compared to those of CD-ROM software.
ROYALTIES AND LICENSE FEES. Royalties and license fees of $78,748 for
the three month period ended March 31, 1996 decreased 32% relative to royalty
and license fees of $116,380 for the same period during 1995. The primary
reason for the decrease was a reduction in shipments by Apple Computer of
computers bundled with educational software titles published by the Company.
-13-
14
GROSS PROFIT. Direct realized a gross profit of $532,744 for the
three months ended March 31, 1996, representing 31% of revenues. Comparative
figures for the same period of 1995 are not readily available. However,
historically the Educorp operations realized a higher gross profit. The decline
from historical levels primarily reflects the lower realized prices per title
as a result of increased competition, and the reduced share of higher margin
self-published titles.
OPERATING AND CORPORATE EXPENSES. Operating and corporate expenses
were $790,095 for the three months ended March 31, 1996, representing
approximately 46% of revenues for the quarter. This figure includes
amortization of goodwill arising from the acquisition of the Direct operations.
After adjusting for the goodwill amortization expense of $218,079, operating
and corporate expenses are $572,016 or 33% of total revenues for the quarter.
HIGHTEXT INTERACTIVE
Effective January 1, 1996, the Company, through a wholly-owned
subsidiary, purchased substantially all of the assets and assumed certain
liabilities of HighText Publications, Inc., for a purchase price of $641,000.
This transaction was accounted for as a purchase.
HighText generated revenues of $99,910 for the three months ended
March 31, 1996, of which $14,594 was from retail sales to end-users, and
$85,316 was from sales to dealers. HighText realized a gross profit of $50,048
for the quarter, and incurred a net loss of $106,379.
SOFTWARE SALES. Software sales for the three months ended March 31,
1996 were $12,063, consisting of $4,943 sales to end-users and $7,120 sales to
dealers. HighText realized an average CD-ROM title price of $19.33. HighText
did not publish or sell CD-ROM software titles during the comparable period of
1995.
HighText's first CD-ROM title was published in May 1995, followed by
two additional titles in November 1995. During the three months ended March 31,
1996, HighText focused on the development of seven additional titles, at the
expense of developing distribution for existing products. As a result, software
sales during the first quarter were limited.
BOOK SALES. Book sales for the three months ended March 31, 1996 were
$87,847, consisting of $9,651 retail sales to end-users and $78,196 sales to
dealers. HighText realized an average book price of $12.65 during the quarter.
By comparison, for the three months ended March 31, 1995, retail sales were
$13,020, and dealer sales were $84,824.
HighText published its first book title in June 1991. As of January
1, 1996, HighText had published fifteen book titles. During the three months
ended March 31, 1996, HighText published no new book titles.
OPERATING AND CORPORATE EXPENSES. The most significant components of
HighText's $154,774 of operating and corporate expenses for the three month
period ended March 31, 1996,
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were salary costs totaling $60,153 and marketing and trade show costs of
$49,993. HighText expenses the costs of developing new software and book titles
as they are incurred. During the period January 1 to March 31, 1996, HighText
had seven software and three book titles under development.
HARISTON AND EUROEASTERN OPERATING AND CORPORATE EXPENSES
Due to the divestitures during 1995 of certain operating businesses
and investments, and the subsequent acquisition of new businesses, Hariston's
non-consolidated operating and corporate expenses for the period January 1 to
March 31, 1996 of $316,477 are not directly comparable to the $316,729 of costs
for the same period of a year earlier. The majority of Hariston's
non-consolidated operating and corporate expenses for the first quarter of 1996
were general, administrative and salary costs, including in excess of $16,000
of costs incurred for shareholder communications, and more than $71,000 of
accounting and legal fees. The majority of EuroEastern's non-consolidated
operating and corporate expenses, totaling $34,589, were also general,
administrative and salary costs. There are no prior year comparable figures for
EuroEastern as it was incorporated in October 1995.
INVESTMENTS
POLISH LIFE IMPROVEMENT S.A. PLI is a retail operator of eight
supermarkets and four home improvement stores in Poland. PLI is a public Polish
company which during 1995 applied for its shares to be listed and traded on the
Warsaw Stock Exchange. Approval for share trading was obtained in early 1996,
and on February 5, 1996, PLI's shares began trading on the parallel market of
the Warsaw Stock Exchange.
Over 3 million shares in PLI are reported on Hariston's balance sheet,
at an average cost of approximately $0.64 per share. These include 1.4 million
shares which the Company agreed to sell to a third party and for which it has
received a promissory note that is presently in default. The promissory note is
secured by the 1.4 million shares. Management has determined that collection on
the note is not reasonably assured and is discussing with the purchaser the
return of the 1.4 million PLI shares.
After accounting for the Company's obligation to transfer 613,684 PLI
shares under the terms of a stock sale agreement, and not including the 1.4
million PLI shares discussed above, which Hariston does not control or vote,
Hariston's percentage ownership in PLI is approximately 23%.
Management is of the opinion that due to the Company's minority
ownership position in PLI, Hariston has not been able to exercise significant
influence over the operating, investing, and financial policies of PLI and
therefore the investment in PLI shares was accounted for on the cost method.
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MADISON PARTNERS LIMITED. Madison was a Canadian-based supplier of
proprietary home medical products. Madison's shares are listed for trading on
the Canadian Dealing Network, a division of the Toronto Stock Exchange.
Hariston owns 800,000 shares of Madison common stock, representing less than a
5% interest in Madison. In January 1996, Madison's secured creditors seized its
assets, causing Hariston to fully write off its investment in Madison as of
December 31, 1995. Madison's shares last traded in January 1996.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1996, the Company had cash balances in excess of
$600,000, a working capital ratio of 0.51 and a debt/equity ratio of 1.17. The
Company's principal capital requirements include working capital to finance the
internal expansion of Educorp Multimedia, and costs which may be incurred in
connection with the acquisition of businesses in the future.
Historically, the Company has also required capital to finance
operating losses, having incurred operating losses in each year after 1990. As
of March 31, 1996, the Company had an accumulated deficit of $26,421,234.
However, the Company has disposed of or written off substantially all of the
operations and investments that gave rise to this accumulated deficit,
retaining only the Company's investment in shares of PLI, and the Educorp
Multimedia operations.
PLI does not require the financial assistance of the Company. Further,
based on historical results and management's expectations for future
operations, the Company expects that the Direct operations will generate
sufficient cash flow to cover their operating requirements for the immediate
future. However, with the recent acquisition of HighText and the need to
finance product development and general corporate expenses until Educorp
Multimedia is sufficiently profitable, the Company will have to raise
additional equity and/or debt capital in 1996. There is no assurance that cash
flows from operations will be sufficient to meet operating requirements, or
that additional debt or equity financing will be available on terms acceptable
to the Company.
To finance the Company's working capital needs and the repayment of a
short-term note that arose from the acquisition of the Direct operations, the
Company reset the exercise price of certain warrants from $3.60 to $2.00 per
share as an incentive for exercise. The repriced warrants were exercised and,
pursuant to the exercise, the Company issued 250,000 shares on March 1, 1996 to
realize proceeds of $500,000.
SEASONALITY OF BUSINESS
Historically, the Educorp Multimedia operations have been subject to a
seasonal effect during the "back to school" and year-end holiday buying
seasons, commencing in August and peaking during the period November through
January. To generate gift sales, Direct has historically timed the mailing of
its catalogs to be received by potential customers during November and early
December. In addition, catalogs are mailed in January to generate sales
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from those who may have received computers as gifts. Management expects that
this seasonal effect will continue to have an impact on HighText's and Direct's
operations for the foreseeable future.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Not Applicable.
Item 2. Changes in Securities.
Not Applicable.
Item 3. Defaults Upon Senior Securities.
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
During the quarter ended March 31, 1996 the Company did not submit any
matters to a vote of the Company's shareholders.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on From 8-K.
(a) Exhibits.
Exhibit No. Exhibit Description
- - ----------- -------------------
2.1 Agreement and Plan of Reorganization dated December
31, 1995 by and among CD-Soft Press Corporation,
High Text Publications, Inc., Carol Lewis, Jack Lewis
and Harry Helms (omits schedules and exhibits. The
Registrant hereby agrees to supplementally provide
the omitted schedules and exhibits to the Securities
and Exchange Commission upon request)
27 Financial Data Schedule
(b) Reports on Form 8-K: None
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Pursuant to the requirements 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.
HARISTON CORPORATION
Dated: May 13, 1996 By: /s/ JAMES V. McGOODWIN
----------------------------------------
James V. McGoodwin, President
(Principal Executive Officer)
Dated: May 13, 1996 By: /s/ L. JAMES PORTER
----------------------------------------
L. James Porter, Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
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EXHIBIT INDEX
Exhibit No. Exhibit Description Page
- - ----------- ------------------- ----
2.1 Agreement and Plan of Reorganization dated December
31, 1995 by and among CD-Soft Press Corporation, High Text
Publications, Inc., Carol Lewis, Jack Lewis and Harry Helms
27 Financial Data Schedule