1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO 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
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
1500 WEST GEORGIA STREET, SUITE 1555, VANCOUVER, V6G 2Z6
BRITISH COLUMBIA (Zip Code)
(Address of principal executive offices)
(604) 685-8514
(Registrant's telephone number, including area code)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [ X ] NO [ ]
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE:
AS OF NOVEMBER 19, 1996, 12,663,113 SHARES OF THE REGISTRANT'S COMMON
STOCK WERE OUTSTANDING.
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The unaudited Consolidated Statements of Loss and Deficit for the
three and nine month periods ended September 30, 1996 and September 30, 1995,
the unaudited Consolidated Statements of Changes in Financial Position for the
nine month periods ended September 30, 1996 and September 30, 1995 and the
unaudited Consolidated Balance Sheets as at September 30, 1996 and December 31,
1995, of Hariston Corporation ("Hariston" or the "Company") follow.
3
HARISTON CORPORATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Expressed in thousands of U.S. dollars)
September 30 December 31
1996 1995
- --------------------------------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $1,308 $1,419
Receivables 537 457
Inventory 1,079 1,335
Prepaids 147 147
- --------------------------------------------------------------------------------------------------
3,071 3,358
Investments (Note 12) 1,688 1,956
Furniture and equipment 406 207
Goodwill, licenses, mailing lists, and other intangibles 4,368 4,667
- --------------------------------------------------------------------------------------------------
6,462 6,830
- --------------------------------------------------------------------------------------------------
$9,533 $10,188
==================================================================================================
LIABILITIES
Current
Payables $1,657 $1,829
Deferred revenues 19 185
Put option 300 -
Current portion of term debt 3,975 413
- --------------------------------------------------------------------------------------------------
5,951 2,427
Term debt 172 3,200
Put option - 300
- --------------------------------------------------------------------------------------------------
172 3,500
- --------------------------------------------------------------------------------------------------
6,123 5,927
SHAREHOLDERS' EQUITY
Capital stock 31,999 29,887
Deficit (28,589) (25,626)
- --------------------------------------------------------------------------------------------------
3,410 4,261
- --------------------------------------------------------------------------------------------------
$9,533 $10,188
==================================================================================================
================================================================================
The accompanying notes are an integral part of these consolidated financial
statements
4
HARISTON CORPORATION
CONSOLIDATED STATEMENTS OF LOSS AND DEFICIT (UNAUDITED)
(Expressed in thousands of U.S. dollars except per share amounts)
3 MONTHS ENDED SEPTEMBER 30 1996 1995
- ---------------------------------------------------------------------------------------------------------------
REVENUES
Software sales $1,246 503
Book sales 151 -
Software royalties and license fees 1 15
Other - 39
- ---------------------------------------------------------------------------------------------------------------
1,398 557
- ---------------------------------------------------------------------------------------------------------------
COST OF SALES AND PRODUCTION EXPENSES
Direct cost of sales 944 409
Royalties 30 16
- ---------------------------------------------------------------------------------------------------------------
974 425
- ---------------------------------------------------------------------------------------------------------------
GROSS MARGIN 424 132
- ---------------------------------------------------------------------------------------------------------------
OPERATING AND CORPORATE EXPENSES
Administration, office, and travel 104 90
Consultants and directors fees, salaries and employee benefits 641 79
Accounting, legal and other professional fees 134 10
Marketing, catalog and trade show costs 395 40
Depreciation and amortization 309 80
Rent 44 42
- ---------------------------------------------------------------------------------------------------------------
1,627 341
- ---------------------------------------------------------------------------------------------------------------
(1,203) (209)
- ---------------------------------------------------------------------------------------------------------------
OTHER
Net interest (expense) income (81) (2)
Net gain on recovery of doubtful receivables - (83)
Gain on sale of shares 514 123
Provision for loss on settlement of note (179) -
Other (2) (18)
- ---------------------------------------------------------------------------------------------------------------
252 20
- ---------------------------------------------------------------------------------------------------------------
NET LOSS FROM CONTINUING OPERATIONS (951) (189)
- ---------------------------------------------------------------------------------------------------------------
DISCONTINUED OPERATIONS (Note 11)
Quebec industrial condominium rental property - (2)
Minerals recovery project - (221)
Oil and gas working and royalty interests (3) 1,138
- ---------------------------------------------------------------------------------------------------------------
(3) 915
- ---------------------------------------------------------------------------------------------------------------
NET (LOSS) INCOME ($954) $726
DEFICIT, beginning of period (27,635) (25,201)
- ---------------------------------------------------------------------------------------------------------------
DEFICIT, END OF PERIOD ($28,589) ($24,475)
===============================================================================================================
PRIMARY (LOSS) INCOME PER SHARE (Note 13) ($0.08) $0.07
Shares used in primary computation 11,515,287 11,066,974
FULLY DILUTED (LOSS) INCOME PER SHARE (Note 13) ($0.08) $0.07
Shares used in fully diluted computation 11,515,287 11,066,974
===============================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements
5
HARISTON CORPORATION
CONSOLIDATED STATEMENTS OF LOSS AND DEFICIT (UNAUDITED)
(Expressed in thousands of U.S. dollars except per share amounts)
9 MONTHS ENDED SEPTEMBER 30 1996 1995
===========================================================================================================
REVENUES
Software sales $4,176 503
Book sales 319 -
Software royalties and license fees 80 15
Other 20 39
- -----------------------------------------------------------------------------------------------------------
4,595 557
- -----------------------------------------------------------------------------------------------------------
COST OF SALES
Direct cost of sales 3,095 409
Royalties 117 16
- -----------------------------------------------------------------------------------------------------------
3,212 425
- -----------------------------------------------------------------------------------------------------------
GROSS MARGIN 1,383 132
- -----------------------------------------------------------------------------------------------------------
OPERATING AND CORPORATE EXPENSES
Administration, office, and travel 504 263
Consultants and directors fees, salaries and employee benefits 1,831 399
Accounting, legal and other professional fees 471 194
Marketing, catalog and trade show costs 697 40
Depreciation and amortization 826 90
Rent 148 87
- -----------------------------------------------------------------------------------------------------------
4,477 1,073
- -----------------------------------------------------------------------------------------------------------
(3,094) (941)
- -----------------------------------------------------------------------------------------------------------
OTHER
Net interest (expense) income (249) (20)
Net gain on recovery of doubtful receivables 10 131
Gain on sale of shares 573 123
Provision for loss on settlement of note (179) -
Other 2 (18)
- -----------------------------------------------------------------------------------------------------------
157 216
- -----------------------------------------------------------------------------------------------------------
NET LOSS FROM CONTINUING OPERATIONS (2,937) (725)
- -----------------------------------------------------------------------------------------------------------
DISCONTINUED OPERATIONS (Note 11)
Quebec industrial condominium rental property - 9
Minerals recovery project - (287)
Oil and gas working and royalty interests (26) 1,330
- -----------------------------------------------------------------------------------------------------------
(26) 1,052
- -----------------------------------------------------------------------------------------------------------
NET (LOSS) INCOME ($2,963) $327
DEFICIT, beginning of period (25,626) (24,802)
- -----------------------------------------------------------------------------------------------------------
DEFICIT, END OF PERIOD ($28,589) ($24,475)
===========================================================================================================
PRIMARY (LOSS) INCOME PER SHARE (Note 13) ($0.26) $0.03
Shares used in primary computation 11,421,313 10,851,476
FULLY DILUTED (LOSS) INCOME PER SHARE (Note 13) ($0.26) $0.03
Shares used in fully diluted computation 11,421,313 11,066,974
===========================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements
6
HARISTON CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION (UNAUDITED)
(Expressed in thousand of U.S. dollars)
9 MONTHS ENDED SEPTEMBER 30 1996 1995
========================================================================================================
OPERATING ACTIVITIES
Net loss from continuing operations ($2,937) ($725)
Non-cash items:
Amortization and depreciation 826 146
Gains on disposal of investments (573) (123)
Provision for loss on settlement of note 179 -
Net increase in non-cash working capital items (178) (389)
- --------------------------------------------------------------------------------------------------------
CASH USED FOR CONTINUING OPERATIONS (2,683) (1,091)
- --------------------------------------------------------------------------------------------------------
Net (loss) income from discontinued operations (26) 1,051
Non-cash items:
Amortization - 146
Costs (gain) on disposal of discontinued operations 26 (867)
- --------------------------------------------------------------------------------------------------------
CASH PROVIDED BY DISCONTINUED OPERATIONS - 330
- --------------------------------------------------------------------------------------------------------
CASH USED FOR OPERATING ACTIVITIES (2,683) (761)
- --------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net term debt issuances 534 1,731
Issuances of common stock 2,113 539
- --------------------------------------------------------------------------------------------------------
CASH PROVIDED BY FINANCING ACTIVITIES 2,647 2,270
- --------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Acquisitions of multimedia software businesses (641) (5,650)
Net (additions) disposals of other assets (97) 69
Collection of notes receivable - 1,170
Net proceeds from disposal of PLI shares 670 -
Net (purchase of) proceeds from sales of Madison shares (7) 156
Sale of oil and gas working and royalty interests - 3,318
Minerals recovery project - (365)
- --------------------------------------------------------------------------------------------------------
CASH USED FOR INVESTING ACTIVITIES (75) (1,302)
- --------------------------------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN CASH (111) 207
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,419 1,199
- --------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $1,308 $1,406
========================================================================================================
================================================================================
The accompanying notes are an integral part of these consolidated financial
statements
7
HARISTON CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(EXPRESSED IN U.S. DOLLARS)
9 MONTHS ENDED SEPTEMBER 30, 1996
================================================================================
NOTE 1. OPERATIONS
The Company is incorporated under the Canada Business Corporations Act and has
operated historically as a diversified holding company. On August 25, 1995, the
Company focused on the multimedia CD-ROM software business with the purchase of
all of the assets, and the assumption of 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 also operates as part of
Educorp Multimedia. In addition, the Company continues to hold a large minority
shareholding in Polish Life Improvement S.A., a Polish retailer co-founded by
the Company in 1993.
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 the
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 and nine month periods ended September 30,
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 HighText
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
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HARISTON CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(EXPRESSED IN U.S. DOLLARS)
9 MONTHS ENDED SEPTEMBER 30, 1996
================================================================================
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").
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 to be 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 sellers' 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.
Pro forma results of operations, as though the purchase of HighText had ocurred
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 THIRD QUARTER
On September 27, 1996, the Company issued 1.2 million units by private
placement, for total cash proceeds of $1.2 million. Each unit consisted of one
common share, one-half A warrant and one-half B warrant. Each A warrant allows
the holder to purchase one common share of Hariston at a price of $1.75 per
share if exercised on or before September 27, 1997. Each B warrant allows the
holder to purchase one common share of Hariston at a price of $2.50 per share
if exercised on or before September 27, 1998. Further, B warrants are only
exercisable to the extent an equivalent number of A warrants have been
previously exercised.
9
HARISTON CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(EXPRESSED IN U.S. DOLLARS)
9 MONTHS ENDED SEPTEMBER 30, 1996
================================================================================
NOTE 5. SUMMARY OF OPTIONS GRANTED DURING THE THIRD QUARTER
Date Option Number of Shares Option Option
Granted under Vested Option Optionee Exercise Price Expiry Date
===================================================================================================================
July 17, 1996 40,000 James P. Angus 1.25 July 17, 2003
July 17, 1996 40,000 Nuno Brandolini 1.25 July 17, 2003
July 17, 1996 40,000 Neil S. MacKenzie 1.25 July 17, 2003
July 17, 1996 250,000 J. V. McGoodwin 1.25 July 19, 1999
July 17, 1996 90,000 Nicholas Mosich 1.25 July 17, 2003
July 17, 1996 50,000 L. James Porter 1.25 July 17, 2003
- -------------------------------------------------------------------------------------------------------------------
August 16, 1996 40,000 James P. Angus 1.25 August 16, 2003
August 16, 1996 133,333 Nuno Brandolini 1.25 August 16, 2003
August 16, 1996 40,000 Neil S. MacKenzie 1.25 August 16, 2003
August 16, 1996 100,000 Kevin R. McCarthy 1.25 August 16, 2003
August 16, 1996 63,333 L. James Porter 1.25 August 16, 2003
- -------------------------------------------------------------------------------------------------------------------
By resolutions dated July 17 and August 16, 1996, Hariston's Board resolved to
cancel the 1995 Stock Option Plan and all outstanding option grants thereunder,
and to create the 1996 Stock Option Plan and the 1996 Stock Option Plan No. 2.
Stock option grants under the 1996 Stock Option Plan vested immediately as of
the date of grant. Stock option grants under the 1996 Stock Option Plan No. 2
vest as follows: one-third immediately as of the date of grant, one third to
vest as of August 16, 1997 and the remainder to vest as of August 16, 1998. The
vested option grants during the third quarter are shown in the schedule above.
Total option grants in the third quarter under the 1996 plans consisted of
options to purchase 1,280,000 shares at $1.25 per share granted to employees,
and options to purchase 360,000 shares at $1.25 per share granted to directors.
NOTE 6. AUTHORIZED AND ISSUED SHARE CAPITAL AS OF SEPTEMBER 30, 1996
Class Par Value Authorized Number Issued Number Amount
===================================================================================================================
Common None Unlimited 12,663,113 $31,999,167
NOTE 7. SHARES IN ESCROW OR SUBJECT TO POOLING AS OF SEPTEMBER 30, 1996
The common shares issued on September 27, 1996 as described in Note 4 were
issued in a Regulation S foreign private placement not registered under the
Securities Act of 1933. The shares were accordingly placed in escrow for the
duration of a mandatory forty day hold period.
NOTE 8. LIST OF DIRECTORS AS OF SEPTEMBER 30, 1996 (Note 14)
Nuno Brandolini James P. Angus Neil S. MacKenzie Kevin R. McCarthy
(Chairman) L. James Porter
10
HARISTON CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(EXPRESSED IN U.S. DOLLARS)
9 MONTHS ENDED SEPTEMBER 30, 1996
================================================================================
NOTE 9. OPTIONS AND WARRANTS OUTSTANDING AS OF SEPTEMBER 30, 1996
Number of Shares Exercise Market Price
OPTION ISSUE TYPE under Vested Option Price on Date of Grant Expiry Date
===================================================================================================================
Employee options 10,000 1.86 2.49 November 30, 1997
Employee options 10,000 3.15 4.57 February 17, 1998
Director options 20,000 3.53 4.57 March 31, 1998
- -------------------------------------------------------------------------------------------------------------------
Employee options 250,000 1.25 1.13 July 19, 1999
Employee options 140,000 1.25 1.13 July 17, 2003
Director options 120,000 1.25 1.13 July 17, 2003
- -------------------------------------------------------------------------------------------------------------------
Employee options 296,666 1.25 1.25 August 16, 2003
Director options 80,000 1.25 1.25 August 16, 2003
----------
926,666
==========
Number Exercise Market Price
WARRANT HOLDER of Shares Price on Date of Grant Expiry Date
=====================================================================================================================
Commonwealth Consulting Corporation 125,000 2.25 2.62 December 31, 1996
Dahlia Financial 150,000 1.75 1.06 September 27, 1997
Dahlia Financial 150,000 2.50 1.06 September 27, 1998
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 Finanz A.G. 250,000 2.50 2.25 August 24, 2000
Silvercreek Investments, Ltd. 150,000 1.75 1.06 September 27, 1997
Silvercreek Investments, Ltd. 150,000 2.50 1.06 September 27, 1998
Tross Ltd. 150,000 1.75 1.06 September 27, 1997
Tross Ltd. 150,000 2.50 1.06 September 27, 1998
Wallington Investments Ltd. 150,000 1.75 1.06 September 27, 1997
Wallington Investments Ltd. 150,000 2.50 1.06 September 27, 1998
Zocal Foundation 250,000 2.50 2.25 August 24, 2000
---------
3,075,000
=========
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)
NINE MONTHS ENDED SEPTEMBER 30, 1996
Net loss according to Canadian GAAP ($2,963)
Non cash compensation expense (59)
- -------------------------------------------------------------------------------------------------------------------
NET LOSS ACCORDING TO U.S. GAAP ($3,022)
There would be no differences in net assets or shareholders' equity.
11
HARISTON CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(EXPRESSED IN U.S. DOLLARS)
9 MONTHS ENDED SEPTEMBER 30, 1996
================================================================================
The above variance in the net loss figure results from the difference in the
accounting treatment for employee stock options. During 1995, 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 or are cancelled before exercise (Note 5). Under Canadian GAAP,
the issuance, exercise, expiration or cancellation 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 interim financial statements.
NOTE 12. INVESTMENTS
Amount
============
Polish Life Improvement S.A.
1,657,205 shares owned as of December 31, 1995 $1,123,420
143,481 shares sold January 1 to September 30, 1996 (97,266)
----------
1,513,724 shares owned as of September 30, 1996 $1,026,154
Collateral interest in 1.4 million shares under note receivable in default 832,714
Provision for estimated loss on settlement of note (178,500)
----------
$1,680,368
Madison Holdings Limited 7,304
----------
Investments as of September 30, 1996 $1,687,672
==========
NOTE 13. LOSS PER SHARE
Primary and fully diluted loss per share have been computed using the weighted
average number of shares of common stock outstanding during the periods
presented. Stock options and warrants have not been included in these
calculations as their impact would be antidilutive.
NOTE 14. CHANGES IN MANAGEMENT AND BOARD OF DIRECTORS
As announced by news release dated July 18, 1996, effective July 19, 1996 J.V.
McGoodwin resigned from the positions of President, Chief Executive Officer and
as a Director of the Company. Concurrently, Nuno Brandolini was appointed Chief
Executive Officer and elected Chairman of the Board, and Kevin R. McCarthy was
appointed President and elected to the Board.
12
HARISTON CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
================================================================================
OVERVIEW
During the third quarter of 1996, Hariston completed one full calendar year of
being primarily a multimedia CD-ROM publisher and distributor. Previously, the
Company had participated in such diverse businesses and investments as
environmental remediation technology, oil and gas working and royalty
interests, receivables factoring, and retailing of sports memorabilia and
commemorative coins. The Company continues to participate in retailing in
Poland through its minority shareholding in Polish Life Improvement S.A.
("PLI"), an operator of hardware stores in Poland. Management currently intends
to rationalize the Company's U.S. multimedia operations and expand the
Company's investment activities in Poland.
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. From January 1 to
September 30, 1996, Direct mailed 2,140,000 catalogs and newsletters to its
customer base. 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 released ten
software titles to date as part of its Crash Course product series. These
titles are distributed through catalog sales direct to end-users and by
wholesale dealers to college and specialty bookstores, and computer software
stores.
By news release dated September 27, 1996, the Company announced that its new
management team had completed a review of the Company's operations and had
concluded that a change in strategic direction would be in the best interests
of shareholders. Under the direction of Nuno Brandolini, the Company's recently
appointed Chairman and Chief Executive Officer, management decided that
Hariston's resources should be concentrated on further investments in Poland.
This decision follows Hariston's successful investment in PLI, a company it
co-founded in February, 1993. While Hariston continues to retain a large
minority investment in PLI, directly and through a collateral position for a
note receivable, during the second and third quarters the Company affirmed the
liquidity and value of its investment by selling a limited number of PLI shares
in public trades on the parallel market of the Warsaw Stock Exchange.
Given the disappointing results of the Company's multimedia operations and new
management's stated intention to focus the Company's resources on Poland, the
Company is considering various alternatives in order to maximize the value of
its investment in these multimedia operations. Such alternatives may include
but are not limited to: (1) the disposition of the operations in whole or in
part, (2) the merger with or acquisition of complementary businesses, (3) the
development of new distribution channels, and (4) international expansion of
the business. No assurances can be given that these or any other activities
will be undertaken or if undertaken will be successful.
13
HARISTON CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
================================================================================
CORPORATE STRUCTURE
During June, 1995, Hariston incorporated a wholly-owned California subsidiary,
CD-Soft Corporation. 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 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. This company has been
largely inactive to date.
CHANGES IN MANAGEMENT AND BOARD OF DIRECTORS
As announced by news release dated July 18, 1996, effective July 19, 1996 James
V. McGoodwin resigned as Hariston's President and Chief Executive Office. He
also resigned from the Company's Board, and from his positions with Hariston's
affiliated and subsidiary companies. Concurrently, Nuno Brandolini, a Hariston
Director and President of Hariston's wholly-owned subsidiary EuroEastern
Investment Corporation, was appointed as Hariston's Chief Executive Officer and
was elected Chairman of the Board, and Kevin R. McCarthy was appointed as
Hariston's President and was elected to the Board.
Mr. McGoodwin had served as a Director and Officer of the Company since
December, 1994 and left to pursue other interests. He agreed to assist with an
orderly management transition, for which the Company has agreed to pay him,
through his private company McGoodwin James & Co., payments through the period
ending December 31, 1996.
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE
MONTHS ENDED SEPTEMBER 30, 1995
The Company incurred a consolidated net loss of $2,963,822 for the nine months
ended September 30, 1996. Of this loss, $2,081,694 was attributable to Educorp
Multimedia and its subsidiaries, $778,002 to Hariston, and $104,126 to
EuroEastern. Of the $2,081,694 loss attributable to the Company's multimedia
operations, $976,575 arose from the Direct operations, $610,340 from the
HighText operations, and the remainder was due to operating and corporate
expenses incurred at the Educorp Multimedia level. Of the $778,002 loss
incurred at the Hariston legal entity level, $231,696 was attributable to
interest expense on debt, and the remainder related primarily to corporate
administration and overhead costs.
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.
Similarly, the analysis of HighText considers the comparable results during
1995, where available, of the operations of its predecessor, HighText
Publications, Inc.
14
HARISTON CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
================================================================================
The results of operations for the nine months ended September 30, 1996 are not
necessarily indicative of the results of operations to be expected for the
entire fiscal year ending December 31, 1996.
EDUCORP DIRECT
On August 25, 1995, Hariston, 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
$6,067,071. This transaction was accounted for as a purchase.
Direct generated revenues of $4,180,498 for the nine months ended September 30,
1996, comprised of $3,098,376 from retail sales to end-users, $1,001,848 from
sales to dealers, and $80,274 from software royalties and license fees. Direct
realized gross profit of $1,218,349 for the nine months ended September 30,
1996, incurred a loss for the period of $281,168 before interest, depreciation
and amortization, and incurred a net loss after these items of $976,575.
RETAIL SOFTWARE SALES
Retail software sales for the nine months ended September 30, 1996 of
$3,098,376 declined 14% relative to retail software sales of $3,618,299 for the
same period during 1995. The primary reasons for the decline in same period
sales were, first, the 14% decline in the average CD-ROM retail price realized
by Direct in 1996, $29.80 as compared to $34.56 in the same period in 1995; and
second, the discontinuance, in the second half of 1995, of sales of certain
software titles that were incompatible with the Company's future business
plans.
Second quarter, 1996 sales were also adversely affected by a delay in the
mailing of a catalog due to the implementation of a new Management Information
System by Direct. Implementation of the new system required an allocation of
resources for both training and problem resolution.
Other factors adversely affecting nine month sales included a significant
slowdown in the software industry in general during the first half of 1996, and
with respect to sales of Macintosh CD-ROM titles, the widely publicized
problems at Apple Computer.
International retail software sales were $525,754, or 17% of total retail
sales, for the nine months ended September 30, 1996, versus $524,487 or 15% of
total retail sales for the comparable prior year period. The increase in
international retail sales as a percentage of total retail sales was primarily
due to the decline of domestic software sales as described above.
DEALER SOFTWARE SALES
Dealer software sales for the nine months ended September 30, 1996 of
$1,001,848 declined 37% relative to dealer software sales of $1,586,570 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 13%
decrease in the average CD-ROM dealer price realized by Direct. The average
price realized was $26.90 for the first nine months of 1996 as compared to
$30.85 for the first nine months of 1995.
International dealer software sales were $813,822, or 81% of total software
sales to dealers, for the nine months ended September 30, 1996, versus
$1,198,084 or 76% for the comparable prior year period. The 32% decline in
international dealer sales reflected smaller international order sizes due to
an increasing number of publishers seeking direct distribution to foreign
dealers. However, international dealer sales represented a larger percentage of
the Company's sales to dealers reflecting the fact that there were more
distribution sources available to domestic dealers than to foreign dealers.
15
HARISTON CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
================================================================================
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 nine months ended
September 30, 1996. During the comparable period of 1995, retail hardware sales
were $107,900. 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 of hardware as
compared to those of CD-ROM software.
ROYALTIES AND LICENSE FEES
Royalties and license fees of $80,274 for the nine months ended September 30,
1996 decreased 76% relative to royalty and license fees of $334,120 for the
same period during 1995. The primary reason for the decrease was the expiration
during 1996 of a bundling license the Company had negotiated with Apple
Computer. Under the terms of the license, Apple Computer had bundled
educational software titles published by the Company with sales of certain
computers.
GROSS PROFIT
Direct realized a gross profit of $1,218,349 for the nine months ended
September 30, 1996, representing 29% of revenues. Comparative nine month
figures for 1995 (i.e. prior to Educorp's acquisition by Hariston) are not
readily available; however, historically the Educorp operations realized a
higher gross profit. The decline of 1996 results from historical levels
primarily reflects the lower realized prices per title as a result of increased
competition, the discontinuance of a higher margin product line that was
incompatible with the Company's business plans, and the reduced share of higher
margin self-published titles.
OPERATING AND CORPORATE EXPENSES
Operating and corporate expenses were $2,189,324 for the nine months ended
September 30, 1996, representing approximately 52% of revenues for the period.
This figure includes amortization of goodwill and other intangibles arising
from the August 25, 1995 acquisition of the Direct operations. After adjusting
for this amortization expense of $656,108, operating and corporate expenses
were $1,533,216 or 37% of total revenues for the period.
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 $641,421. This transaction
was accounted for as a purchase.
HighText generated revenues of $414,730 for the nine months ended September 30,
1996, comprised of $115,933 from retail sales to end-users, $278,535 from sales
to dealers, and $20,262 from technical documentation fees. HighText realized a
gross profit of $164,562 for the nine months ended September 30, 1996, and
incurred a net loss for the period of $610,340.
SOFTWARE SALES
Software sales for the nine months ended September 30, 1996 were $75,529,
comprised of $35,799 sales to end-users and $39,730 sales to dealers. HighText
realized an average CD-ROM title price of $21.59. Comparable results for 1995
are not readily available.
HighText's first CD-ROM title was published in May, 1995, followed by two
additional titles in November, 1995. During the first quarter of 1996, HighText
focused on the development of seven additional titles, at the expense of
developing distribution for existing products. During the second quarter,
HighText substantially completed the development of the seven software titles
and commenced the development of seven new software titles. During the third
quarter, HighText substantially completed the development of three software
titles. As of September 30, 1996, HighText had ten software titles available
for sale, three software titles in beta testing, and four software titles under
development, for a total of seventeen software
16
HARISTON CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
================================================================================
titles. HighText's software sales increased from $12,063 in the first quarter
to $14,733 in the second quarter and $48,733 in the third quarter.
BOOK SALES
Sales for the nine months ended September 30, 1996 were $318,939, consisting of
$80,134 retail sales to end-users and $238,805 sales to dealers. HighText
realized an average book price of $19.31 during the nine months ended September
30, 1996. By comparison, for the nine months ended September 30, 1995, retail
sales were $72,347 and dealer sales were $231,360.
HighText published its first book title in June, 1991. As of January 1, 1996,
HighText had published fifteen book titles. During the nine months ended
September 30, 1996, HighText published one additional book title. As of
September 30, 1996, HighText had three book titles under development.
OPERATING AND CORPORATE EXPENSES
The most significant components of HighText's $771,102 of operating and
corporate expenses for the nine months ended September 30, 1996 were salary
costs totaling $331,014, marketing and trade show costs of $227,811, and
depreciation and amortization expense of $116,103. HighText expenses the costs
of developing new software and book titles as they are incurred. During the
period January 1 to September 30, 1996, HighText had fourteen software and four
book titles under development.
EDUCORP MULTIMEDIA OPERATING AND CORPORATE EXPENSES
The majority of Educorp Multimedia's $487,057 of non-consolidated operating and
corporate expenses for the nine months ended September 30, 1996 arose from
general, administrative and salary costs, including $101,849 of accounting and
legal fees, $314,196 of salaries and consultants fees, and $31,250 of
recruiting fees. These costs reflected legal and accounting costs incurred in
connection with the January 1, 1996 acquisition of HighText, and costs
attributable to the building of a management structure at the Educorp
Multimedia level. There are no prior year comparable figures for Educorp
Multimedia as it was incorporated in January, 1996 and although its
predecessor, CD-Soft Corporation, was incorporated in June, 1995, it remained
an inactive holding company during the comparable prior year period.
HARISTON AND EUROEASTERN OPERATING AND CORPORATE EXPENSES
Due to the divestitures during 1995 of Hariston's operating businesses and the
subsequent acquisition of new businesses, Hariston's non- consolidated
operating and corporate expenses for the nine months ended September 30, 1996
of $925,979 are not directly comparable to the $885,000 of costs for the same
period of a year earlier. The majority of Hariston's non-consolidated operating
and corporate expenses for the nine months ended September 30, 1996 consisted
of $329,284 of accounting and legal fees, $283,392 of salaries, directors fees
and consultants fees, $108,606 of shareholder communications costs including
transfer agent and investor relations firm fees, $53,724 of insurance costs,
$39,212 of rent expense, and $37,131 of travel costs. Hariston incurred
exceptional salaries and consultants fees during the third quarter due to the
closure of its Costa Mesa, California offices. Hariston incurred significant
non-recurring legal and accounting fees during the first and second quarters as
a consequence of the filings and disclosures required in connection with the
August 25, 1995 acquisition of Direct and the January 1, 1996 acquisition of
HighText. Hariston also incurred significant non-recurring legal, accounting
and other professional fees during the nine months ended September 30, 1996 due
to the restructuring proposals under examination by the Company.
The majority of EuroEastern's non-consolidated operating and corporate
expenses, totaling $104,126, consisted of $63,176 of salaries and consultants
fees and $31,852 of rent expense. There are no prior year comparable figures
for EuroEastern as it was incorporated in October, 1995.
17
HARISTON CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
================================================================================
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE
MONTHS ENDED SEPTEMBER 30, 1995
The Company incurred a consolidated net loss of $954,287 for the three months
ended September 30, 1996, as compared to net income of $726,000 for the same
period of the prior year. Eliminating the impact of discontinued operations,
the Company incurred a net loss of $189,000 for the same period of the prior
year. Of the third quarter 1996 loss, $823,382 was attributable to Educorp
Multimedia and its subsidiaries, $87,235 to Hariston, and $43,670 to
EuroEastern. Of the $823,382 loss attributable to the Company's multimedia
operations, $358,656 arose from the Direct operations, $273,183 from the
HighText operations, and the remainder was due to operating and corporate
expenses incurred at the Educorp Multimedia level. Of the $87,235 loss incurred
at the Hariston legal entity level, $68,221 was attributable to interest
expense on debt, and the remainder related primarily to corporate
administration and overhead costs.
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.
Similarly, the analysis of HighText considers the comparable results during
1995, where available, of the operations of its predecessor, HighText
Publications, Inc.
The results of operations for the three months ended September 30, 1996 are not
necessarily indicative of the results of operations to be expected for the
three months ending December 31, 1996.
EDUCORP DIRECT
Direct generated revenues of $1,199,412 for the three months ended September
30, 1996, comprised of $875,474 from retail sales to end users, $322,436 from
sales to dealers, and $1,502 from software license fees. Direct realized a
gross profit of $362,615 for the third quarter of 1996, incurred a loss of
$125,459 before interest, depreciation and amortization, and a net loss for the
quarter of $358,656.
RETAIL SOFTWARE SALES
Retail software sales for the quarter ended September 30, 1996 of $875,474
declined 15% relative to retail software sales of $1,034,993 for the same
period during 1995. The primary reasons for the decline in same period sales
were, first, the decline in the average CD-ROM retail price realized by Direct
in 1996; second, the discontinuance, in the second half of 1995, of sales of
certain software titles that were incompatible with the Company's future
business plans; and third, the widely publicized problems at Apple Computer.
International retail software sales were $146,955, or 17% of total retail
sales, for the three months ended September 30, 1996, versus $153,378 or 15% of
total retail sales for the comparable prior year period. The increase in
international retail sales as a percentage of total retail sales was primarily
due to the decline of domestic software sales as described above.
DEALER SOFTWARE SALES
Dealer software sales for the quarter ended September 30, 1996 of $322,436
declined 34% relative to dealer software sales of $489,632 for the same period
during 1995. The decline in same period sales
18
HARISTON CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
================================================================================
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 decrease in the average CD-ROM dealer price realized by Direct.
International dealer software sales were $275,430, or 85% of total software
sales to dealers, for the three months ended September 30, 1996, versus
$401,021 or 82% for the comparable prior year period. The 31% decline in
international dealer sales reflected smaller international order sizes due to
an increasing number of publishers seeking direct distribution to foreign
dealers.
ROYALTIES AND LICENSE FEES
Royalties and license fees of $1,502 for the quarter ended September 30, 1996
compare to royalty and license fees of $71,570 for the same period during 1995.
The primary reason for the decrease was the expiration during 1996 of a
bundling license with Apple Computer.
GROSS PROFIT
Direct realized a gross profit of $362,615 for the quarter ended September 30,
1996, representing 30% of revenues. Comparative figures for the full three
months ended September 30, 1995 (i.e. including the period prior to Educorp's
August 25, 1995 acquisition by Hariston) are not readily available. However,
for the five weeks from August 25, 1995 to September 30, 1995, Direct realized
a gross profit of $125,000 on revenues of $550,000, for a gross profit margin
of 23%. Cost of sales included a one-time inventory adjustment relating to the
acquisition. Without this adjustment, Direct would have earned a gross profit
margin for the five weeks ending September 30, 1995 of 33%. The 3% reduction in
comparable margin from third quarter, 1995 to third quarter, 1996 primarily
reflects lower realized prices per title as a result of increased competition.
OPERATING AND CORPORATE EXPENSES
Operating and corporate expenses were $714,675 for the quarter ended September
30, 1996, representing approximately 60% of revenues for the quarter. This
figure includes amortization of goodwill and other intangibles arising from the
August 25, 1995 acquisition of the Direct operations. After adjusting for this
amortization expense of $218,014, operating and corporate expenses were $496,661
or 41% 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.
HighText generated revenues of $199,629 for the three months ended September
30, 1996, comprised of $50,343 from retail sales to end-users and $149,286 from
sales to dealers. HighText realized a gross profit of $61,395 for the third
quarter, 1996, and incurred a net loss for the quarter of $273,183.
SOFTWARE SALES
Software sales for the quarter ended September 30, 1996 were $48,733,
consisting of $23,933 sales to end-users and $24,800 sales to dealers.
Comparable results for 1995 are not readily available.
During the third quarter, 1996, HighText substantially completed the
development of three software titles. As of September 30, 1996, HighText had
ten software titles available for sale, three software titles in beta testing,
and four software titles under development, for a total of seventeen software
titles.
19
HARISTON CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
================================================================================
BOOK SALES
Sales for the quarter ended September 30, 1996 were $150,896, consisting of
$29,474 retail sales to end-users and $121,422 sales to dealers. By comparison,
for the three months ended September 30, 1995, retail sales were $22,111, and
dealer sales were $81,612.
During the third quarter, 1996, HighText published no further book titles and
continued development of three book titles.
OPERATING AND CORPORATE EXPENSES
The most significant components of HighText's $334,193 of operating and
corporate expenses for the quarter ended September 30, 1996, were salary costs
totaling $146,452, marketing and trade show costs of $85,906, and depreciation
and amortization expense of $75,945. HighText expenses the costs of developing
new software and book titles as they are incurred.
EDUCORP MULTIMEDIA OPERATING AND CORPORATE EXPENSES
The majority of Educorp Multimedia's $183,820 of non-consolidated operating and
corporate expenses for the quarter ended September 30, 1996 arose from general,
administrative and salary costs, including $168,495 of salaries and consultants
fees. There are no prior year comparable figures for Educorp Multimedia as it
was incorporated in January, 1996 and its predecessor, CD-Soft Corporation,
although incorporated in June, 1995, remained an inactive holding company
during the comparable prior year period.
HARISTON AND EUROEASTERN OPERATING AND CORPORATE EXPENSES
Due to the divestitures during 1995 of Hariston's operating businesses and the
subsequent acquisition of new businesses, Hariston's non- consolidated
operating and corporate expenses for the quarter ended September 30, 1996 of
$350,342 are not directly comparable to the $153,000 of costs for the same
period of a year earlier. The majority of Hariston's non-consolidated operating
and corporate expenses for the third quarter of 1996 consisted of $112,907 of
salaries and consultants fees including severance payments, $110,678 of
accounting and legal fees, $48,596 of shareholder communications costs, $27,309
of travel costs and $13,035 of insurance costs. Hariston incurred exceptional
salaries and consultants fees during the third quarter due to the closure of
the Costa Mesa, California offices.
The majority of EuroEastern's non-consolidated operating and corporate
expenses, totaling $43,670, were 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 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. Hariston co-founded PLI in
1993 and currently holds a large minority interest in the company.
PLI is a retail operator of five home improvement stores in Poland, operated
under the name NOMI, and was previously also the operator of eight supermarkets
in Poland, operated under the name MAX.
20
HARISTON CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
================================================================================
In December, 1995 PLI sold a 51% interest in its former supermarket subsidiary
for $10.5 million, to a joint venture controlled by Royal Ahold NV, one of the
world's largest food retailers with headquarters in the Netherlands. As
announced by news release dated July 11, 1996, PLI has additionally sold its
remaining 49% interest to the Royal Ahold joint venture for $9.4 million.
As of September 30, 1996, 2,613,724 shares in PLI were reported on Hariston's
balance sheet, at an average cost of approximately $0.64 per share. These
include 1.1 million shares out of a total of 1.4 million shares which the
Company agreed in 1994 to sell to a third party and for which it received a
promissory note that is presently in default. The promissory note is secured by
the 1.4 million shares; however, Hariston does not control or vote these
shares. Management has determined that collection on the note is not reasonably
assured and is discussing with the purchaser arrangements for the return of the
shares. Based on present negotiations, the Company has provided in its third
quarter results for $178,500 of estimated loss on settlement of the collateral
claim under the note receivable.
Not including the 1.4 million PLI shares discussed above, Hariston's percentage
ownership in PLI is approximately 21%. 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 is accounted for on
the cost method.
During the second and third quarters, the Company sold a limited number of PLI
shares in public trades on the parallel market of the Warsaw Stock Exchange.
The Company sold 128,346 PLI shares during the third quarter realizing net
proceeds of $600,444. During 1996 to date, Hariston has sold a total of 143,481
PLI shares realizing net proceeds of approximately $670,000.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1996, the Company had cash balances of $1,307,761, a
working capital ratio of 0.52 and a debt/equity ratio of 1.80. The Company's
principal capital requirements include working capital to finance the
multimedia operations including the development of new multimedia CD-ROM
titles, capital to fund debt repayments, and capital to effect the acquisition
of businesses or investments in the future.
Historically, the Company has required capital to finance operating losses,
having incurred operating losses in each year after 1990. As of September 30,
1996, the Company had an accumulated deficit of $28,588,806. The Company has
continued to experience negative operating cash flows.
Based on historical results and management's expectations for future
operations, the Company expects that the Direct operations will require modest
capital infusion to cover their operating requirements for the immediate
future. However, with the need to finance HighText's product development
efforts, Educorp Multimedia's and Hariston's general corporate expenses, and
Hariston's debt repayments, the Company will have to raise additional equity
and/or debt capital in 1996 or early 1997, or sell assets or business units
within this time-frame. Management is currently considering a number of
alternatives.
There is no assurance that cash flows from operations will be sufficient to
meet operating requirements, that additional debt or equity financing will be
available on terms acceptable to the Company, or that the Company will be able
to conclude the sale of assets or business units on terms acceptable to the
Company.
In order to finance working capital needs, during the third quarter the Company
raised $1,200,000 from the private placement of shares and share purchase
warrants.
Also during the third quarter, the Company continued limited sales of PLI
shares on the parallel market of the Warsaw Stock Exchange. To date, 143,481
PLI shares have been sold raising net proceeds of
21
HARISTON CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
================================================================================
approximately $670,000. The proceeds of sales to date have been primarily
invested in the operations of Educorp Multimedia and its subsidiaries.
Importantly, these share sales have also served to demonstrate the liquidity
and value of the Company's investment in PLI. The Company continues to own
outright in excess of 1.5 million PLI shares, not including shares pledged to
the Company as collateral on a note receivable that is in default.
The ability of the Company to continue to effectively manage its working
capital and ultimately, to attain profitability, is dependent upon a number of
factors including but not limited to: competitive conditions in the
marketplace, general economic conditions, the efficiency of the Company's
operations, the timely development and introduction of new products which
address market needs, and continuing access to investment capital.
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.
Management expects that this seasonal effect will continue to have an impact for
the foreseeable future.
FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q includes forward-looking information, which
may include but is not limited to information concerning the Company's business
strategies, plans and objectives for product development and releases,
marketing plans, financing plans and the settlement of a note receivable. These
forward-looking statements are subject to risks and uncertainties, including
technological uncertainties in the development and testing of new products, the
impact of competitive products and pricing, the Company's ability to recruit
and retain qualified personnel, the Company's ability to raise financing or
sell assets, and other factors, which could cause actual results to differ from
those projected.
22
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On September 30, 1996, the Company held its annual meeting of
stockholders. At the meeting, James P. Angus, Nuno Brandolini, Neil S.
MacKenzie, Kevin R. McCarthy, and L. James Porter were elected to serve as
directors of the Company for the ensuing year. In addition, the Report of the
Directors, the Consolidated Financial Statements for the fiscal year ended
December 31, 1995 and the Auditor's Report thereon were received, the
appointment of Arthur Andersen & Co. as auditors for the Company was approved,
and the amended and restated By-Laws were confirmed.
The following table provides the number of votes cast for, against or
withheld as to each matter submitted to a vote of stockholders at the meeting:
Matter
Election of Directors: For Against Withheld
- --------------------- --- ------- --------
James P. Angus 6,486,232 0 195,946
Nuno Brandolini 6,486,201 0 195,977
Neil S. MacKenzie 6,486,432 0 195,746
Kevin R. McCarthy 6,593,652 0 88,526
L. James Porter 6,486,342 0 195,836
Matter For Against Withheld
- ------ --- -------- --------
Appointment of Auditors 6,663,363 9,905 8,910
Matter For Against Withheld
- ------ --- ------- --------
Confirmation of By-Laws 2,929,229 142,146 35,380
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 3.2 Amended and Restated By-Laws of Hariston Corporation
Exhibit 4.8 1996 Hariston Corporation Stock Option Plan
Exhibit 4.9 1996 Hariston Corporation Stock Option Plan No. 2
23
(b) Reports on Form 8-K
On July 22, 1996, the Company filed a Current Report on Form 8-K with
respect to the resignation of J.V. McGoodwin as Director, President and Chief
Executive Officer of the Company and from his positions with the Company's
affiliated and subsidiary companies. Nuno Brandolini was appointed Chairman
and Chief Executive Officer of the Company, and Kevin McCarthy was appointed
President of the Company and as a Director to hold office until the next
shareholders meeting.
24
SIGNATURE
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: November 19, 1996 By: /s/ L. James Porter
---------------------------------
L. James Porter,
Chief Financial Officer
(Duly authorized officer and Principal
Financial and Accounting Officer)