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 MARCH 31, 1997
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 MAY 14, 1997, 12,663,113 SHARES OF THE REGISTRANT'S COMMON STOCK
WERE OUTSTANDING.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
The unaudited Consolidated Statements of Income, Loss and Deficit for
the three month periods ended March 31, 1997 and March 31, 1996, the unaudited
Consolidated Statements of Changes in Financial Position for the three month
periods ended March 31, 1997 and March 31, 1996 and the unaudited Consolidated
Balance Sheets as at March 31, 1997 and December 31, 1996, of Hariston
Corporation ("Hariston" or the "Company") follow.
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HARISTON CORPORATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS)
MARCH 31 DECEMBER 31
1997 1996
----------- -----------
ASSETS
Current assets
Cash and cash equivalents $ 3,801 $ 2,805
Short-term notes receivable 1,000 -
Trade and other receivables 336 421
Inventory 325 559
Prepaids 121 207
----------- -----------
5,583 3,992
Investments (Note 12) 48 1,216
Furniture and equipment 333 363
Goodwill, licenses, mailing lists, and other intangibles 2,052 2,339
----------- -----------
2,433 3,918
----------- -----------
$ 8,016 $ 7,910
=========== ===========
LIABILITIES
Current
Payables $ 1,522 $ 2,349
Deferred revenues 134 113
Current portion of term debt 252 3,539
----------- -----------
1,908 6,001
Term debt 168 201
Put option - 300
----------- -----------
168 501
----------- -----------
2,076 6,502
SHAREHOLDERS' EQUITY
Capital stock 31,999 31,999
Deficit (26,059) (30,591)
----------- -----------
5,940 1,408
----------- -----------
$ 8,016 $ 7,910
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements
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HARISTON CORPORATION
CONSOLIDATED STATEMENTS OF INCOME, LOSS AND DEFICIT (UNAUDITED)
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS)
3 MONTHS ENDED MARCH 31 1997 1996
- ----------------------- ----------- -----------
REVENUES
Software sales $ 884 $ 1,665
Book sales 18 88
Software royalties and license fees 6 79
----------- -----------
908 1,832
----------- -----------
COST OF SALES
Direct cost of sales 552 1,185
Royalties 12 64
----------- -----------
564 1,249
----------- -----------
GROSS MARGIN 344 583
----------- -----------
OPERATING AND CORPORATE EXPENSES
Administration, office, and travel 129 188
Consultants and directors fees, salaries and employee benefits 484 562
Accounting, legal and other professional fees 77 72
Marketing, catalog and trade show costs 156 171
Rent 40 51
Depreciation and amortization 185 258
----------- -----------
1,071 1,302
----------- -----------
(727) (719)
----------- -----------
OTHER
Net interest expense (43) (83)
Net gain on sale of PLI shares 5,328 -
Foreign exchange loss (28) -
Other income 2 7
----------- -----------
5,259 (76)
----------- -----------
NET INCOME (LOSS) $ 4,532 $ (795)
----------- -----------
DEFICIT, beginning of period (30,591) (25,626)
----------- -----------
DEFICIT, END OF PERIOD $ (26,059) $ (26,421)
=========== ===========
PRIMARY INCOME (LOSS) PER SHARE (Note 10) $ 0.36 $ (0.07)
Shares used in primary computation 12,663,113 11,281,363
FULLY DILUTED INCOME (LOSS) PER SHARE (Note 10) $ 0.36 $ (0.07)
Shares used in fully diluted computation 12,663,113 11,281,363
=========== ===========
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 1997 1996
- ----------------------- ----------- ------------
OPERATING ACTIVITIES
Net income (loss) $ 4,532 $ (795)
Non-cash items:
Depreciation and amortization 185 258
Gain on sale of PLI shares (5,328) -
----------- ------------
(611) (537)
Net increase in non-cash working capital items (401) (589)
----------- ------------
CASH USED FOR OPERATING ACTIVITIES (1,012) (1,126)
----------- ------------
FINANCING ACTIVITIES
Net term debt payments (3,320) (333)
Amount paid upon exercise of put option (175) -
Issue of common stock - 913
----------- ------------
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES (3,495) 580
----------- ------------
INVESTING ACTIVITIES
Net purchase of assets (18) (232)
Net issuance of notes receivable (1,000) -
Net proceeds from sale of PLI shares 6,521 -
----------- ------------
CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES 5,503 (232)
----------- ------------
NET INCREASE (DECREASE) IN CASH 996 (778)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,805 1,419
----------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,801 $ 641
=========== ============
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, 1997
_______________________________________________________________________________
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 software business with the purchase of
substantially all of the assets, and the assumption of certain liabilities, of
a group of affiliated companies doing business under the name Educorp. These
affiliated companies now operate under the name Educorp Direct ("Direct").
Direct is principally a catalog retailer of multimedia CD-ROM titles. On
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 has subsequently
operated under the name HighText Interactive ("HighText"). Both Direct and
HighText operate as subsidiaries of Educorp Multimedia ("Educorp"), a
wholly-owned subsidiary of Hariston. Effective January 31, 1997 HighText sold
its book publishing operations. In February, 1997 Hariston entered into a
letter of intent to sell the multimedia software operations (see Note 13).
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 interim
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 9. 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, 1996.
In the opinion of management, all adjustments necessary to fairly state the
results of operations for the three months ended March 31, 1997, 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, 1996.
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.
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HARISTON CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(EXPRESSED IN U.S. DOLLARS)
3 MONTHS ENDED MARCH 31, 1997
_______________________________________________________________________________
NOTE 3. SUMMARY OF SECURITIES ISSUED DURING THE FIRST QUARTER
On June 11 and June 24, 1996 the Company issued, for a total of $250,000 cash,
two separate four month promissory notes payable bearing simple interest at a
rate of 10%. The proceeds were used to fund the working capital needs of the
Company's multimedia software operations. Principal repayment on the notes was
deferred by negotiation until January 1997. Effective January 22, 1997 the
Company issued a new $250,000 note payable, in replacement of the June 1996
notes which had expired. Under the terms of the new note, payments of $20,833
of principal, plus accrued interest, are required to be made monthly, with full
repayment of the note scheduled to occur on December 15, 1997. The note bears
simple interest at a rate of 10%. All scheduled payments on the note have been
made to date.
NOTE 4. SUMMARY OF OPTIONS GRANTED DURING THE FIRST QUARTER
None.
NOTE 5. AUTHORIZED AND ISSUED SHARE CAPITAL AS OF MARCH 31, 1997
Class Par Value Authorized Number Issued Number Amount
- ----- --------- ----------------- ------------- ------
Common None Unlimited 12,663,113 $31,999,167
NOTE 6. SHARES IN ESCROW OR SUBJECT TO POOLING AS OF MARCH 31, 1997
None.
NOTE 7. LIST OF DIRECTORS AS OF MARCH 31, 1997
Nuno Brandolini James P. Angus Kevin R. McCarthy 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, 1997
_______________________________________________________________________________
NOTE 8. OPTIONS AND WARRANTS OUTSTANDING AS OF MARCH 31, 1997
Number of Shares Exercise Market Price Option
OPTIONEE under Vested Option Price on Date of Grant Expiry Date
- -------- ------------------- -------- ---------------- -----------
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 40,000 1.25 1.25 July 17, 2003
Nuno Brandolini 40,000 1.25 1.25 July 17, 2003
Neil S. MacKenzie 40,000 1.25 1.25 July 17, 2003
Nicholas Mosich 90,000 1.25 1.25 July 17, 2003
L. James Porter 50,000 1.25 1.25 July 17, 2003
------- ---- ---- -----------------
James P. Angus 40,000 1.25 1.25 August 16, 2003
Nuno Brandolini 133,333 1.25 1.25 August 16, 2003
Kevin R. McCarthy 100,000 1.25 1.25 August 16, 2003
Neil S. MacKenzie 40,000 1.25 1.25 August 16, 2003
L. James Porter 63,333 1.25 1.25 August 16, 2003
------- ---- ---- -----------------
676,666
=======
WARRANT Exercise Market Price Warrant
HOLDER Number of Shares Price on Date of Grant Expiry Date
- -------- ---------------- -------- ---------------- -----------
Dahlia Financial 150,000 1.75 1.06 September 27,1997
Dahlia Financial 150,000 2.50 1.06 September 27,1998
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
---------
2,825,000
=========
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HARISTON CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(EXPRESSED IN U.S. DOLLARS)
3 MONTHS ENDED MARCH 31, 1997
_______________________________________________________________________________
NOTE 9. 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 1997 1996
Net income (loss) according to Canadian GAAP 4,532 (795)
Non cash compensation expense - (7)
------ ------
NET INCOME (LOSS) ACCORDING TO U.S. GAAP $4,532 $(802)
There would be no differences in net assets or shareholders' equity.
The above variance in the 1996 net loss figure results from a 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. Under Canadian GAAP, the
issuance or exercise of employee or director stock options does not affect the
reported profitability of the Company. In July 1996 all outstanding option
grants were cancelled. In August 1996 new option grants were made at exercise
prices no less than the traded price of the stock on the measurement date.
NOTE 10. INCOME (LOSS) PER SHARE
Primary and fully diluted income (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 11. DISCONTINUED OPERATIONS
On February 21, 1997 HighText reached agreement to sell its book publishing
operations back to the former owners of the book publishing operations, with
effect from the close of business on January 31, 1997. These operations have
not been separately reported as discontinued in these interim consolidated
financial statements due to the immateriality of the results of the book
publishing operations and the practical difficulty of separating the results of
the book publishing operations from the multimedia software operations. The
loss on sale of these operations was fully provided for as of December 31,
1996.
NOTE 12. INVESTMENTS
Amount
----------
Polish Life Improvement S.A.
1,820,566 shares owned as of December 31, 1996 $1,208,439
1,760,000 shares sold January 1 to March 31, 1997 (1,167,382)
----------
60,566 shares owned as of March 31, 1997 41,057
Madison Holdings Limited 7,304
----------
Investments as of March 31, 1997 $48,361
==========
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HARISTON CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(EXPRESSED IN U.S. DOLLARS)
3 MONTHS ENDED MARCH 31, 1997
_______________________________________________________________________________
NOTE 13. PROPOSED SALE OF MULTIMEDIA SOFTWARE OPERATIONS
In February 1997 Hariston entered into a non-binding letter of intent to sell
substantially all of the assets, and transfer certain of the liabilities, of
Educorp and its subsidiaries Direct and HighText to Legacy Software, Inc.
("Legacy") for proceeds of $1.8 million, such amount to be received entirely in
the form of common shares of Legacy. Legacy's shares trade on the Nasdaq
SmallCap Market tier of The Nasdaq Stock Market under the symbol "LGCY".
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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.
12
HARISTON CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
_______________________________________________________________________________
OVERVIEW
During the first quarter of 1997 Hariston's management and Board reviewed the
fiscal 1996 results and determined that the interests of the Company and its
shareholders would be best served by Hariston selling its multimedia software
operations and investing its resources in a business or industry with higher
expected returns. This difficult decision was made in light of the continuing
drain experienced on the Company's treasury to fund the working capital needs
of the multimedia software operations, and the prospect of a continued high
level of competition and continued pricing pressure in the multimedia software
industry for the foreseeable future. In February 1997 Hariston entered into a
non-binding letter of intent to sell substantially all of the assets, and
transfer certain of the liabilities, of its multimedia software operations to
Legacy Software, Inc. ("Legacy") for proceeds of $1.8 million, such amount to
be received entirely in the form of common shares of Legacy. Legacy's shares
trade on the Nasdaq SmallCap Market tier of The Nasdaq Stock Market under the
symbol "LGCY".
In accordance with management and the Board's strategy to reposition the
Company, Hariston's management devoted considerable time and attention during
the first quarter to the selection of, financial and operational review of, and
negotiation with viable acquisition candidates. As described by a February 13,
1997 news release, management selected three potential acquisition candidates:
manufacturers in the food, plastics and aerospace industries respectively. The
three companies under consideration each had projected 1997 revenues in excess
of $60 million. As announced by a March 3, 1997 news release, Hariston entered
into a non-binding letter of intent to acquire the aerospace products
manufacturer. Under the proposed arrangement, Hariston would have taken a
controlling interest in a company to be set up to effect the purchase. However,
as announced by an April 29, 1997 news release, the seller subsequently gave
notice to Hariston that the aerospace products manufacturer had been withdrawn
from sale. While Hariston's management and Board regret that the acquisition of
the aerospace products manufacturer will not proceed as planned, Hariston will
continue to pursue its strategy of selling its multimedia software operations
and acquiring a business in an unrelated industry with higher expected returns.
During the first quarter the Company continued sales of its shares in Polish
Life Improvement S.A ("PLI"). The Company sold 1,500,000 PLI shares in private
transactions and a further 260,000 PLI shares in sales on the parallel market
to the Warsaw Stock Exchange, realizing total proceeds of approximately
$6,522,000.
Also during the first quarter, the Company took steps to curtail spending in
its multimedia software operations. Staffing at Educorp Direct, Inc. ("Direct")
was reduced from 31 at December 31, 1996 to 23 at March 31, 1997. Staffing at
HighText Interactive, Inc. ("HighText") was reduced from 13 at December 31,
1996 to only 1 employee at March 31, 1997. This reduction in staffing at
HighText was effected pursuant to management's decision that HighText cease
development on uncompleted and new CD-ROM titles. Management's decision was
made in response to the poor sales realized to date from the eleven CD-ROM
titles that HighText has available for sale, as well as the proposed sale of
HighText's assets to Legacy. As of March 31, 1997 HighText's principal assets
consisted of rights relating to and inventories of its completed CD-ROM titles.
Founded in 1984, Direct is a San Diego, California based publisher and direct
mail distributor of multimedia software on CD-ROM. 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 1996, Direct mailed 2.9 million
direct mail pieces to its customer base.
Founded in 1990, HighText is a San Diego, California based developer and
publisher of educational software titles on CD-ROM. Prior to February 1997
HighText was also a publisher of books on mathematics, electronics and other
topics of a technical or scientific nature. Since being acquired by the Company
on January 1, 1996 HighText's primary emphasis has been on the development of
educational multimedia software for the adult consumer, higher education, and
corporate markets. HighText has eleven software titles available for sale as
part of its CrashCourse(TM) 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.
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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"), a wholly-owned Delaware subsidiary of Hariston formed in January,
1996. Upon this merger, Educorp became the holding company for all of
Hariston's 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.
RESULTS OF OPERATIONS
The Company earned consolidated net income of $4,531,815 for the three months
ended March 31, 1997. However, excluding the $5,328,457 gain from the sale of
PLI shares in the quarter and an associated $28,047 foreign exchange loss, the
Company incurred a consolidated net loss of $768,595 for the three months ended
March 31, 1997. Of this loss, $473,550 was attributable to Educorp and its
subsidiaries, $256,317 to Hariston and $38,728 to EuroEastern. Of the $473,550
loss attributable to the Company's multimedia operations, $337,230 arose from
the Direct operations, $80,536 from the HighText operations, and the $55,784
remainder was due to operating and corporate expenses incurred at the Educorp
legal entity level. Of the $256,317 loss incurred at the Hariston legal entity
level (excluding the effect of the PLI share sales), $30,285 was attributable
to net interest expense on debt, and the remainder related primarily to
corporate administration and overhead costs.
For the first quarter of 1996 the Company incurred a consolidated net loss of
$795,250. Of this loss, $373,898 was attributable to Educorp and its
subsidiaries, $386,763 to Hariston and $34,589 to EuroEastern. Of the $373,898
loss attributable to the Company's multimedia operations, $259,431 arose from
the Direct operations, $106,379 from the HighText operations, and the $8,088
remainder was due to operating and corporate expenses incurred at the Educorp
legal entity level. Of the $386,763 loss incurred at the Hariston legal entity
level, $78,567 was attributable to interest expense on debt, and the remainder
related primarily to corporate administration and overhead costs.
A more detailed analysis of the results is presented below, presenting 1996
comparatives as well as 1995 comparatives where available.
14
HARISTON CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
_______________________________________________________________________________
EDUCORP DIRECT
Direct generated revenues of $874,221 for the three months ended March 31, 1997
as compared to $1,731,636 for the three months ended March 31, 1996. Of the
$874,221 figure, $651,598 was from retail sales to end-users, $216,363 from
sales to dealers and $6,260 from software royalties and license fees. Of the
$1,731,636 figure, $1,223,556 was from retail sales to end-users, $429,332 from
sales to dealers, and $78,748 from software royalties and license fees.
Direct realized gross profit of $310,494 for the first quarter of 1997 as
compared to $532,744 for the first quarter of 1996. Direct incurred a loss
before interest, depreciation and amortization of $165,051 and a net loss after
these items of $337,230 for the first quarter of 1997, as compared to a first
quarter 1996 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, 1997 of $651,598
declined 47% relative to retail software sales of $1,223,556 for the comparable
period of 1996. Comparable period 1995 sales were $1,247,917. The primary
reasons for the decline in 1997 sales from the same period of 1996 were first,
a low number of catalogs in circulation during the quarter (320,000 catalogs
were mailed in the first quarter of 1997 as compared to 520,000 in the first
quarter of 1996), and second, an 84% decline in international retail sales.
Additionally, Direct experienced a 1.3% decline in the average realized CD-ROM
retail price during the first quarter of 1997, $31.96 as compared to $32.39 for
the first quarter of 1996 (and $35.80 in the same period of 1995). The industry
sales environment also remained extremely competitive during the first quarter
of 1997, and the ongoing difficulties at Apple Computer continued to depress
sales of Macintosh CD-ROM titles.
International retail software sales for the first quarter of 1997 were $38,022
or 6% of total retail software sales, compared to $234,541 or 19% of total
retail software sales for the first quarter of 1996 (and $190,937 or 15% of
total retail software sales for the comparable period of 1995). The 84% decline
in international retail software sales during the first quarter of 1997 as
compared to the first quarter of 1996 was primarily due to first, a significant
curtailment in catalog mailings to international addresses, and second, the
increased availability of foreign language CD-ROM titles in foreign countries
causing reduced demand for U.S. sourced English language versions of the same
or equivalent titles.
DEALER SOFTWARE SALES
Dealer software sales for the first quarter of 1997 of $216,363 declined 50%
from sales of $429,332 in the first quarter of 1996. Comparable period 1995
sales were $589,158. The decline in same period sales from 1996 to 1997
primarily reflects first, a 69% decline in international dealer software sales,
and second, a 10% decrease in the average CD-ROM dealer price realized by
Direct. The average price realized was $26.15 for the first quarter of 1997 as
compared to $29.10 for the first quarter of 1996 (and $31.26 for the first
quarter of 1995).
International dealer software sales were $109,483 or 51% of total software
sales to dealers for the three months ended March 31, 1997, as compared to
$356,839 or 83% of total software sales to dealers for the three months ended
March 31, 1996 (and $419,737 or 71% for the comparable period of 1995). The 69%
decline in international dealer software sales for the first quarter of 1997
compared to the first quarter of 1996 primarily reflects, first, a number of
foreign dealers going out of business in the last quarter of 1996 and the first
quarter of 1997 including the Japanese dealer that in the past had placed the
largest international dealer orders received by Direct, and second, a
continuation of the trend to smaller international order sizes due to an
increasing number of publishers seeking direct distribution to foreign dealers.
15
HARISTON CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
_______________________________________________________________________________
ROYALTIES AND LICENSE FEES
Royalties and license fees of $6,260 earned for the first quarter of 1997
decreased 92% from the $78,748 figure earned for the first quarter of 1996 (as
compared to $116,380 for the same period of 1995). The primary reason for the
year over year decrease was the expiration during 1996 of a bundling license
with Apple Computer. Under the terms of the license, Apple had bundled
educational software titles published by the Company with sales of certain
computers.
GROSS PROFIT
Direct realized a gross profit of $310,494 for the first quarter of 1997,
representing 36% of revenues. This compares to $532,744 or 31% of revenues for
the first quarter of 1996. The improvement in gross profit as a percentage of
revenues primarily reflects first, the sale of previously written down
inventory during the first quarter of 1997 for prices higher than had been
previously expected, and second, improved efficiency in shipping and handling
reducing the cost of filling orders.
OPERATING AND CORPORATE EXPENSES
Operating and corporate expenses were $641,198 for the first quarter of 1997
representing 73% of revenues for the quarter, as compared to $790,095 or 46%
for the first quarter of 1996. These figures include amortization of goodwill
and other intangibles arising from the acquisition of the Direct operations.
After adjusting for this amortization, operating and corporate expenses were
$491,684 or 56% of revenues in the first quarter of 1997 as compared to
$572,016 or 33% of total revenues for the first quarter of 1996. The increase
in operating and corporate expenses as a percentage of revenues in 1997 as
compared to 1996 reflects primarily the high level of discretionary fixed costs
and overhead costs in the Direct operation. The first quarter 1997 reduction in
staffing at Direct did not materially reduce first quarter, 1997 payroll costs
due to these staff cuts being made in late February. The reduction in payroll
costs should become apparent in the second quarter 1997 results.
HIGHTEXT INTERACTIVE
HighText generated revenues of $33,733 for the first quarter of 1997 as
compared to $99,910 for the first quarter of 1996. Of the $33,733 figure for
1997, $3,352 was from retail sales to end-users and $30,381 was from sales to
dealers. Of the $99,910 figure for 1996, $14,594 was from retail sales to
end-users and $85,316 was from sales to dealers.
HighText realized a gross profit of $32,972 for the first quarter of 1997, and
incurred a net loss of $80,536. During the first quarter of 1996, HighText
realized a gross profit of $50,048 and incurred a net loss of $106,379.
SOFTWARE SALES
Software sales for the first quarter of 1997 were $16,081, a 33% increase over
software sales of $12,063 for the first quarter of 1996.
First quarter 1997 software sales consisted of $524 sales to end-users and
$15,557 sales to dealers. By comparison, first quarter 1996 software sales
consisted of $4,943 sales to end-users and $7,120 sales to dealers.
HighText realized an average CD-ROM title price of $19.72 in the first quarter
of 1997 as compared to $19.33 in the first quarter of 1996. HighText did not
publish or sell CD-ROM software titles during the first quarter of 1995.
HighText's first CD-ROM title was published in May 1995 followed by two
additional titles in November 1995. As of December 31, 1996 HighText had eleven
CD-ROM software titles available for sale, with non-hybrid Windows ("Win") and
Macintosh ("Mac") versions of the titles considered to be separate titles. No
further titles were completed during the first quarter of 1997 and all title
development efforts ceased when Hariston's management and Board made the
decision to during the first quarter to lay off substantially all of HighText's
employees and concentrate the Company's efforts on marketing the titles that had
been developed to date. These titles are as follows: Algebra 1 (Win version),
Differential Calculus (Win and Mac versions), Integral Calculus (Win and Mac
versions), Easy Statistics (Win and Mac hybrid), Statistics 2 (Win version),
Accounting Fundamentals (Win and Mac versions), Personal Finance (Win version),
and Basic Physics (Win version).
16
HARISTON CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
_______________________________________________________________________________
BOOK SALES
By agreement dated February 21, 1997 and with effect from the close of business
on January 31, 1997, HighText transferred ownership of its book publishing
operations back to the former principals of HighText Publications, Inc. In
exchange, Hariston was relieved of its obligation arising under the original
agreement by which Hariston purchased the HighText operations, to issue to the
former principals common shares of Hariston equal in value to the after-tax
income of the book publishing operations over a five year period.
Therefore, only book sales through January 31, 1997 are reported herein.
Book sales for the first quarter of 1997 through January 31, 1997 were $17,652,
consisting of $2,828 retail sales to end-users and $14,824 sales to dealers.
During the first quarter of 1996, book sales were $87,847, consisting of $9,651
retail sales to end-users and $78,196 sales to dealers. During the first
quarter of 1995, book sales were $97,844, consisting of retail sales of
$13,020, and dealer sales of $84,824.
HighText published its first book title in June, 1991. As of December 31 1996,
HighText had published sixteen book titles. During the period January 1 to
January 31, 1997 HighText published no new book titles.
OPERATING AND CORPORATE EXPENSES
The most significant components of HighText's $113,508 of operating and
corporate expenses for the first quarter of 1997 were salary costs totaling
$73,648, goodwill amortization of $12,682 and rent expense of $8,889. By
comparison, HighText incurred $154,774 of operating and corporate expenses for
the first quarter of 1996, consisting principally of salary costs totaling
$66,552, marketing and trade show costs of $49,993, goodwill amortization of
$18,487 and rent expense of $8,515. HighText expensed the costs of developing
new software and book titles as they were incurred.
HARISTON AND EUROEASTERN OPERATING AND CORPORATE EXPENSES
Hariston incurred $226,032 of non-consolidated operating and corporate expenses
during the first quarter of 1997, compared to $316,477 for the first quarter of
1996 and $316,729 for the first quarter of 1995.
The majority of Hariston's non-consolidated operating and corporate expenses
for the first quarter of 1997 were general, administrative and salary costs,
including $99,653 of salaries and consultants fees, $48,105 of legal fees,
$19,823 of accounting, audit and tax return preparation fees, $8,004 of
shareholder communications costs, $20,393 of insurance costs, $2,957 of office
rent, $5,939 of directors fees and $2,581 of travel costs.
The majority of Hariston's non-consolidated operating and corporate expenses
for the first quarter of 1996 were also general, administrative and salary
costs, including $134,544 of salaries and consultants' fees, $48,704 of legal
fees, $22,339 of accounting, audit and tax return preparation fees, $16,716 of
shareholder communications costs, $26,235 of insurance costs, $21,000 of
recruiting fees, $20,982 of office rent, $8,222 of directors fees and $2,658 of
travel costs.
17
HARISTON CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
_______________________________________________________________________________
EuroEastern incurred $38,728 of operating and corporate expenses for the first
quarter of 1997, consisting principally of $20,767 of consultant's fees
including travel costs reimbursement, $5,049 of secretarial fees and $10,250 of
rent expense. During the first quarter of 1996, EuroEastern incurred $34,589 of
operating and corporate expenses, consisting principally of $20,000 of
consultant's fees, $4,208 of secretarial fees and $7,935 of rent expense. There
are no first quarter 1995 comparable figures for EuroEastern as it was
incorporated in October, 1995.
INVESTMENTS
POLISH LIFE IMPROVEMENT S.A.
PLI is a Kielce, Poland based company formed in February 1993 for the purpose
of engaging in various retail businesses in Poland. PLI is a retail operator of
home improvement stores in Poland and was also previously the operator of a
chain of supermarkets in Poland. Hariston co-founded PLI and initially held an
80% shareholding in it. In December 1994 PLI completed its initial public
offering and on February 5, 1996 PLI's shares began trading on the parallel
market to the Warsaw Stock Exchange. Due to private sales and public stock
market sales of its PLI shares in 1994 and 1996 and dilution associated with
PLI's public offering, as of December 31, 1996 Hariston owned 1,820,566 PLI
shares or 25.8% of PLI's outstanding shares. During the first quarter of 1997,
Hariston sold 1,500,000 PLI shares in private transactions and a further
260,000 PLI shares in public trades on the parallel market to the Warsaw Stock
Exchange, realizing total proceeds of approximately $6,522,000 including $1.5
million in short-term notes receivable of which $500,000 had been received in
cash by quarter-end. The $1 million in short-term notes receivable outstanding
as of March 31, 1997 are due in two $500,000 installments, to be received in
September 1997 and March 1998.
MADISON HOLDINGS LIMITED
Madison was formerly a Burlington, Ontario based supplier of proprietary home
medical products. Madison is currently a Toronto, Ontario based shell company
whose shares are eligible for trading on the Canadian Dealing Network, an
over-the-counter market affiliated with the Toronto Stock Exchange, subject to
Madison first acquiring an operating business. Madison's shares last traded in
January 1996. Hariston owns 233,591 shares of Madison common stock, representing
an 8.6% interest in that company. In January 1996 Madison's secured creditors
seized its assets, leaving Madison with no significant assets other than its
publicly traded status and several million dollars of tax loss balances.
Madison's management has indicated that it is committed to creating value for
Madison's shareholders and has undertaken steps to locate an operating business
that may be acquired by Madison. Such an acquisition is likely to be made
through the issuance of a substantial number of shares from treasury, resulting
in a reverse takeover. There is no assurance that Madison will be successful in
its endeavor to acquire an operating business.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1997 the Company had cash balances of $3,800,513, a working
capital ratio of 2.93 and a debt/equity ratio of 0.35. This compares favorably
with March 31, 1996 cash of $619,319, working capital ratio of 0.51 and
debt/equity ratio of 1.17. The Company's principal capital requirements include
working capital to finance the multimedia software operations until they can be
sold, 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, 1997 the Company had an accumulated deficit of $26,059,164, as compared to
an accumulated deficit of $26,421,234 at March 31, 1996.
18
HARISTON CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
_______________________________________________________________________________
Based on historical results and management's expectations for future
operations, the Company expects that the multimedia software operations will
require minimal further cash infusion to cover their working capital
requirements until they can be sold. However, there is no assurance that cash
flows from operations will meet projections, or that the proposed sale to
Legacy of the multimedia software operations will occur on the terms currently
proposed or will occur at all.
SEASONALITY OF BUSINESS
Historically, the multimedia software 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. Management expects that this seasonal effect will continue to have an
impact on the multimedia software operations for the foreseeable future.
FOWARD-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, financing plans and the proposed sale of the multimedia software
operations. These forward-looking statements are subject to risks and
uncertainties, including uncertainty as to whether the proposed sale of the
multimedia software operations will occur on the terms currently proposed or
will occur at all, uncertainty as to whether the Company will be able to locate
and acquire a business meeting the Company's selection criteria, risks and
uncertainties associated with the competitive environment in which the Company
operates, risks and uncertainties as to the Company's projected cash flows and
cash requirements, risks and uncertainties as to whether the Company will be
able to raise any necessary financing on fair or favorable terms or at all,
risk and uncertainty as to the Company's ability to recruit and retain
qualified personnel, and risk and uncertainty as to other factors which could
cause actual results to differ from those projected.
19
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, 1997 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 Form 8-K.
(a) Exhibits
Exhibit No. Exhibit Description
- ----------- -----------------------
27 Financial Data Schedule
(b) Reports on Form 8-K: None
20
EXHIBIT INDEX
Exhibit No. Exhibit Description Page
- ----------- ----------------------- ----
27 Financial Data Schedule
21
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: May 14, 1997 By: /s/ L. James Porter
-----------------------------
L. James Porter,
Chief Financial Officer
(Duly authorized officer and Principal
Financial and Accounting Officer)