<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 0-13966
HARISTON CORPORATION
(Exact name of registrant as specified in its charter)
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<S> <C>
CANADA 33-0645339
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
</TABLE>
611 Anton Blvd, Suite 1270 Costa Mesa, California 92626
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(Address of principal executive offices)
(714) 556-1755
--------------
(Registrant's telephone number, including area code)
1500 West Georgia Street, Suite 1555, Vancouver, British Columbia, V6G 2Z6
---------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes ___ No ___
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Common Stock: 11,463,113 Shares
<PAGE> 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
The unaudited Consolidated Statements of Operations and Deficit for
the three month periods ended March 31, 1996 and March 31, 1995, the unaudited
Consolidated Statements of Changes in Financial Position for the three month
periods ended March 31, 1996 and March 31, 1995 and the unaudited Consolidated
Balance Sheets as at March 31, 1996 and December 31, 1995, of Hariston
Corporation ("Hariston" or the "Company") follow.
<PAGE> 3
HARISTON CORPORATION
PART 1: ITEM 1 -- FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
1996 1995
=======================================================================================================
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 641 $ 1,419
Receivables 435 457
Inventory 1,171 1,335
Prepayments 187 147
- - -------------------------------------------------------------------------------------------------------
2,434 3,358
Investments 1,956 1,956
Furniture and equipment 206 207
Goodwill, licenses, mailing lists and other intangibles 4,900 4,667
- - -------------------------------------------------------------------------------------------------------
7,062 6,830
- - -------------------------------------------------------------------------------------------------------
$ 9,496 $ 10,188
=======================================================================================================
LIABILITIES
Current
Payables $ 1,048 $ 1,829
Deferred revenues 231 185
Current portion of term debt 3,493 413
- - -------------------------------------------------------------------------------------------------------
4,772 2,427
Term debt 45 3,200
Put option 300 300
- - -------------------------------------------------------------------------------------------------------
345 3,500
- - -------------------------------------------------------------------------------------------------------
5,117 5,927
SHAREHOLDERS' EQUITY
Capital stock 30,800 29,887
Deficit (26,421) (25,626)
- - -------------------------------------------------------------------------------------------------------
4,379 4,261
- - -------------------------------------------------------------------------------------------------------
$ 9,496 $ 10,188
=======================================================================================================
=======================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
<PAGE> 4
HARISTON CORPORATION
CONSOLIDATED STATEMENTS OF LOSS AND DEFICIT (UNAUDITED)
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS)
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<CAPTION>
3 MONTHS ENDED MARCH 31 1996 1995
==============================================================================================================
(Note 12)
<S> <C> <C>
REVENUES
Software sales $ 1,665 $ --
Book sales 88 --
Software royalties and license fees 79 --
- - --------------------------------------------------------------------------------------------------------------
1,832 --
- - --------------------------------------------------------------------------------------------------------------
COST OF SALES
Direct cost of sales 1,185 --
Royalties 64 --
- - --------------------------------------------------------------------------------------------------------------
1,249 --
- - --------------------------------------------------------------------------------------------------------------
GROSS MARGIN 583 --
- - --------------------------------------------------------------------------------------------------------------
OPERATING AND CORPORATE EXPENSES
Administration, office, and travel 239 74
Consultants and directors fees, salaries and employee benefits 562 146
Accounting, legal and other professional fees 72 92
Marketing, catalog and trade show costs 171 --
Depreciation and amortization 258 5
- - --------------------------------------------------------------------------------------------------------------
1,302 317
- - --------------------------------------------------------------------------------------------------------------
(719) (317)
- - --------------------------------------------------------------------------------------------------------------
OTHER
Net interest income (expense) (83) 9
Net gain on recovery of receivables 7 --
- - --------------------------------------------------------------------------------------------------------------
(76) 9
- - --------------------------------------------------------------------------------------------------------------
NET LOSS FROM CONTINUING OPERATIONS (795) (308)
- - --------------------------------------------------------------------------------------------------------------
RESULTS FROM DISCONTINUED OPERATIONS (Note 11)
Oil and gas working and royalty interests -- 109
Quebec industrial condominium rental property -- 5
- - --------------------------------------------------------------------------------------------------------------
-- 114
- - --------------------------------------------------------------------------------------------------------------
LOSS ON SALE OF MINERALS RECOVERY PROJECT (Note 11) -- (78)
- - --------------------------------------------------------------------------------------------------------------
NET LOSS $ (795) $ (272)
DEFICIT, beginning of period (25,626) (24,802)
- - --------------------------------------------------------------------------------------------------------------
DEFICIT, end of period $ (26,421) $ (25,074)
==============================================================================================================
Loss per share (Note 13) $ (0.07) $ (0.03)
Shares used in computation (weighted average outstanding) 11,281,363 9,226,476
==============================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
<PAGE> 5
HARISTON CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION (UNAUDITED)
(EXPRESSED IN THOUSAND OF U.S. DOLLARS)
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<CAPTION>
3 MONTHS ENDED MARCH 31 1996 1995
====================================================================================================================
<S> <C> <C>
OPERATING ACTIVITIES
Net loss from continuing operations $ (795) $ ($308)
Non-cash items:
Amortization and depreciation 258 5
Changes in non-cash working capital used in operations (589) (411)
- - --------------------------------------------------------------------------------------------------------------------
Cash used for continuing operations (1,126) (714)
- - --------------------------------------------------------------------------------------------------------------------
Net income (loss) from discontinued operations -- 36
Non-cash items:
Amortization of oil & gas royalty interests -- 77
Provision for costs of disposition of Metanetix Division -- 78
- - --------------------------------------------------------------------------------------------------------------------
Cash provided by discontinued operations -- 191
- - --------------------------------------------------------------------------------------------------------------------
CASH USED FOR OPERATING ACTIVITIES (1,126) (523)
- - --------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net term debt payments (333) (132)
Conversion of debentures -- --
Issue of common stock 913 --
- - --------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 580 (132)
- - --------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Net purchase of assets (232) (12)
Collection of notes receivable -- 137
Minerals recovery project -- (78)
- - --------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES (232) 47
- - --------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash (778) (608)
Cash and cash equivalents, beginning of period 1,419 1,199
- - --------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 641 $ 591
====================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
<PAGE> 6
HARISTON CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(EXPRESSED IN U.S. DOLLARS)
3 MONTHS ENDED MARCH 31, 1996
===============================================================================
NOTE 1. OPERATIONS
The Company is incorporated under the Canada Business Corporations Act and has
operated, historically, as a diversified holding company. More recently, the
Company has focused on the multimedia CD-ROM software business. Effective
August 25, 1995, the Company purchased all the assets and assumed certain
liabilities of a group of affiliated companies doing business under the trade
name Educorp. These affiliated companies now operate as part of Educorp
Multimedia, a wholly-owned multimedia software publishing and distribution
subsidiary. Effective January 1, 1996, the Company purchased substantially all
of the assets and assumed certain liabilities of HighText Publications, Inc., a
book and multimedia software developer and publisher. This business now
operates as part of Educorp Multimedia, as well.
NOTE 2. ACCOUNTING POLICIES
BASIS OF PRESENTATION
In accordance with the requirements of the Canada Business Corporations Act,
the Company's accounting and reporting policies conform to Canadian generally
accepted accounting principles ("Canadian GAAP"). Accordingly, these
consolidated financial statements have been prepared in accordance with
Canadian GAAP. These interim statements also conform in all material respects
with United States generally accepted accounting principles ("U.S. GAAP"). A
reconciliation to U.S. GAAP is presented at Note 10. For further information on
the Company's accounting policies, reference should be made to Note 2 of Notes
to Consolidated Financial Statements included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1995.
In the opinion of management, all adjustments necessary to fairly state the
results of operations for the three months ended March 31, 1996, are of a normal
recurring nature and have been made. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with GAAP have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission. These interim consolidated financial
statements should therefore be read in conjunction with the consolidated
financial statements and the notes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1995.
PRINCIPLES OF CONSOLIDATION
These interim consolidated financial statements include the accounts of the
Company, Hariston Corporation, and its wholly-owned subsidiaries, EuroEastern
Investment Corp., Educorp Multimedia, Inc., Educorp Direct, Inc., and High Text
Interactive, Inc. All significant intercompany accounts and transactions have
been eliminated on consolidation.
NOTE 3. PURCHASE OF HIGHTEXT
Effective January 1, 1996, a newly incorporated wholly-owned subsidiary of the
Company acquired substantially all of the assets and assumed certain
liabilities of HighText Publications, Inc., a company engaged in the
development and distribution of books and multimedia CD-ROM software titles.
On January 22, 1996, the subsidiary changed its name to Hightext Interactive,
Inc. ("HighText").
<PAGE> 7
HARISTON CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(EXPRESSED IN U.S. DOLLARS)
3 MONTHS ENDED MARCH 31, 1996
===============================================================================
The purchase price of $641,421 was satisfied as follows:
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166,139 shares of the Company valued at approximately $2.82 per share $469,080
Assumption of current liabilities 172,341
--------
$641,421
========
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The purchase price was allocated as follows:
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Inventories, accounts receivable, furniture and equipment, prepaids $186,550
Customer and supplier lists 15,000
Goodwill and other intangibles 439,871
--------
$641,421
========
</TABLE>
Further consideration may become payable with respect to the purchase of the
book publishing operations. The amount will vary depending on the profitability
of the operations over a five year period commencing with the fiscal year
ending December 31, 1996, and whether these operations are sold in an arm's
length transaction prior to December 31, 2000. The minimum consideration for
the five year period will be 4,000 Hariston shares per year, or an aggregate of
20,000 shares. An estimate of this minimum amount has been booked by the
Company and is reflected in the purchase price. The maximum shares issuable
with respect to each year will be the number of shares equivalent to the
after-tax income, as defined, of the book publishing operations, based on
valuing the Hariston shares at the average closing sale price for the 20
trading days prior to December 31 of each fiscal year.
If the book publishing operations are sold prior to December 31, 2000, the
above obligation for the year of sale and subsequent periods is replaced by an
obligation to issue Hariston shares to the sellers equivalent to the after-tax
sale proceeds, still subject to the 20,000 shares minimum requirement. As
management cannot predict with reasonable assurance the net income of the book
publishing operations within the five year period, nor the selling price if
these operations were sold within that period, additional consideration beyond
an estimate of the value of the 20,000 shares minimum payment has not been
recorded on the Company's books at this time.
Additional consideration, up to a maximum of $60,000, may become payable,
contingent on a U.S. patent being issued no later than December 31, 1998 with
respect to a feature of the seller's multimedia products. As management cannot
predict with reasonable assurance when or if this patent will be issued, the
additional consideration has not been recorded on the Company's books at this
time.
Proforma results of operations, as though the purchase of Hightext had occurred
on January 1, 1995, are not presented in these interim financial statements as
the effect on the Company's 1995 results of operations would not be material.
NOTE 4. SUMMARY OF SECURITIES ISSUED DURING THE FIRST QUARTER
On January 10, 1996, the Company issued 146,139 shares of the Company, valued
at $412,611 or approximately $2.82 per share, for purposes of effecting the
purchase of HighText (Note 3).
By Directors Resolution dated February 20, 1996, Hariston's Board resolved to
reset the exercise price of 250,000 warrants for the purchase of shares from
$3.60 to $2.00 per share. These "A" warrants were issued on November 21, 1994,
pursuant to a private placement of 625,000 units valued at $3.20 per unit.
Each unit consisted of one "A" and one "B" warrant. The "A" warrant was priced
at $3.60 per share,
<PAGE> 8
HARISTON CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(EXPRESSED IN U.S. DOLLARS)
3 MONTHS ENDED MARCH 31, 1996
===============================================================================
exercisable on or prior to May 21, 1996. The "B" warrant was priced at $2.00
per share, exercisable on or prior to November 21, 1997. On March 1, 1996,
pursuant to the exercise of the repriced "A" warrants, the Company issued
250,000 shares valued at $2.00 per share, for total realized proceeds of
$500,000.
NOTE 5. SUMMARY OF OPTIONS GRANTED DURING THE FIRST QUARTER
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<CAPTION>
Date Option Number of Shares Option Option
Granted under Vested Option Optionee Exercise Price Expiry Date
=================================================================================================================================
<S> <C> <C> <C> <C>
February 20, 1996 23,438 Nicholas Mosich 2.50 August 2, 2002
February 20, 1996 23,437 Nicholas Mosich 3.75 August 2, 2002
February 20, 1996 23,438 Nicholas Mosich 5.00 August 2, 2002
February 20, 1996 23,437 Nicholas Mosich 6.25 August 2, 2002
-------
93,750
</TABLE>
On July 20, 1995, the Company adopted a Stock Option Plan to be effective from
July 1, 1995. On August 2, 1995, the Board approved the initial grant of
options. As approved, options to acquire a total of 1,000,000 shares were
granted to J.V. McGoodwin, options to acquire a total of 250,000 shares were
granted to L. James Porter, and options to acquire 150,000 shares were granted
to each of the three outside directors. One quarter of these options were
vested effective August 2, 1995. The remaining options vest as follows:
one-third effective August 2, 1996, one-third effective August 2, 1997, and
one-third effective August 2, 1998. On February 20, 1996, the Board approved
the further grant of options to acquire 375,000 shares. These options were
granted to Nicholas Mosich, and are subject to the same vesting provisions as
the previously granted options.
NOTE 6. AUTHORIZED AND ISSUED SHARE CAPITAL AS OF MARCH 31, 1996
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<CAPTION>
Class Par Value Authorized Number Issued Number Amount
=========================================================================================================================
<S> <C> <C> <C> <C>
Common None Unlimited 11,463,113 $30,799,167
</TABLE>
NOTE 7. SHARES IN ESCROW OR SUBJECT TO POOLING AS OF MARCH 31, 1996
None.
NOTE 8. LIST OF DIRECTORS AS OF MARCH 31, 1996
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<S> <C> <C> <C> <C>
J.V. McGoodwin James P. Angus Nuno Brandolini Neil S. MacKenzie L. James Porter
(Chairman)
</TABLE>
<PAGE> 9
HARISTON CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(EXPRESSED IN U.S. DOLLARS)
3 MONTHS ENDED MARCH 31, 1996
===============================================================================
NOTE 9. OPTIONS AND WARRANTS OUTSTANDING AS OF MARCH 31, 1996
<TABLE>
<CAPTION>
Number of Shares Exercise Market Price Option
Optionee under Vested Option Price on Date of Grant Expiry Date
=========================================================================================================================
<S> <C> <C> <C> <C>
William B. Sharp 35,000 0.93 0.93 September 15, 1996
Yvonne Tremblay 10,000 1.86 2.49 November 30, 1997
William B. Sharp 10,000 3.15 4.57 February 17, 1998
S. David Anfield 20,000 3.53 4.57 March 31, 1998
- - -------------------------------------------------------------------------------------------------------------------------
James P. Angus 9,375 2.50 2.87 August 2, 2002
Nuno Brandolini 9,375 2.50 2.87 August 2, 2002
Neil MacKenzie 9,375 2.50 2.87 August 2, 2002
J.V. McGoodwin 62,500 2.50 2.87 August 2, 2002
Nicholas Mosich 23,438 2.50 2.87 August 2, 2002
L. James Porter 125 2.50 2.87 August 2, 2002
- - -------------------------------------------------------------------------------------------------------------------------
James P. Angus 9,375 3.75 2.87 August 2, 2002
Nuno Brandolini 9,375 3.75 2.87 August 2, 2002
Neil MacKenzie 9,375 3.75 2.87 August 2, 2002
J.V. McGoodwin 62,500 3.75 2.87 August 2, 2002
Nicholas Mosich 23,437 3.75 2.87 August 2, 2002
L. James Porter 15,625 3.75 2.87 August 2, 2002
- - -------------------------------------------------------------------------------------------------------------------------
James P. Angus 9,375 5.00 2.87 August 2, 2002
Nuno Brandolini 9,375 5.00 2.87 August 2, 2002
Neil MacKenzie 9,375 5.00 2.87 August 2, 2002
J.V. McGoodwin 62,500 5.00 2.87 August 2, 2002
Nicholas Mosich 23,438 5.00 2.87 August 2, 2002
L. James Porter 15,625 5.00 2.87 August 2, 2002
- - -------------------------------------------------------------------------------------------------------------------------
James P. Angus 9,375 6.25 2.87 August 2, 2002
Nuno Brandolini 9,375 6.25 2.87 August 2, 2002
Neil MacKenzie 9,375 6.25 2.87 August 2, 2002
J.V. McGoodwin 62,500 6.25 2.87 August 2, 2002
Nicholas Mosich 23,437 6.25 2.87 August 2, 2002
L. James Porter 15,625 6.25 2.87 August 2, 2002
- - -------------------------------------------------------------------------------------------------------------------------
578,250
=======
</TABLE>
<TABLE>
<CAPTION>
Warrant Exercise Market Price Option
Holder Number of Shares Price on Date of Grant Expiry Date
=========================================================================================================================
<S> <C> <C> <C> <C>
Near East Commercial Bank SAL 375,000 3.60 5.00 May 21,1996
Commonwealth Consulting Corporation 125,000 2.25 2.62 December 31, 1996
Daryl Jamison 125,000 2.25 2.62 December 31, 1996
Near East Commercial Bank SAL 625,000 4.00 5.00 November 21,1997
Kinaro S.A. 250,000 2.50 2.25 August 24, 2000
Neval Management Ltd. 250,000 2.50 2.25 August 24, 2000
Privatim Finaz A.G. 250,000 2.50 2.25 August 24, 2000
Zocal Foundation 250,000 2.50 2.25 August 24, 2000
- - -------------------------------------------------------------------------------------------------------------------------
2,250,000
=========
</TABLE>
<PAGE> 10
HARISTON CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(EXPRESSED IN U.S. DOLLARS)
3 MONTHS ENDED MARCH 31, 1996
===============================================================================
NOTE 10. RECONCILIATION TO U.S. GAAP
In certain respects, Canadian generally accepted accounting principles differ
from U.S. generally accepted accounting principles. If U.S. GAAP were to be
applied, the following difference would exist:
(Expressed in Thousands of U.S. dollars)
Three Months Ended March 31, 1996
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Net loss according to Canadian GAAP (795)
Non cash compensation expense (7)
- - -------------------------------------------------------------------------------
Net loss according to U.S. GAAP ($802)
</TABLE>
There would be no differences in net assets or shareholders' equity.
The above variance in the net loss figure results from a difference in the
accounting treatment for employee stock options. Options to purchase shares of
the Company were issued to employees and directors at prices below the traded
price of the stock on the measurement date. Under U.S. GAAP, the difference in
value must be recognized as a non-cash compensation expense over the period
during which the options vest, regardless of whether the options expire
unexercised. Under Canadian GAAP, the issuance or exercise of employee stock
options does not affect the reported profitability of the Company.
NOTE 11. DISCONTINUED OPERATIONS
Effective April 29, 1995, the Company sold its Metanetix minerals recovery
operations. On July 20, 1995, the Company sold its Quebec industrial
condominium rental property. Effective August 1, 1995, the Company sold its
Canadian oil and gas working and royalty interests. Accordingly, these
operations are presented as discontinued operations for purposes of the 1995
comparatives in these financial statements.
NOTE 12. FUNCTIONAL CURRENCY
Effective August 25, 1995, the Company's functional currency changed from the
Canadian dollar to the the U.S. dollar. For comparison purposes, all March 31,
1995 amounts have been restated into U.S. dollars.
NOTE 13. LOSS PER SHARE
Loss per share is computed using the weighted average number of shares of
common stock outstanding during the periods presented. Stock options and
warrants outstanding have not been included in the calculations as the impact
on loss per share would be dilutive.
<PAGE> 11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The following information should be read in conjunction with the
consolidated financial data and the notes thereto included in Item 1.
OVERVIEW
In accordance with management's previously stated strategy to
reposition the Company, Hariston continued its transformation during the first
quarter, 1996. During 1995, the Company divested substantially all of the
businesses and investments which were unrelated to its new focus on multimedia
software publishing and distribution. On August 25, 1995, the Company purchased
substantially all of the assets and assumed certain liabilities of a group of
affiliated businesses operating under the trade name Educorp. These affiliated
businesses now operate under the name Educorp Direct ("Direct"), as part of the
Company's wholly-owned subsidiary Educorp Multimedia. Effective January 1,
1996, the Company acquired substantially all of the assets and selected
liabilities of HighText Publications, Inc. This business now operates under the
name HighText Interactive ("HighText"), also as part of Educorp Multimedia.
Founded in 1984, Direct is a San Diego, California based publisher and
direct mail distributor of CD-ROM multimedia software. Through its catalogs,
Direct offers what is believed to be one of the largest selections of consumer
CD-ROM software titles in the industry. In fiscal 1995, Direct mailed more than
two million catalogs and newsletters to its customer base. Through its
affiliates, Direct is also involved in the development and publishing of
software titles as well as wholesale and international distribution.
Founded in 1990, HighText is a San Diego, California based developer
and publisher of books and educational CD-ROM software titles. HighText's
primary emphasis is on the development of educational multimedia software for
the adult consumer, higher education, and corporate markets. HighText has
developed ten software titles to date as part of its Crash Course and Virtual
MBA product series. These titles are distributed by wholesale dealers to
college and specialty bookstores, computer software stores, and through catalog
retailers direct to end-users.
In the future, the Company's multimedia operations may be expanded
through the acquisition of complementary businesses and through the: (1)
development and/or publishing of new software titles, (2) increased number and
mailing frequency of print catalogs, (3) development of new distribution
channels, and (4) international expansion of the business. Although the Company
is considering all of these alternatives, no assurance can be given that these
or any other activities will be successful.
The company continues to retain its sizable investment, directly and
through a collateral position for a note receivable, in Polish Life Improvement
S.A ("PLI").
-11-
<PAGE> 12
CORPORATE STRUCTURE
During June 1995, Hariston incorporated a wholly-owned California
subsidiary, CD-Soft Corporation, to pursue Hariston's strategy of focusing its
investment capital and managerial expertise on the multimedia software
publishing and distribution business. In July 1995, CD-Soft Corporation
incorporated a wholly-owned California subsidiary, for the purpose of acquiring
substantially all of the assets and selected liabilities of a group of
businesses operating under the trade name Educorp. Effective March 8, 1996,
this subsidiary was renamed Educorp Direct, Inc.
In December 1995, CD-Soft Corporation formed a second wholly-owned
California subsidiary, for the purpose of acquiring substantially all of the
assets and selected liabilities of HighText Publications, Inc. Effective
January 22, 1996, this subsidiary was renamed HighText Interactive, Inc.
In March 1996, CD-Soft Corporation was merged into Educorp Multimedia,
Inc. ("Educorp Multimedia"), a wholly-owned Delaware subsidiary of Hariston
formed in January 1996. Upon this merger, Educorp Multimedia, Inc. became the
holding company for all of Hariston's book and multimedia CD-ROM development,
publishing, and distribution operations.
In October 1995, Hariston formed a wholly-owned Delaware subsidiary,
EuroEastern Investment Corp. ("EuroEastern"), for the purpose of pursuing
investment opportunities in central and eastern Europe.
RESULTS OF OPERATIONS
The Company incurred a consolidated net loss of $795,250 for the three
months ended March 31, 1996. Of this loss, $259,431 was attributable to Direct,
$106,379 to HighText and $78,567 to interest expense on debt incurred at the
Hariston legal entity level. The remainder of the loss was primarily due to
corporate administration and overhead costs incurred by Hariston and its
subsidiary, EuroEastern. An analysis of the results is presented below. For
comparative purposes, the analysis of Direct considers the comparable results
during 1995, where available, of the operations of its predecessor, Gazelle
Technologies, Inc. and its affiliates, which had been doing business under the
trade name Educorp.
EDUCORP DIRECT
On August 25, 1995, the Company, through a wholly-owned subsidiary,
acquired substantially all of the assets and assumed certain liabilities of a
group of businesses now operated under the name Educorp Direct for a purchase
price of $6,067,000. This transaction was accounted for as a purchase.
Direct generated revenues of $1,731,636 for the three months ended
March 31, 1996, of which $1,223,556 was from retail sales to end-users,
$429,332 was from sales to dealers, and $78,748 was from software royalties and
license fees. Direct realized gross profit of $532,744
-12-
<PAGE> 13
for the quarter. Direct incurred a loss before interest, depreciation and
amortization of $28,038, and a net loss after these items of $259,431.
RETAIL SOFTWARE SALES. Retail software sales for the three months
ended March 31, 1996 of $1,223,556 declined 2% relative to retail software
sales of $1,247,917 for the same period during 1995. The primary reason for the
decline in same period sales was the 10% decline in the average CD-ROM retail
price realized by Direct in 1996, $32.39 as compared to $35.80 for the same
period in 1995. The effect of lower realized prices was somewhat offset by
increased unit sales volume, primarily attributable to an increased number of
catalogs in circulation during the quarter as compared to the same period of
1995.
International retail software sales were $234,541, or 19% of total
retail sales, for the three months ended March 31, 1996, versus $190,937 or 15%
of total retail sales for the comparable prior year period. The 23% increase in
international retail sales was primarily due to the increased number of
catalogs in circulation and the fact that there are fewer distribution sources
available to retail customers internationally than domestically.
DEALER SOFTWARE SALES. Dealer software sales for the three months
ended March 31, 1996 of $429,332 declined 27% relative to dealer software sales
of $589,158 for the same period during 1995. The decline in same period sales
primarily reflects lower unit sales volume due to an increased level of
competition, arising partly from new distribution channels that have opened for
the supply of CD-ROM titles to dealers. These new channels include a trend
towards publishers selling their titles directly to dealers. Additionally,
there was a 7% decrease in the average CD-ROM dealer price realized by Direct.
The average price realized was $29.10 for the first quarter of 1996 as compared
to $31.26 for the first quarter of 1995.
International dealer software sales were $356,839, or 83% of total
software sales to dealers, for the three months ended March 31, 1996, versus
$419,737 or 71% for the comparable prior year period. The 15% decline in
international dealer sales reflected smaller international order sizes due an
increasing number of publishers seeking direct distribution to foreign dealers.
However, international dealer sales represented an increasingly large
percentage of the Company's sales to dealers reflecting the fact that there are
still more distribution sources available to domestic dealers than to foreign
dealers.
HARDWARE SALES. The Company decided in early 1995 to discontinue
selling computer hardware. As a result, there were no retail sales of hardware
for the three months ended March 31, 1996. During the comparable period of
1995, retail hardware sales were $101,182. The decision to terminate this
product line was based on the relatively low gross profit margins realized by
hardware relative to CD-ROM software, and the relatively high inventory
maintenance costs as compared to those of CD-ROM software.
ROYALTIES AND LICENSE FEES. Royalties and license fees of $78,748 for
the three month period ended March 31, 1996 decreased 32% relative to royalty
and license fees of $116,380 for the same period during 1995. The primary
reason for the decrease was a reduction in shipments by Apple Computer of
computers bundled with educational software titles published by the Company.
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<PAGE> 14
GROSS PROFIT. Direct realized a gross profit of $532,744 for the
three months ended March 31, 1996, representing 31% of revenues. Comparative
figures for the same period of 1995 are not readily available. However,
historically the Educorp operations realized a higher gross profit. The decline
from historical levels primarily reflects the lower realized prices per title
as a result of increased competition, and the reduced share of higher margin
self-published titles.
OPERATING AND CORPORATE EXPENSES. Operating and corporate expenses
were $790,095 for the three months ended March 31, 1996, representing
approximately 46% of revenues for the quarter. This figure includes
amortization of goodwill arising from the acquisition of the Direct operations.
After adjusting for the goodwill amortization expense of $218,079, operating
and corporate expenses are $572,016 or 33% of total revenues for the quarter.
HIGHTEXT INTERACTIVE
Effective January 1, 1996, the Company, through a wholly-owned
subsidiary, purchased substantially all of the assets and assumed certain
liabilities of HighText Publications, Inc., for a purchase price of $641,000.
This transaction was accounted for as a purchase.
HighText generated revenues of $99,910 for the three months ended
March 31, 1996, of which $14,594 was from retail sales to end-users, and
$85,316 was from sales to dealers. HighText realized a gross profit of $50,048
for the quarter, and incurred a net loss of $106,379.
SOFTWARE SALES. Software sales for the three months ended March 31,
1996 were $12,063, consisting of $4,943 sales to end-users and $7,120 sales to
dealers. HighText realized an average CD-ROM title price of $19.33. HighText
did not publish or sell CD-ROM software titles during the comparable period of
1995.
HighText's first CD-ROM title was published in May 1995, followed by
two additional titles in November 1995. During the three months ended March 31,
1996, HighText focused on the development of seven additional titles, at the
expense of developing distribution for existing products. As a result, software
sales during the first quarter were limited.
BOOK SALES. Book sales for the three months ended March 31, 1996 were
$87,847, consisting of $9,651 retail sales to end-users and $78,196 sales to
dealers. HighText realized an average book price of $12.65 during the quarter.
By comparison, for the three months ended March 31, 1995, retail sales were
$13,020, and dealer sales were $84,824.
HighText published its first book title in June 1991. As of January
1, 1996, HighText had published fifteen book titles. During the three months
ended March 31, 1996, HighText published no new book titles.
OPERATING AND CORPORATE EXPENSES. The most significant components of
HighText's $154,774 of operating and corporate expenses for the three month
period ended March 31, 1996,
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<PAGE> 15
were salary costs totaling $60,153 and marketing and trade show costs of
$49,993. HighText expenses the costs of developing new software and book titles
as they are incurred. During the period January 1 to March 31, 1996, HighText
had seven software and three book titles under development.
HARISTON AND EUROEASTERN OPERATING AND CORPORATE EXPENSES
Due to the divestitures during 1995 of certain operating businesses
and investments, and the subsequent acquisition of new businesses, Hariston's
non-consolidated operating and corporate expenses for the period January 1 to
March 31, 1996 of $316,477 are not directly comparable to the $316,729 of costs
for the same period of a year earlier. The majority of Hariston's
non-consolidated operating and corporate expenses for the first quarter of 1996
were general, administrative and salary costs, including in excess of $16,000
of costs incurred for shareholder communications, and more than $71,000 of
accounting and legal fees. The majority of EuroEastern's non-consolidated
operating and corporate expenses, totaling $34,589, were also general,
administrative and salary costs. There are no prior year comparable figures for
EuroEastern as it was incorporated in October 1995.
INVESTMENTS
POLISH LIFE IMPROVEMENT S.A. PLI is a retail operator of eight
supermarkets and four home improvement stores in Poland. PLI is a public Polish
company which during 1995 applied for its shares to be listed and traded on the
Warsaw Stock Exchange. Approval for share trading was obtained in early 1996,
and on February 5, 1996, PLI's shares began trading on the parallel market of
the Warsaw Stock Exchange.
Over 3 million shares in PLI are reported on Hariston's balance sheet,
at an average cost of approximately $0.64 per share. These include 1.4 million
shares which the Company agreed to sell to a third party and for which it has
received a promissory note that is presently in default. The promissory note is
secured by the 1.4 million shares. Management has determined that collection on
the note is not reasonably assured and is discussing with the purchaser the
return of the 1.4 million PLI shares.
After accounting for the Company's obligation to transfer 613,684 PLI
shares under the terms of a stock sale agreement, and not including the 1.4
million PLI shares discussed above, which Hariston does not control or vote,
Hariston's percentage ownership in PLI is approximately 23%.
Management is of the opinion that due to the Company's minority
ownership position in PLI, Hariston has not been able to exercise significant
influence over the operating, investing, and financial policies of PLI and
therefore the investment in PLI shares was accounted for on the cost method.
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<PAGE> 16
MADISON PARTNERS LIMITED. Madison was a Canadian-based supplier of
proprietary home medical products. Madison's shares are listed for trading on
the Canadian Dealing Network, a division of the Toronto Stock Exchange.
Hariston owns 800,000 shares of Madison common stock, representing less than a
5% interest in Madison. In January 1996, Madison's secured creditors seized its
assets, causing Hariston to fully write off its investment in Madison as of
December 31, 1995. Madison's shares last traded in January 1996.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1996, the Company had cash balances in excess of
$600,000, a working capital ratio of 0.51 and a debt/equity ratio of 1.17. The
Company's principal capital requirements include working capital to finance the
internal expansion of Educorp Multimedia, and costs which may be incurred in
connection with the acquisition of businesses in the future.
Historically, the Company has also required capital to finance
operating losses, having incurred operating losses in each year after 1990. As
of March 31, 1996, the Company had an accumulated deficit of $26,421,234.
However, the Company has disposed of or written off substantially all of the
operations and investments that gave rise to this accumulated deficit,
retaining only the Company's investment in shares of PLI, and the Educorp
Multimedia operations.
PLI does not require the financial assistance of the Company. Further,
based on historical results and management's expectations for future
operations, the Company expects that the Direct operations will generate
sufficient cash flow to cover their operating requirements for the immediate
future. However, with the recent acquisition of HighText and the need to
finance product development and general corporate expenses until Educorp
Multimedia is sufficiently profitable, the Company will have to raise
additional equity and/or debt capital in 1996. There is no assurance that cash
flows from operations will be sufficient to meet operating requirements, or
that additional debt or equity financing will be available on terms acceptable
to the Company.
To finance the Company's working capital needs and the repayment of a
short-term note that arose from the acquisition of the Direct operations, the
Company reset the exercise price of certain warrants from $3.60 to $2.00 per
share as an incentive for exercise. The repriced warrants were exercised and,
pursuant to the exercise, the Company issued 250,000 shares on March 1, 1996 to
realize proceeds of $500,000.
SEASONALITY OF BUSINESS
Historically, the Educorp Multimedia operations have been subject to a
seasonal effect during the "back to school" and year-end holiday buying
seasons, commencing in August and peaking during the period November through
January. To generate gift sales, Direct has historically timed the mailing of
its catalogs to be received by potential customers during November and early
December. In addition, catalogs are mailed in January to generate sales
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<PAGE> 17
from those who may have received computers as gifts. Management expects that
this seasonal effect will continue to have an impact on HighText's and Direct's
operations for the foreseeable future.
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<PAGE> 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Not Applicable.
Item 2. Changes in Securities.
Not Applicable.
Item 3. Defaults Upon Senior Securities.
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
During the quarter ended March 31, 1996 the Company did not submit any
matters to a vote of the Company's shareholders.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on From 8-K.
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit No. Exhibit Description
- - ----------- -------------------
<S> <C>
2.1 Agreement and Plan of Reorganization dated December
31, 1995 by and among CD-Soft Press Corporation,
High Text Publications, Inc., Carol Lewis, Jack Lewis
and Harry Helms (omits schedules and exhibits. The
Registrant hereby agrees to supplementally provide
the omitted schedules and exhibits to the Securities
and Exchange Commission upon request)
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K: None
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<PAGE> 19
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HARISTON CORPORATION
Dated: May 13, 1996 By: /s/ JAMES V. McGOODWIN
----------------------------------------
James V. McGoodwin, President
(Principal Executive Officer)
Dated: May 13, 1996 By: /s/ L. JAMES PORTER
----------------------------------------
L. James Porter, Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
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<PAGE> 20
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Exhibit Description Page
- - ----------- ------------------- ----
<S> <C> <C>
2.1 Agreement and Plan of Reorganization dated December
31, 1995 by and among CD-Soft Press Corporation, High Text
Publications, Inc., Carol Lewis, Jack Lewis and Harry Helms
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 2.1
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is
entered into as of this _____ day of December, 1995, by and among CD-SOFT PRESS
CORPORATION, a California corporation ("Purchaser"), HIGH TEXT PUBLICATIONS,
INC., a California corporation ("Seller") and CAROL LEWIS, an individual, JACK
LEWIS, an individual and HARRY HELMS, an individual (collectively the
"Shareholders"), with reference to the following facts:
RECITALS
A. The Seller is in the business of developing, marketing and
distributing educational multimedia software and CD-ROM programs. The Seller's
offices are located at 125 No. Acacia Avenue, Suite 110, Solana Beach,
California 92075.
B. Purchaser is a wholly-owned subsidiary of Hariston Corporation
("Hariston"). Purchaser and its affiliates are also in the business of
developing, marketing and distributing educational multimedia software and
CD-ROM programs. Purchaser's offices are located at 611 Anton Boulevard, Suite
1270, Costa Mesa, California 92626.
C. The parties hereto desire that Purchaser acquire all of the
tangible and intangible assets of the Seller, including the assets of Seller's
multimedia operations and of its book publishing operations, and assume certain
liabilities, all as described in Section 1 herein, in consideration of the
payment of the "Purchase Price," as such term is defined herein, and in
consideration of Purchaser's other agreements in this Agreement. The
Shareholders currently own all of the issued and outstanding capital stock of
the Seller, and will be materially benefitted by this transaction.
D. The parties intend that the transactions contemplated hereby
constitute a Plan of Reorganization as described in Section 368(a)(1)(C) of the
Internal Revenue Code of 1986, as amended.
AGREEMENTS
NOW, THEREFORE, in consideration of the foregoing Recitals, and of the
representations, warranties and agreements of the parties contained herein, the
parties hereto do hereby agree as follows:
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<PAGE> 2
1. Asset Purchase.
(a) Purchase and Sale of Assets. Seller hereby agrees to sell,
transfer and assign to Purchaser, and Purchaser hereby agrees to acquire from
Seller, on the terms and conditions set forth herein, all of the assets,
properties and business of the Seller (all of which are collectively referred
to herein as the "Assets") consisting of the following:
(i) Products. All right, title and interest in and to
all proprietary, technology, legal and other rights in all multimedia
software and CD-Rom software and programs, and all books and other
publications, including without limitation all of such programs,
software and books described in Exhibit 1 hereto, together with all
work-in-process for uncompleted programs and publications, and all
copyrights, patents, trademarks, trade secrets and other proprietary
rights relating thereto.
(ii) Contract Rights. All contract rights under the
contracts identified in Exhibit 1.1.2 hereto.
(iii) Licenses. All of the Seller's rights in and to the
"Licenses," as defined in Section 3.3.4 hereof and as further
identified in Exhibit 3.3.4, other than those Licenses which are
specifically identified in such Exhibit as not being transferable.
(iv) Furniture and Equipment. All of the furniture,
equipment, computers and associated peripheral equipment owned by the
Seller, as identified in Exhibit 1.
(v) Inventory. The Seller's entire inventory of books,
raw materials, components, manuals, and finished goods relating to the
Products, wherever located, as of the "Closing Date" (as defined in
Section 2.2), all as identified on Exhibit 1.
(vi) Cash and Accounts Receivable. All of the Seller's
cash and all accounts receivable from any party, as such accounts
receivable exist at the Closing Date (the "Current Assets"),
including, without limitation, those specifically identified on
Exhibit 3.3.2.
(vii) Databases. The Seller's databases of customers,
distributors and suppliers.
(viii) Records. All records (copies and/or originals where
necessary) of the Seller (other than the Seller's corporate records)
relating to the ownership, development, design, sale and/or
distribution of the Products, including property records, service
records, contract records and accounting records, subject to the
Seller's reasonable continuing access, as required.
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<PAGE> 3
The Assets are more fully specified on Exhibit 1 hereto.
Notwithstanding anything in this Section 1.1 to the contrary, there shall be
excluded from the assets, properties, rights and business to be transferred to
the Purchaser the assets of the Seller listed or described on Exhibit 1.1
hereto (the "Excluded Assets").
(b) Assumption of Liabilities. The Purchaser shall assume all of
the following, but no other, obligations of the Seller:
(i) Current Liabilities. Subject to the limitation set
forth below, the current liabilities of Seller at the "Closing" (as
defined in Section 2.2), consisting of (a) accounts payable; (b)
Seller's debt to insiders relating to credit card indebtedness
incurred on the Seller's behalf, and Seller's Bank of America line of
credit; and (c) taxes payable. Seller covenants that its current
assets being transferred to Purchaser hereunder, valued in accordance
with generally accepted accounting principles, shall exceed its
current liabilities being assumed by Purchaser hereunder, by at least
$10,000. Seller covenants that the current liabilities, as of the
closing date shall not exceed the amount set forth in Exhibit 1.2.1
hereto ("Current Liabilities").
(ii) Other Agreements. All of the Seller's obligations
under those agreements identified in Exhibit 1.1.2 hereof (the
"Assumed Agreements").
Except as otherwise expressly provided herein, Purchaser shall not
assume or in any way be liable or responsible for any liabilities or
obligations of the Seller whatsoever, including, without limitation, any
Current Liabilities to the extent they exceed the limitation set forth in
Section 1.2.1 above. Without limiting the generality of the foregoing,
Purchaser shall have no liability or responsibility for any tax liabilities
arising as a result of or in connection with the transactions contemplated by
this Agreement, any pending or threatened litigation, any unknown or
undisclosed claims, liabilities or obligations.
2. Purchase Price and Closing.
(a) Purchase Price.
(i) Purchase Price. As the purchase price ("Purchase
Price") for the Assets, Purchaser shall: (a) assume the Current
Liabilities and the Assumed Agreements; (b) with respect to Seller's
multimedia operations, deliver to Seller shares of Hariston's Common
Stock in the amount set forth in Section 2.1.2 and 2.1.3 below; and
(c) with respect to Seller's book publishing operations, deliver to
Seller the shares of Hariston Common Stock specified in Section 2.1.4
below.
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<PAGE> 4
(ii) Common Stock. As part of the Purchase Price,
Purchaser shall deliver to Seller, at the closing, that number of
shares of Common Stock of Hariston Corporation as have a value equal
to the difference between $500,000 and the actual amount of the
Seller's Current Liabilities that are assumed, other than accounts
payable or taxes payable. For these purposes, the Common Stock to be
issued shall be valued using the average public sale price for the
twenty (20) trading days ending three (3) days prior to the closing.
(iii) Infinite Drill. In the event a United States patent
is issued not later than December 31, 1998 with respect to Seller's
"Infinite Drill" feature of its multimedia products, Purchaser shall
deliver Common Stock, as additional purchase price, having a market
value (calculated as the average public sales price for the twenty day
period ending on the date the patent is issued) equal to the
difference between $60,000 and the legal and other costs incurred in
the patent search and patent application process.
(iv) Book Publishing Operations.
(A) With respect to the book publishing
operations (which shall be defined as titles currently published or
currently under contract to be published, but not any other titles),
the consideration to be paid shall consist of Hariston Common Stock,
valued at the market value pursuant to a formula as follows: for each
of the five consecutive fiscal years commencing with the fiscal year
ending December 31, 1996, the Purchaser will deliver to Seller that
number of shares equal to the after-tax income for the book publishing
operations divided by the market value of a share of Common Stock.
Market value of the Common Stock shall be based on the average public
sale price for the twenty trading day period ending on December 31 of
each fiscal year. After-tax income shall be computed, and the Common
Stock shall be delivered, within ninety days of the end of the fiscal
year. There is no maximum amount of Common Stock deliverable, but the
minimum amount of Common Stock so deliverable (subject to Section
2.1.4(b) below) shall be 4,000 shares per year, or an aggregate of
20,000 shares.
(B) In the event that the Purchaser sells the
"book publishing operations" (as defined above) in an arm's length
transaction prior to December 31, 2000, Purchaser shall not be
required to issue any Hariston Common Stock to the Seller calculated
with respect to the after tax income of the book publishing operations
received in the fiscal year in which the sale occurs, or in any year
thereafter. Instead, Purchaser shall in such event issue to the
Seller a number of shares of Common Stock equal to: (a) the net after
tax value, expressed in dollars, of the consideration received by the
Purchaser for such operations (with noncash consideration valued at
its fair market value, for such purposes), divided by (b) the per
share
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<PAGE> 5
market value of the Common Stock (based on the average public sale
price of the Common Stock for the twenty trading days ending on the
closing of such sale), with the result so obtained multiplied times
(c) a fraction, having five (5) as its denominator and as its
numerator the number of years, rounded to the nearest whole number
(but in no event less than one (1)), between the closing date of such
sale and December 31, 2000. Notwithstanding the above, the minimum
aggregate number of shares of Common Stock that shall be issued to
Seller under Sections 2.1.4(a) and 2.1.4(b) shall be 20,000 shares.
(C) For purposes of Sections 2.1.4(a) and 2.1.4(b)
above, after-tax income shall conclusively be deemed to be equal to
70% of pretax income, and the after tax value of the consideration
received upon the purchase of the book publishing operations shall be
determined by multiplying the amount of such consideration by 0.7.
(v) Allocation of Purchase Price. The Purchase Price
shall be allocated among the Assets (including goodwill) and the
covenant not to compete set forth in Section 5.3 as set forth in
Exhibit 2.1.5 hereto, and each of the parties hereto agrees not to
take an inconsistent position in any tax returns or other filings with
any third party or governmental agency, unless otherwise required by
any third party or governmental agency.
(b) Time and Place. The closing of the transactions contemplated
hereby (the "Closing") shall be held at the offices of Rutan & Tucker, 611
Anton Boulevard, Suite 1400, Costa Mesa, California 92626, at 9:00 a.m. on
January 12, 1996 (the "Closing Date"). The Closing shall be deemed completed
when the parties have delivered the consideration and documents to be delivered
by them as specified below.
(c) Deliveries by Purchaser at the Closing. Purchaser shall, at
the Closing, deliver or cause to be delivered to the Seller the following:
(i) Purchase Price. Certificates representing the shares
to be delivered pursuant to Section 2.1.2 above.
(ii) Assumption of Liabilities. Such documents as are
necessary to effectuate the assumption by Purchaser of the Assumed
Liabilities described in Section 1.2 herein.
(iii) Resolutions. Certified copies of the resolutions of
Board of Directors of Purchaser approving the transactions
contemplated hereby.
(iv) Certificate. A certificate of authorized officers of
the Purchaser, certifying that the representations and warranties of
the Purchaser herein remain true and correct at
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<PAGE> 6
the Closing Date and that the Purchaser is in compliance herewith.
(d) Deliveries by Purchaser after the Closing. After the Closing,
Purchaser shall, within the time periods set forth in Section 2.1.3, calculate
and deliver the number of shares of Hariston Common Stock deliverable under
such Section. In addition, within twenty (20) days following the issuance (if
any) of the patent referred to in Section 2.1.4 above, Purchaser shall deliver
to Seller the certificates representing the shares of Common Stock which are
deliverable under such Section. In the event Seller disputes the number of
shares that are deliverable under section 2.1.3, the parties shall meet and use
their best efforts to resolve such dispute. In the event they are unable to
resolve such dispute, it shall be resolved by final and binding arbitration
conducted in Orange County, California before a board of three arbitrators,
each party to select one of such arbitrators and the arbitrators so chosen to
select the third arbitrator.
(e) Deliveries by the Seller. The Seller shall, at the Closing,
deliver or cause to be delivered to Purchaser:
(i) Bill of Sale. A bill of sale, in form and substance
satisfactory to Purchaser, transferring title to the Assets to
Purchaser.
(ii) Other Documents. Such other documents as are
necessary to convey to Purchaser legal title to all of the Assets
purchased by Purchaser pursuant hereto.
(iii) Consents. Copies of all consents received from third
parties relating to the transactions contemplated hereby.
(iv) Resolutions. A certified copy of the resolutions of
the Board of Directors (and shareholders, if necessary) of the Seller,
approving the transactions contemplated hereby.
(v) Certificate. A certificate of authorized officers of
the Seller, certifying that the representations and warranties of the
Seller made herein remain true and correct at the Closing Date and
that the Seller is in compliance herewith.
(vi) Possession. Possession of all of the Assets,
together with all files, books, records and computer programs and data
files relating to the Assets and the operation of the Seller's
business.
3. Representations and Warranties of the Seller and Shareholders.
In order to induce Purchaser to enter into and perform its obligations
under this Agreement, and subject to the exceptions set
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<PAGE> 7
forth on the exhibits attached hereto (which exceptions shall be deemed
representations and warranties hereunder) the Seller and Shareholders, jointly
and severally, hereby make each of the representations and warranties to
Purchaser as set forth below:
(a) Corporate Organization. The Seller is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of California, and is not qualified to do business as a foreign corporation in
any jurisdiction, there being no jurisdiction in which the failure so to
qualify would have a material adverse effect on the Seller or its business or
properties. Since its incorporation, the Seller has not conducted business
under any other corporate or fictitious name. The Seller has no subsidiaries,
does not own any capital stock of any other corporation, and does not otherwise
directly, or indirectly, control any corporation, partnership, business, trust
or other entity. All of the outstanding capital stock of the Seller is owned,
beneficially and of record, by the Shareholders.
(b) Corporate Authority. Seller has full corporate power and
authority to own its properties and assets, and to carry on its business as
presently conducted. Seller has full corporate power and authority to execute,
enter into and carry out the provisions of this Agreement. All corporate
action on the part of the Seller (including, without limitation, approval by
the Board of Directors of the Seller and the Shareholders) necessary for the
authorization, execution, delivery and performance of all obligations of the
Seller under this Agreement has been taken, all of which actions have been in
full compliance with applicable law, and this Agreement constitutes the valid
and legally binding obligation of the Seller, enforceable in accordance with
its terms, except as such validity, binding nature and enforceability may be
affected by applicable bankruptcy, insolvency, reorganization, moratorium,
general principles of equity or other laws of general application relating to
or affecting enforcement of creditor's rights.
(c) Business.
(i) Assets. Exhibit 3.3.1 hereto contains a complete and
accurate schedule specifying the location of all of the Assets as of
the date hereof. The property identified in Exhibit 1 (i.e., the
Assets) constitutes all personal property of any nature owned by the
Seller and used in the operation of the Seller's business as conducted
at this date, except for the Excluded Assets. All tangible personal
property of the Seller included in the Assets, with immaterial
exceptions, is in good operating condition and repair, ordinary wear
and tear excepted. The Seller presently has, and shall deliver to
Purchaser at the Closing, good and marketable title to the Assets,
free and clear of all liens, claims, security interests or agreements,
licenses, leases, encumbrances of any nature whatsoever. The Seller
presently is in actual possession of all of the tangible Assets. The
Assets being
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<PAGE> 8
transferred to Purchaser pursuant to this Agreement include all
proprietary rights and technology necessary for the ownership,
operation, production, manufacturing, distribution and sale of the
Products. All of the licenses for, or other rights to use, any
computer software included in the Assets are transferable without the
consent of the licensor thereof, except for those licenses for which
such consent has been received by Purchaser, or which will be
delivered at the Closing. All of such consents are identified in
Exhibit 3.10hereto. To the knowledge of the Seller and the
Shareholders, all of such computer programs perform substantially in
compliance with the manufacturer's specifications and representations
therefor, and there are no material defects therein.
(ii) Receivables. All of the accounts receivable which
are included in the Assets (the "Receivables") arose from valid sales
in the ordinary course of business. All of such Receivables are
identified in Exhibit 3.3.2 hereto. All of the Receivables are valid
and enforceable and are collectible at their full amounts within
ninety days of the Closing Date. To the knowledge of the Seller and
the Shareholders, there are or will be at all relevant times no
defenses, counterclaims or set-offs against such Receivables.
(iii) Distribution Channels. Attached hereto as Exhibit
3.3.3 is a list of all of the Seller's authorized dealers and
distributors in effect as of the date hereof (collectively, the
"Distributors"). Such Exhibit accurately describes the terms and
conditions of the Seller's distribution contracts or arrangements with
the Distributors for the Products. The Seller is not aware, after
reasonable investigation of the employees at the Seller, that any of
such Distributors intends to reduce materially or terminate, during
the 12 month period following the date of this Agreement, the amount
of its business with the Seller compared to that conducted during the
twelve months ended November 30, 1995. Routine complaints received in
the ordinary course of business which do not, by their terms, threaten
reduction or termination shall not be deemed to evidence an intent to
reduce materially or terminate a Distributor's business conducted with
the Seller.
(iv) Patents, Trademarks, Permits and Licenses. Set forth
on Exhibit 3.3.4 hereto are all material licenses, consents, patents,
patent applications, copyrights, trademarks, trademark applications,
trade names, franchises, permits, and government authorizations
necessary or legally required for, or actually used in, the conduct of
the Seller's business (the "Licenses"). The Seller has not received
any demand or notification from any governmental agency that the
Seller is required to obtain any license, permit, or authorization
material to the operation of the Seller's business which it does not
presently have. All of the
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<PAGE> 9
Licenses are presently valid and subsisting. The consummation of the
transactions contemplated herein will not cause the termination,
expiration, breach or modification of any License. There are no
pending or, to the knowledge of the Seller, threatened claims against
the Seller alleging that the conduct of the Seller's business
infringes or conflicts with the rights of others under patents,
trademarks, copyrights, trade secrets or other proprietary rights.
The Seller's business as now conducted, including, without limitation,
the development, ownership, use, licensing and sale of the Products,
does not infringe or conflict with the rights of others under patents,
trademarks, copyrights, trade secrets or other proprietary rights.
The Seller has taken reasonable steps to protect against dissemination
any trade secrets or confidential information relating to the
Products.
(v) Employees. The name, position and present
compensation rate of each of the Seller's full-time employees as of
the date hereof are identified in Exhibit 3.3.5 hereto. Exhibit 3.3.5
also identifies all of the Seller's employee benefit, compensation or
similar plans (including all ERISA plans) and material terms of
employment, including vacation, severance policies and any post
employment benefit. There are no union organization activities
pending or threatened between the Seller and its employees. None of
the Seller's employees is represented, for purposes of his or her
employment with the Seller, by a union or employee association, and
the Seller is not currently negotiating any collective bargaining
agreement. The Seller has no knowledge of any claimed violation by
its employees of any applicable state or federal equal employment
opportunity or other law relating to employment. No existing pension,
bonus, profit sharing, stock option or other plan, agreement or
arrangement has any unfunded or underfunded liability, nor have any
prohibited transactions, reportable events or events of termination
occurred concerning such plans, agreements or arrangements. Other
than as set forth in Exhibit 3.3.5 hereto, there is not now, and there
will not be at the Closing, any outstanding contract of service
between the Seller and any of its directors, officers or employees
which is not terminable without compensation (including any
compensation payable by statute) on 90 days' notice or less.
(d) Financial.
(i) Financial Statements. Purchaser has received copies
of the Seller's balance sheet as of November 30, 1995, and income
statements for the [eleven month] period then ended (the "Financial
Statements"). The Financial Statements are complete and correct and
have been prepared in accordance with generally accepted accounting
principles applied on a consistent basis during the respective
periods, and fairly present the financial condition of the Seller as
at the respective dates thereof and the results of operations for the
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Seller for the respective periods covered by the statements of
income contained therein.
(ii) Absence of Changes. Since November 30, 1995, there
has not been any material adverse change in the Assets, liabilities,
financial condition or operations of the Seller's business or the
Assets except for changes in the ordinary course of business which
have not been, either in any individual case or in the aggregate,
materially adverse;
(e) Taxes. The Seller has accurately prepared and timely filed
all federal, state and local income tax returns and other tax returns which are
required to be filed, and has paid, or made provision for the payment of, all
taxes which have or may have become due pursuant to said returns or applicable
law or pursuant to any assessment which has been levied upon its assets,
business or operations. The Seller has not waived or extended any applicable
statute of limitations relating to the assessment of federal, state or local
taxes and no examinations of the federal, state or local tax returns of the
Seller are currently in progress nor, to the best knowledge of the Seller, is
any such examination threatened.
(f) Contracts. Exhibit 3.6 hereto describes all of the Material
Contracts. For purposes of this Section 3.6, the term "Material Contract"
shall mean every contract, agreement, indenture, deed of trust, lease, license
or other instrument, commitment, or obligation, written or oral, absolute or
contingent, to which the Seller is a party or by which any of its assets are
bound, and which are necessary or helpful (in any material respect) to the
operation of the Seller's business or to the development, distribution and sale
of the Products. Each of the Seller's Material Contracts is in full force and
effect, and the Seller has received no notification of any termination or
intent to terminate any of such Material Contracts. The Seller has delivered
to Purchaser complete and accurate copies of each of the Material Contracts and
none of the Material Contracts has been amended or modified in any material
respect, except to the extent that such modifications or amendments are
disclosed by the copies delivered to Purchaser or as expressly provided herein.
There are no material defaults by the Seller under, and to the knowledge of the
Seller no circumstances exist which could result in such default under, any of
such Material Contracts. To the knowledge of the Seller, there are no material
defaults by any other party under, and no circumstances exist which could
result in such default under, any of such Material Contracts.
(g) No Default. The Seller is not in violation, breach, or
default of any term or provision of its Articles of Incorporation or Bylaws, or
of any term or provision of any state or federal judgment, decree or order
applicable to or binding upon it. The execution, delivery and performance of
and compliance with this Agreement by the Seller will not result in any such
violation or constitute a default under (or an event which with notice or lapse
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of time or both would constitute an event of default) or result in the
termination, expiration, breach or modification, or accelerate the performance
required by, any such term or provision or any term or provision of any
Material Contract, or Assumed Agreement, or result in the creation of any
mortgage, pledge, lien, encumbrance or charge upon any of the properties or
assets of the Seller, which violation, conflict, default, termination,
acceleration or creation would have a material adverse effect on the Seller's
assets, liabilities, operations or financial position.
(h) Compliance With Laws. The Seller is in compliance in all
material respects with, and has no notice of any violation of, any applicable
federal, state or local statute, law, rule, ordinance or regulation affecting
the Seller's business, which violation would have a material adverse effect on
the Seller's business. In connection with the transactions contemplated
hereby, the Seller has complied with or is exempt from all applicable laws
including, without limitation, bulk sales laws, under which liabilities of the
Seller may be imposed on Purchaser as the buyer of the Seller's assets. As a
result of such compliance or exemption, Purchaser will not have or incur any
liability thereunder.
(i) Litigation. No litigation, proceeding, suit, action or
controversy is pending or, to the knowledge of the Seller, threatened by or
against the Seller before any court or administrative or governmental agency
which if adversely determined would have a material adverse effect on the
Seller's business, nor, to the knowledge of the Seller, is there any basis for
any such material litigation, proceeding or controversy by or against the
Seller before any court or administrative or governmental agency.
(j) Consents. Except as set forth in Exhibit 3.10 hereto, the
Seller has obtained all consents, authorizations, approvals, orders,
registrations and qualifications from, and have made all filings with, any
third party, including, without limitation, all customers, other parties to the
Assumed Agreements, and any public, governmental, administrative or regulatory
authority, agency or body required on the part of the Seller in connection with
the execution, delivery or performance of this Agreement by it. Such consents,
authorizations, approvals, orders, registrations, qualifications and filings
are identified on Exhibit 3.10.
(k) Finders. Seller has not employed or engaged any broker,
finder or similar intermediary in connection with the transactions contemplated
herein, and no such person is entitled, as a result of the Seller's actions, to
any fee or commission payable by the Seller based upon the consummation of the
transactions contemplated hereby.
(l) Insurance. The Seller presently carries policies of insurance
with financially responsible insurance companies covering its liability to
third parties against loss or damage to its properties in such amounts and
covering such perils as are
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<PAGE> 12
reasonable and prudent. The Seller has disclosed all existing insurance
policies on Exhibit 3.12 hereto.
(m) Hazardous Materials. The facilities which are the subject of
leases of real property used by the Seller are not and, during the entire term
of the Seller's tenancy therein, have not been a site for the use, generation,
manufacture, storage, disposal or transportation of any material toxic or
hazardous wastes or materials (collectively "Hazardous Materials") under
applicable environmental laws, ordinances or regulations. The Seller is in
material compliance with, and at all times has complied in all material
respects with, all environmental laws, ordinances and regulations, including
without limitation, those relating to any Hazardous Materials.
(n) Investment Matters. Seller and the Shareholders are acquiring
the shares of Hariston Corporation to be issued hereunder for investment
purposes and not with a view to the distribution thereof. Seller and
Shareholders acknowledge that such shares will be "restricted securities," and
may not be resold by them unless such sale has been registered under the
Securities Act of 1933, as amended, or is exempt therefrom. Seller and the
Shareholders acknowledge that they have been provided with all material
information requested by them with respect to Hariston Corporation, including,
without limitation, its Annual Report on Form 20-F for the fiscal year ended
December 31, 1994, Current Report on Form 8-K, and Quarterly Report on Form
10-Q for quarter ended September 30, 1995. Seller and the Shareholders have
been advised to obtain, and have obtained, such legal, tax and accounting
advise as they deem necessary to protect their interest in connection with the
transactions contemplated hereby, and understand that the firm of Rutan &
Tucker has solely represented the Purchaser in this transaction.
(o) Disclosure. No representation or warranty by the Seller or
the Shareholders contained in this Agreement nor any other written statement or
certificate furnished or to be furnished by the Seller pursuant hereto or in
connection with the transactions contemplated hereby, when read together,
contains or will contain any untrue statement of a material fact or omits or
will omit to state a material fact necessary to make the statements contained
therein or herein not misleading in light of the circumstances under which they
were made.
4. Representations and Warranties of Purchaser.
In order to induce the Seller and the Shareholders to enter into and
perform their obligations under this Agreement, and subject to the exceptions
set forth herein (which exceptions shall be deemed representations and
warranties hereunder) Purchaser hereby represents, warrants and covenants to
the Seller as set forth below.
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<PAGE> 13
(a) Corporate Organization. Purchaser is a corporation duly
incorporated, validly existing and in good standing under the laws of Canada.
(b) Corporate Authority. Purchaser has full corporate power and
authority to own its properties and assets, to carry on its business as
presently conducted and to enter into and carry out the provisions of this
Agreement. All corporate action on the part of Purchaser and its officers,
directors and shareholders necessary for the authorization, execution, delivery
and performance of all obligations of Purchaser under this Agreement has been
taken and this Agreement constitutes the valid and legally binding obligation
of Purchaser, enforceable in accordance with its terms, except as such
validity, binding nature and enforceability may be affected by applicable
bankruptcy, insolvency, reorganization, moratorium or other laws of general
application relating to or affecting enforcement of creditor's rights. The
Hariston Common Stock to be issued to Seller hereunder shall be, when issued in
accordance herewith, duly authorized and validly issued, fully paid and
nonassessable.
(c) Consents. Purchaser has obtained all consents,
authorizations, approvals, orders, registrations and qualifications from, and
has made all filings with, any third party, including, without limitation, any
public, governmental, administrative or regulatory authority, agency or body
required on the part of Purchaser in connection with the execution, delivery or
performance of this Agreement by Purchaser.
(d) Finders. Purchaser has not employed or engaged any broker,
finder or similar intermediary in connection with the transactions contemplated
herein, and no such person is entitled, as a result of Purchaser's actions, to
any fee or commission payable by Purchaser based upon the consummation of the
transactions contemplated hereby.
5. Additional Covenants of Seller and the Shareholders.
Seller and the Shareholders further agree as follows:
(a) Conduct of Business. Seller will operate and maintain its
business and the Assets during the period prior to the Closing Date in the
ordinary course, in substantially the same manner as heretofore operated and
maintained, and will use its best efforts to preserve its existing business
relationships with vendors, employees and others.
(b) Indemnification. The Seller and the Shareholders shall
indemnify, defend and hold harmless Purchaser against and in respect of any and
all claims, demands, losses, liabilities, judgments, costs, expenses and
obligations, including, without limitation, interest, penalties and reasonable
attorneys's fees (collectively, "Purchaser Losses"), suffered or incurred by
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<PAGE> 14
Purchaser which arise, result from or relate to: (a) any breach of, or failure
by the Seller or the Shareholders to fulfill or perform any of, their
representations, warranties, covenants or agreements in this Agreement, or in
any exhibit, schedule or other instrument furnished under this Agreement, (b)
the operation or conduct of the Seller's business through the Closing Date or
(c) any of the liabilities or obligations of the Seller or the Shareholders
which are not expressly assumed hereunder.
(c) Noncompetition.
(i) Noncompetition. Subject to Section 5.3.2 below, each
of the Seller and the Shareholders covenant and agree that as a
material consideration to Purchaser for Purchaser's agreements
hereunder, the Seller and the Shareholders will not, for a period of
three (3) years from and after the Closing Date, without the express
prior written consent of Purchaser, recruit, hire, assist others in
recruiting or hiring, discuss employment with or refer to others
concerning employment, any person currently employed by the Seller who
becomes an employee of Purchaser within one month after the Closing
Date. The Seller and Shareholders further agree that for a period of
three (3) years following the Closing Date, none of them, nor any of
their affiliated corporations, businesses or entities, shall directly
or indirectly engage in or have any financial or other interest in any
person, firm, corporation, business or other entity that engages in,
the development or sale of computer software or CD-Rom products. The
foregoing restriction shall be effective throughout the United States,
which constitutes the geographic area in which the business of the
Seller has been carried on.
(ii) Termination of Noncompetition Agreement. It is
presently intended that each of the Shareholders shall be employed by
Purchaser or its affiliates following the Closing, pursuant to the
employment contracts referred to in Section 6.2 below (providing for
"at-will" employment). The parties agree that in the event any
Shareholder voluntarily leaves the employ of the Purchaser or its
affiliate within three (3) years from the Closing Date, or if his or
her employment is terminated for "cause" (as defined below), then the
agreements not to compete and related agreements set forth in Section
5.3.1 above shall continue for the full three (3) year periods set
forth therein, notwithstanding such termination of employment. In
addition, in the event of a termination "for cause" or a voluntary
termination of employment by a Shareholder, if the terminated
Shareholder commences a business which involves the sale of software
products which are not directly competitive with those presently
produced by the Seller, the Shareholder will, before selling such
products to any third party, provide the Purchaser or its affiliates
with a right of first refusal to acquire such products on the same
terms as are offered by the third party. In the event any
Shareholder's employment is
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<PAGE> 15
terminated by the Purchaser or its affiliates prior to three (3) years
from the Closing Date without cause, the covenants set forth in
Section 5.3.1 above shall terminate with respect to the terminated
Shareholder (but not as to the other Shareholders) as of the date of
termination of employment, and the Purchaser shall, notwithstanding
the termination of employment, continue to pay salary to the
terminated Shareholder until such time as the shares to be issued to
the Seller under Section 2 above have been registered for resale under
the Securities Act of 1933, as amended.
(iii) Definition of "for cause." For purposes of the
above, termination shall be deemed "for cause" if:
(A) The Shareholder has been convicted of a
felony or of any theft or embezzlement;
(B) The Shareholder has violated the
noncompetition, nonsolicitation and related provisions of
Section 5.3.1 above;
(C) The Shareholder shall have failed to cure a
material default in his or her performance of his or her
duties under the Employment Agreement to be entered into with
the Purchaser or its affiliate, as contemplated by Section 6.2
hereof, after the employer has given written notice of such
default to the Shareholder, specifying the nature thereof, and
providing the Shareholder with 30 days in which to cure the
default.
(iv) Change in Management. The parties further agree
that in the event there is a significant change of the senior
management of the Purchaser prior to the end of the three (3) year
period during which Section 5.3.1 is otherwise operative, the
covenants set forth in such section shall terminate as of the date
such significant change in senior management occurs.
(d) Trade Secrets and Confidentiality. The Seller and the
Shareholders further agree that at all times hereafter (including at all times
after the Closing Date), neither of them will use for its own benefit or
disclose, communicate or divulge to, or use for the direct or indirect benefit
of any other person, firm, corporation, business or entity any confidential
information regarding the design, sale, distribution or marketing of the
Products, including but not limited to any information relating to the
business, customers, trade practices, trade secrets or know-how associated with
or relevant to the Products. The parties acknowledge that all of these items
constitute trade secrets.
(e) Assistance in Transition. From and after the date of this
Agreement, including for a reasonable period after the Closing Date, the Seller
and the Shareholders shall assist Purchaser in all reasonable ways in the
transfer to and assumption by Purchaser of the business previously conducted by
the Seller which is being
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<PAGE> 16
acquired by Purchaser hereunder. The Seller will use its best efforts to
ensure an orderly transition in transferring to the Purchaser the Seller's
relationships with the Distributors, including, without limitation, preparing
and distributing to the Distributors a mutually agreed notification of the
sale, and including forwarding to Purchaser inquiries regarding the sale and/or
distribution of the Products. The Seller and Shareholders will also notify all
account debtors on the Receivables that all such Receivables are to be paid to
Purchaser.
(f) Employees. The Seller shall be responsible for all costs
relating to the termination of employment of any of its employees, including,
without limitation, severance pay and unpaid vacation in accordance with
existing arrangements with such employees. The Purchaser shall, effective on
the Closing Date, offer employment to those employees identified on Exhibit 5.6
hereof, on terms specified by the Purchaser in its sole and absolute
discretion. The Seller shall maintain in effect its present health insurance
policies covering such employees, until such employees are eligible for and
have become covered by Purchaser's health insurance policies, provided that the
Purchaser and/or the employees shall pay the cost of such insurance from and
after the Closing Date.
(g) Taxes. The Seller shall pay one half of the taxes, including,
without limitation, sales and use taxes, resulting from the consummation of the
transactions contemplated hereby.
(h) Prorations. All charges, if any, that may be assessed by law
against the owner of the Assets, including without limitation personal property
taxes, shall be prorated at the Closing Date, with the Seller and Shareholders
paying and being responsible for all charges relating to the period ending on
the Closing Date, and the Purchaser paying and being responsible for all such
charges accruing after the Closing Date.
(i) Mail; Bank Accounts. After the Closing, the Purchaser and the
Seller shall jointly review all mail, payments, deliveries or other
correspondence addressed to the Seller which relate to the Assets or the
Products. Any of such mail, payments, deliveries or correspondence as relates
to any of the Assets, any of the liabilities being assumed by Purchaser or the
continuing business previously conducted by the Seller with respect to the
Assets or the Products shall be forwarded to, retained by, and shall be the
property of the Purchaser. To the extent any of such materials relate to any
liabilities not being assumed by Purchaser hereunder, or to the corporate
affairs of the Seller unrelated to the continuing business being acquired by
Purchaser, it shall be retained by and shall be the property of the Seller.
(j) Title to Assets. To the extent that any Shareholder holds
legal title to any of the Assets, such Shareholder shall deliver such bills of
sale and other instruments, and take such other actions, as are necessary to
ensure that Purchaser receives
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<PAGE> 17
at the Closing good and marketable title to such Assets, free of all liens,
claims and encumbrances.
(k) Reorganization Covenants. Seller represents that it
has adopted a Plan of Reorganization in compliance with the provisions of
Section 368 of the Internal Revenue Code (the "Code"). Seller represents that
it will take all corporate action necessary on its part to cause the
transactions contemplated hereby to constitute a reorganization under Section
368(a)(1)(C) of the Code and represents that it will be liquidated as required
by Section 368(a)(2)(G)(i) of the Code. Seller agrees to liquidate its assets
in accordance with such section, and further agrees that following the closing
of the transactions contemplated hereby, it will not engage in the active
conduct of a trade or business except to the extent necessary to wind up its
affairs. Seller agrees to file, as required by law, all necessary documents
with its next and final income tax returns to report the transactions
contemplated hereby as a tax free reorganization under Section 368(a)(1)(C),
unless advised by legal counsel or its certified public accountants that such
reporting is improper.
6. Purchaser's Covenants.
(a) Indemnification. Subject to the limitations set forth below,
Purchaser hereby covenants and agrees with the Seller, that Purchaser shall
indemnify, defend and hold harmless the Seller against and in respect of any
and all claims, demands, losses, liabilities, costs, expenses and obligations,
including, without limitation, interest, penalties and reasonable attorneys'
fees (collectively, "Seller Losses") suffered or incurred by the Seller which
arise, result from or relate to any breach of or failure of Purchaser to
fulfill or perform any of its representations, warranties, covenants or
agreements in this Agreement, or in any exhibit or other instrument furnished
or to be furnished under this Agreement.
(b) Employment Contracts. Effective at the Closing, Purchaser
will agree to employ each of the Shareholders pursuant to an "at will"
employment agreement (permitting termination by either party at any time
without cause) which will provide for minimum salary of $60,000 for the first
year, $66,000 for the second year, and $72,000 for the third year. Each of the
Shareholders shall also be entitled to participate in a stock option plan to be
established by CD-Soft Corporation, an affiliate of the Purchaser.
(c) Taxes. The Purchaser shall pay one half of the taxes,
including, without limitation, sales and use taxes, resulting from the
consummation of the transactions contemplated hereby.
(d) Registration Provisions.
(i) Registration. Hariston will use its best efforts to
register on Form F-3 or S-3 under the Securities Act of 1933,
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as amended (the "Securities Act"), within nine months after the
Closing, the shares of Hariston Common Stock to be issued to Seller
pursuant to Section 2.1.2 through 2.1.4 above, pursuant to such Form
F-3 or S-3. Concurrently with the filing of such Registration
Statement, Hariston shall file such applications as are necessary to
qualify the sale of the Hariston Common Stock in up to five (5) states
under applicable "blue sky" or state securities laws.
(ii) Piggyback Registration. In the event the Hariston
Common Stock is not registered under the Securities Act pursuant to
Section 6.4.1 above, Hariston shall, at such time during the two year
period following the Closing (the "Registration Period") as it
determines to file a Registration Statement under the Securities Act
(other than a Registration Statement on Form S-4, F-4 or covering
solely an employee benefit plan), promptly give notice of such
determination to Seller. Upon the written request of Seller given
within twenty (20) days after receipt of such notice from Hariston,
Hariston agrees to cause all of the Hariston Common Stock to be
included in such Registration Statement and registered under the
Securities Act, all to the extent necessary to permit the sale or
other disposition by Seller of the Hariston Common Stock to be so
registered. If the registration of which Hariston gives written
notice pursuant to Section 6.4.2 is for a public offering involving an
underwriting, Hariston agrees to so notify Seller as a part of its
written notice. In such event, the right of Seller to registration
pursuant this Section 6.4.2 shall be conditioned upon Seller's
participation in such underwriting and the inclusion of Seller's
registrable securities in the underwriting to the extent provided
herein, and to Seller's agreement to enter into an underwriting
agreement in customary form. Notwithstanding any other provision
hereof, if the managing underwriter of an underwritten distribution
advises Hariston and Seller in writing that in its good faith judgment
the number of shares of Hariston Common Stock and other securities
requested to be registered exceeds the number of shares which can be
sold in such offering, then the number of shares of the Hariston
Common Stock owned by Seller to be included in the offering shall be
reduced to that number of shares which in the good faith judgment of
the managing underwriter can be sold in such offering. All Hariston
Common Stock held by Seller which is excluded from such offering
pursuant to such provision shall be entitled to registration under
Section 6.4.2, in the event of a subsequent registration by Hariston
within the Registration Period.
7. Conditions to Closing.
(a) Conditions to Obligations of Purchaser. The obligation of
Purchaser to purchase and pay for the Assets and to assume the Assumed
Agreements shall be subject to and conditioned upon the
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satisfaction at the Closing of each of the following conditions (any of which
may be waived in the sole and absolute discretion of the Purchaser):
(i) Compliance with Agreement. The Seller and the
Shareholders shall have complied with all agreements and covenants
contained herein which are to be performed prior to the Closing Date.
(ii) Successor Liability Statutes. The Seller shall have
complied with all "bulk sale" and other successor liability statutes,
and shall have obtained all tax clearance and similar certificates
available thereunder, to the extent that the noncompliance therewith
would subject either the Purchaser or the Assets to the claims of any
creditors of the Seller or would subject any of the Assets to any
security interests, restrictions, encumbrances or liens not
specifically consented to by Purchaser, and Purchaser shall have
received satisfactory evidence of such compliance.
(iii) Consents. The Seller shall have received, and shall
be prepared to deliver to the Purchaser, at the Closing, all consents
required from any third party with respect to the transfer of the
Assets, the assumption of and assignment to the Assumed Agreements by
Purchaser, and the consummation of the transactions set forth herein.
(iv) Employee Agreements. The employees identified on
Exhibit 5.6 hereto shall have entered into employment arrangements
with the Purchaser, which shall be mutually satisfactory to the
Purchaser and such employees.
(v) Representations and Warranties. All of the
representations and warranties of the Seller and the Shareholders made
herein shall be true, accurate and correct in all material respects at
the Closing Date, and the Seller shall have delivered a certificate to
such effect, as contemplated by Section 2.4.6 above.
(vi) Absence of Material Adverse Changes. There shall
have been no material adverse change, since November 30, 1995, in the
Seller's business or in the Assets.
(vii) Additional Instruments. The Shareholders and Seller
shall have delivered to the Purchaser such agreements and instruments,
in recordable and/or fileable form, as are necessary for the purpose
of reflecting on the records of any applicable governmental agency the
transfer of those registered copyrights and trademarks which are
included in the Assets. Such agreements and instruments shall be in
form and substance reasonable satisfactory to Purchaser.
(b) Seller's Conditions of Closing. The obligation of the Seller
to sell the Assets and to assign the Assumed Agreements
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shall be subject to and conditioned upon the satisfaction at the Closing Date
of each of the following conditions (any of which may be waived in the sole and
absolute discretion of the Seller):
(i) Representations and Warranties. The representations
and warranties of the Purchaser made herein shall be true and correct
in all material respects as of the Closing Date, and the Seller shall
have received a certificate to such effect as set forth in Section
2.3.5 above.
(ii) Compliance with Agreement. The Purchaser shall have
complied with all obligations set forth herein to be performed prior
to the Closing Date.
8. Miscellaneous.
(a) Survival of Warranties. All agreements, representations and
warranties of the parties made herein (including the exhibits attached hereto)
shall survive the execution and delivery of this Agreement and the Closing,
subject to any limitation with respect thereto set forth herein.
(b) Modification. This Agreement may not be amended, waived or
modified except in writing executed by the parties hereto.
(c) Notices. Except as otherwise expressly provided herein, any
notice required or permitted to be given shall be in writing and may be
personally served or sent by United States mail and shall be deemed to have
been given when personally served three (3) business days after having been
deposited in the United States mail, registered mail, return receipt requested,
with postage prepaid and properly addressed. For the purposes hereof, the
addresses of the parties hereto (until notice of a change thereof is served as
provided in this Section 8.3) shall be as follows:
To the Seller
or Shareholders: High Text Publications, Inc.
----------------------------
____________________________
Attn: President
Purchaser: CD-Soft Press Corporation
611 Anton Blvd, Suite 1270
Costa Mesa, California 92626
Attn: President
(d) Severability. Any provision of this Agreement which is deemed
to be invalid, illegal or unenforceable in any jurisdiction shall, as to that
jurisdiction, be ineffective to the extent of such invalidity, illegality or
unenforceability, without affecting in any way the remaining provisions hereof
in such jurisdiction or rendering that or any other provision of this Agreement
invalid, illegal or unenforceable in any other jurisdiction.
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(e) Applicable Law. This Agreement and the rights and obligations
of the parties hereto shall be governed by the laws of the State of California.
(f) Assignability. This Agreement may not be assigned by either
party hereto. This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors and assigns.
(g) Counterparts. This Agreement may be executed simultaneously
in two or more counterparts, each of which shall be deemed an original but all
of which together shall constitute one and the same instrument.
(h) Headings. The various headings used in this Agreement are
inserted for convenience only and shall not affect the meaning or
interpretation of this Agreement or any provision hereof.
(i) Further Assurances. Subsequent to this date, each of the
parties hereto shall, without charge to the other, take such additional actions
and execute, deliver and file such additional instruments as may be reasonably
required to give effect to the transactions contemplated hereby.
(j) Attorneys' Fees in Event of Dispute. If any legal action or
any arbitration or other proceeding is brought for the enforcement of this
Agreement, or because of an alleged dispute, breach, default, or
misrepresentation in connection with any of the provisions of this Agreement,
the successful or prevailing party or parties shall be entitled to recover
reasonable attorneys' fees and other reasonable costs incurred in that action
or proceeding, in addition to any other relief to which she, he, it or they may
be entitled.
(k) Waivers. No waiver of any of the provisions of this Agreement
shall be deemed, or shall constitute a waiver of any other provision, whether
or not similar, nor shall any waiver constitute a continuing waiver. No waiver
shall be binding unless executed in writing by the party making the waiver.
(l) Defense of Claims. In the event that a claim, demand or
assessment is made or threatened against a party to this Agreement (for
purposes of this Section 8.13, the "Indemnitee") which the Indemnitee believes
is subject to indemnification by the other party (the "Indemnitor"), the
Indemnitee shall promptly notify the Indemnitor of such claim, demand or
assessment and shall provide the Indemnitor with a reasonable opportunity to
defend the same at the Indemnitor's own expense and with mutually acceptable
counsel; provided that the Indemnitee shall at all times also have the right to
fully participate in the defense of such claim, demand or assessment at its own
expense. If the Indemnitor shall, within a reasonable time after receipt of
notice, fail to defend the threatened claim, demand or assessment, Indemnitee
shall have the right, but not the obligation, to undertake the defense of, and
to
-21-
<PAGE> 22
compromise and settle the claim, demand or assessment; provided, however, that
Indemnitee shall not compromise or settle any such claim, demand or assessment
without the prior written consent of Indemnitor, which consent shall not be
unreasonably withheld. If the claim is one that cannot by its nature be
defended solely by Indemnitee, Indemnitor shall make available all information
and assistance that Indemnitee may reasonably request in connection with such
defense.
______________________
[remainder of page intentionally blank]
-22-
<PAGE> 23
IN WITNESS WHEREOF, the parties hereto have executed and entered into
this Agreement on the date first above written.
"Purchaser": CD-SOFT PRESS CORPORATION,
a California corporation
By: /s/ J. V. McGOODWIN
--------------------------
J. V. McGoodwin,
President and Chief
Executive Officer
"Seller": HIGH TEXT PUBLICATIONS, INC.,
a California corporation
By: /s/ CAROL LEWIS
-------------------------
"The Shareholders": /s/ CAROL LEWIS
-----------------------------
CAROL LEWIS
/s/ JACK LEWIS
-----------------------------
JACK LEWIS
/s/ HARRY HELMS
-----------------------------
HARRY HELMS
-23-
<PAGE> 24
LIST OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<S> <C>
1 Assets
1.1 Excluded Assets
1.1.2 Contract Rights
1.2.1 Current Liabilities
2.1.5 Allocation of Purchase Price
3.3.1 Location of Assets
3.3.2 Receivables
3.3.3 List of Distributors
3.3.4 Patents, Trademarks, Permits and Licenses
3.3.5 Full-time Employees, Employee Benefit Plans and Terms of Employment
3.6 Material Contracts
3.10 Consents
3.12 List of Insurance Policies
5.6 Employees to be Hired by Purchaser
</TABLE>
-24-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-01-1996
<CASH> 641
<SECURITIES> 0
<RECEIVABLES> 475
<ALLOWANCES> 40
<INVENTORY> 1,171
<CURRENT-ASSETS> 2,434
<PP&E> 277
<DEPRECIATION> 71
<TOTAL-ASSETS> 9,496
<CURRENT-LIABILITIES> 4,772
<BONDS> 345
0
0
<COMMON> 30,800
<OTHER-SE> (26,421)
<TOTAL-LIABILITY-AND-EQUITY> 9,496
<SALES> 1,753
<TOTAL-REVENUES> 1,832
<CGS> 1,185
<TOTAL-COSTS> 1,249
<OTHER-EXPENSES> 1,295
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 83
<INCOME-PRETAX> (795)
<INCOME-TAX> 0
<INCOME-CONTINUING> (795)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (795)
<EPS-PRIMARY> (0.07)
<EPS-DILUTED> (0.07)
</TABLE>
