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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
for the fiscal year ended December 31, 1996.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
for the transition period from ____________ to ____________.
Commission file no.: 0-13966
HARISTON CORPORATION
(Exact name of Registrant as specified in its charter)
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<C> <C>
CANADA 33-0645339
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
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1500 W. GEORGIA ST., SUITE 1555, VANCOUVER, BRITISH COLUMBIA CANADA V6G 2Z6
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code): (604) 685-8514
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
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COMMON STOCK
(Title of Class)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers in response to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant computed by reference to the price at which the stock was sold;
or the average bid and asked prices of such stock, was: $785,113 at April 7,
1997.
Number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 12,663,113 shares of Common Stock, as
of April 7, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference, and
the part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document
is incorporated: (1) any annual report to security holders; (2) any proxy or
information statement; and (3) any prospectus filed pursuant to Rule 424(b) or
(c) of the Securities Act of 1933: None
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
HISTORY
Hariston Corporation ("Hariston" or the "Company") is a Canadian holding
company which has historically made investments in a wide variety of start-up or
early-stage businesses.
In December 1994, the Company appointed a new Board of Directors and CEO.
Following a review of the Company's investments, management recommended that
Hariston sell all of its assets except the Company's investment in Polish Life
Improvement S.A. ("PLI"), an early-stage retailer in Poland, and invest the
proceeds in a business or businesses that might offer the potential to increase
long-term shareholder value.
In July 1995, Hariston sold the operating subsidiaries of its Metanetix
Division ("Metanetix"), a development-stage technology concern engaged in the
recovery of minerals from contaminated water at a Butte, Montana facility, to
Consolidated Western and Pacific Resources Corp. (since renamed Synergy Resource
Technologies Inc.), its partner in the development of the Butte project, for a
purchase price of up to $7 million(1) with payments dependent upon the Butte
project's future profitability. The Butte project has not yet achieved
profitability and Hariston has received no sale proceeds to date.
In August 1995, Hariston sold its ownership interests in Canadian oil and
gas properties to a private third party for $2.4 million in cash and the
assumption of $979,000 of debt. During this period, the Company also sold a
portion of the shares it held in Madison Partners Limited ("Madison"), a
Canadian public company engaged in the manufacture of consumer medical products.
Madison subsequently experienced financial difficulty, its assets were seized by
its secured creditors in January 1996, and its shares ceased trading immediately
thereafter. Hariston currently owns an 8.6% interest in Madison (renamed Madison
Holdings Limited in October 1996), and Madison's management has indicated that
Madison is negotiating to acquire another operating business. It is anticipated
that Madison's shares will recommence trading on the Canadian Dealing Network,
an over-the-counter market associated with the Toronto Stock Exchange, once it
recommences active business operations.
In June 1995, Hariston incorporated a wholly-owned California subsidiary,
CD-Soft Corporation, to pursue acquisitions in the multimedia software industry.
This subsidiary was subsequently merged into a Delaware subsidiary named Educorp
Multimedia, Inc. ("Educorp"). Educorp is an early-stage company, positioned as a
developer, publisher, and distributor of interactive multimedia software with an
emphasis on adult education titles. In February, 1997, Hariston entered into a
non-binding letter of intent to sell substantially all of the assets, and
transfer certain of the liabilities, of Educorp and its subsidiaries to Legacy
Software, Inc. ("Legacy") for proceeds of $1.8 million, such amount to be
received entirely in the form of common shares of Legacy. Legacy's shares trade
on the Nasdaq SmallCap Market tier of The Nasdaq Stock Market under the symbol
"LGCY".
In August 1995, Educorp, through a wholly-owned subsidiary, acquired
certain assets and liabilities of a CD-ROM catalog retailer and its affiliates,
Gazelle Technologies, Inc. and Affiliates, doing business under the name
"Educorp." Located in San Diego, this subsidiary has since been renamed Educorp
Direct ("Direct"), with a strategic focus on the direct marketing and
distribution of educational CD-ROM software. The businesses previously operated
under the name "Educorp" may be deemed to be a predecessor of the Company. As
described above, in February 1997 Hariston entered into a letter of intent to
sell its multimedia software operations, including the Direct operations, to
Legacy.
In January 1996, Educorp, through a wholly-owned subsidiary, completed the
purchase of certain assets and liabilities of a book and multimedia software
publisher known as HighText Publications, Inc. Also located in San Diego, and
since renamed HighText Interactive, Inc. ("HighText"), this subsidiary has
focused on the development and publishing of interactive adult education
multimedia software. As described above, in
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(1)Unless otherwise indicated, all dollar amounts herein are in U.S. Dollars.
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February 1997 HighText reached agreement to sell its book publishing operations
back to the individuals who were previously the principals of HighText
Publications, Inc., in return for Hariston being relieved of its obligation to
pay consideration in the form of Hariston common stock to the individuals
equivalent to the after-tax income of the book publishing operations over a five
year period. Also in February 1997, Hariston entered into a letter of intent to
sell its multimedia software operations, including the HighText multimedia
software assets, to Legacy. In anticipation of its assets being sold, during the
first quarter of 1997 HighText cut staffing and ceased development of multimedia
CD-ROM titles. As of March 31, 1997 HighText had one employee remaining and its
assets consisted principally of rights to and inventories of eleven completed
multimedia CD-ROM titles.
Hariston's other significant asset as of December 31, 1996 was its minority
shareholding in PLI, a home improvement store retailer co-founded by the Company
in 1993. As of December 31, 1996 Hariston retained 1,820,566 common shares in
PLI or a 25.8% ownership interest. PLI is publicly traded on the parallel market
to the Warsaw Stock Exchange and operates six home-improvement stores in Poland
under the name NOMI.
In the first quarter of 1997 Hariston sold all but 60,566 of its shares in
PLI, retaining a less than 1% interest. These sales were undertaken in order to
use the proceeds to repay current indebtedness and to provide partial funding of
the acquisition of a controlling interest in an operating business outside of
the multimedia software industry.
In February 1997 Hariston entered into a letter of intent to acquire
certain assets, and assume certain liabilities, of a manufacturer of aerospace
products. As presently contemplated, Hariston will take a controlling interest
in a company to be formed for the purpose of effecting the acquisition. Hariston
expects to commit $3 million of its current cash position to funding the
purchase, with the remainder of the purchase price to be funded by borrowings
secured by the assets to be acquired. The total purchase price is not expected
to exceed $23 million. Hariston will not issue shares as part of the purchase
consideration.
EDUCORP MULTIMEDIA, INC. ("EDUCORP")
Educorp is an early-stage developer, publisher, distributor and direct mail
marketer of interactive multimedia software with a strategic focus on adult
education titles. Educorp has two subsidiaries, HighText (primarily engaged in
software development and publishing) and Direct (primarily engaged in direct
response sales and marketing). HighText currently has eleven software titles
available for sale. Direct currently distributes more than 2.5 million print
catalogs each year to existing and potential retail customers and dealers,
offering more than 1,200 consumer CD-ROM software titles in each catalog.
BUSINESS STRATEGY. Hariston's strategy to grow Educorp has been to
develop, publish, and distribute interactive "adult education" software titles
that satisfy the demand for interactive multimedia software by the adult
consumer, higher education, and corporate management and training market
segments. This strategy was the reason for Educorp's January 1, 1996 purchase of
the HighText operations, as HighText had developed multimedia CD-ROM software
titles aimed at this target market. However, HighText did not achieve
significant sales of its multimedia CD-ROM titles in 1996. Additionally, Direct
experienced disappointing sales and low gross margins in 1996 due in part to a
general industry-wide slowdown in sales of, and decline in average realized
prices for, multimedia CD-ROM software titles. Additionally, during 1996 both
HighText and Direct continued to face an increased number of direct and indirect
competitors. Assessing the 1996 results, Hariston's management has concluded
that the economics of the multimedia software publishing and distribution
industry are such that Hariston's shareholders would be better served by
Hariston withdrawing from the multimedia software industry and investing its
limited resources in an industry or business with higher expected returns.
Accordingly, in February 1997 Hariston entered into a letter of intent to sell
substantially all of the assets of, and transfer certain of the liabilities of,
Educorp and its subsidiaries HighText and Direct, and a further letter of intent
to purchase the operations of a manufacturer of aerospace products.
INDUSTRY BACKGROUND. CD-ROM (which stands for "compact disk read only
memory") was originally developed by Philips Electronics NV in the early 1980's
for the purpose of increasing the storage capacity of electronic media. With
over 650 megabytes of storage, the CD-ROM offers publishers the ability to
combine
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audio, text, and video on the same storage format. The advantages of the CD-ROM
as a high capacity medium for storage combined with decreasing costs of new
multimedia computers and increased multimedia offerings of games and educational
programs have led to an explosion in the sales of CD-ROM drives over the past
three years. Sales of multimedia software titles on CD-ROM have similarly
increased, subject however to a general industry-wide slowdown in multimedia
CD-ROM software sales during the first six months of 1996. The median price for
consumer CD-ROM titles has significantly decreased during the past three years.
This trend of decreasing prices is due to a number of factors including: (1)
more available titles, (2) increased competition among CD-ROM publishers to
obtain limited retail shelf space, (3) the addition of mass merchant and
discount stores as new distribution channels, and (4) an attempt by publishers
and resellers to accelerate sales to potential customers through more attractive
pricing.
PRODUCTS. Through its Direct distribution subsidiary, Educorp presently
offers approximately 2,000 CD-ROM titles to its customer base. The majority of
these products are obtained from third-party developers and publishers of CD-ROM
multimedia software. These products, which include titles for both the Apple
Macintosh and IBM PC-compatible computer platforms, fit within the broad
categories of Games, Entertainment, Education, Reference, Desktop Publishing,
Kids Edutainment, and Multimedia Tools and Products. The games and kid's
edutainment/education title segments represent the largest sales categories (by
both number of titles sold and total dollar volume), followed by sales of
general education and reference titles. Retail prices for Direct's titles range
from $5.00 to $99.00 per title depending on the demand for the title,
competition within the product segment, and prices offered by alternative
distribution sources (i.e. retail stores, other catalog vendors, etc.).
Products distributed by Direct are selected based on a number of factors,
including: (1) the product's existing or potential customer appeal, (2) the
publisher's reputation for producing quality products, (3) customer and dealer
requests for the product, (4) internal and independent third-party product
reviews, and (5) the publisher's willingness to provide market development funds
to advertise the product. Direct has established working relationships with most
of the larger publishers, and reviews product submissions from new domestic and
foreign publishers on a weekly basis.
Through its HighText subsidiary, Educorp has developed and published
educational multimedia software for the adult consumer, higher education, and
corporate management and training markets. HighText currently has 11 completed
multimedia titles available for sale in its CrashCourse(TM) series, with Windows
("Win") and Apple Macintosh ("Mac") versions of the titles considered to be
separate titles. The titles are as follows: Algebra 1 (Win version),
Differential Calculus (Win and Mac versions), Integral Calculus (Win and Mac
versions), Easy Statistics (Win and Mac hybrid), Statistics 2 (Win version),
Accounting Fundamentals (Win and Mac versions), Personal Finance (Win version),
and Basic Physics (Win version). These titles provide a concise tutorial, review
and summary of the essential principles of the subject. The current suggested
retail price is $29.95 to $39.95.
Each of HighText's CrashCourse(TM) products is a true multimedia course,
including text, animated graphics, video, audio, simulations, and interactive
practice sessions and review. The interactivity feature makes it possible for a
user to simulate various real world situations. Educorp believes that this
interactivity and "intelligence" is a key competitive advantage of the HighText
products over existing self-study and review materials.
In addition to the products developed by HighText, Educorp also publishes
or exclusively distributes 41 software titles through a division of Direct
called Gazelle Studios. Internally developed titles consist mainly of photo
collections, shareware, and electronic catalogs. Programs sold on an exclusive
basis include a wide range of entertainment and reference titles.
Until recently, Educorp also published math, science, and engineering books
through a HighText division known as HighText Publications ("Publications").
This division had published 16 books, including Video Demystified, and BeBop to
the Boolean Boogie. By agreement dated February 21, 1997 and with effect from
January 31, 1997, Publications was sold back to its original owners.
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SUPPLIERS, INVENTORY. Direct currently obtains 70% of its third party
inventory from more than 200 independent CD-ROM publishers, and 30% from
wholesalers and distributors. Representative publishers include Broderbund,
Interplay, Maxis, Microsoft Home, Sierra-On-Line, Softkey, and Voyager. No
single supplier accounts for more than 15% of Direct's purchases. With the
ability in most instances to purchase directly from the publisher, Direct is
able to obtain competitive pricing.
Direct also obtains inventory from its related entities, HighText and
Gazelle Studios. Approximately 8% of Direct's total 1996 revenues were derived
from the sale of software internally developed and/or published by HighText and
Gazelle Studios.
Direct has established credit facilities with large distributors such as
Ingram Micro and Merisel Corporation. These credit facilities enable Direct to
purchase product with 30 to 60 day terms. Direct has also negotiated agreements
with many of its suppliers which contain price protection provisions intended to
reduce Direct's risk of loss resulting from publisher price reductions. In
addition, Direct has the right to exchange a varying percentage of its purchases
from certain publishers, as part of a "stock rotation" program, subject to
certain limitations.
Direct has agreements with most of its key suppliers for them to provide
market development funds. These funds are used to finance portions of the cost
of catalog production and distribution based upon the suppliers' use of display
space in a catalog. Termination or interruption of Direct's relationship's with
these key suppliers, or modification of or discontinuance of their agreements
with Direct, could adversely affect the Company's operating results.
Direct attempts to manage its inventory position to generate a high number
of inventory turns yet maintaining high product availability and same-day order
rates. Direct's average inventory turns were 4.5 times in 1996. Inventory levels
may vary from period to period due in part to increases or decreases in sales
levels, or the opportunity to add new product, or make large purchases of
existing product at attractive prices.
PRODUCTION. Direct creates its own direct mail pieces, including print
catalogs, with an in-house development team using a computer based desktop
publishing system. The in-house preparation of catalogs accelerates the
production process and provides greater flexibility and creativity for catalog
design. Creation of Educorp's electronic catalog pages and media advertisements
are also completed in-house.
Following the development of a HighText or Gazelle Studios software title
(or one obtained through an exclusive publishing agreement), a package design is
created. Educorp then prepares master disks, and camera-ready user manuals and
collateral materials. CD-ROM duplication, printing and packaging, and the
manufacture of related materials, are performed by outside vendors.
Through January 31, 1997 books published by Publications were printed,
warehoused, and distributed by outside vendors. HighText maintained a small
inventory of published books to satisfy small direct orders. See above comments
regarding the January 31, 1997 sale of the book publishing operations.
PRODUCT DEVELOPMENT. HighText has utilized a model similar to book
publishing to develop its multimedia software programs. Following the selection
of a subject for development into a future title, a product development
specialist retains an expert in the field to prepare an outline of the material
to be presented, with suggested multimedia enhancements. Using a proprietary
software program, this outline is then converted into a basic multimedia
program, awaiting final development.
The proprietary software program employs software templates and reusable
objects to simplify and speed the programming process. This approach allows task
segmenting in which in-house or independent specialists may perform certain
tasks without having to understand other portions of the process. A programmer
then assembles these elements to produce the finished title.
Independently-developed software is sourced by publishing specialists for
distribution by Direct. This product includes titles subject to exclusive
distribution by Direct, and titles published by Direct's Gazelle Studios
division. In exchange for the right to publish and/or exclusively distribute
independently-developed products, Direct pays the developer a percentage royalty
of the product's net sales. When acting as a software publisher, Direct is
usually responsible for the packaging design, product manufacturing,
fulfillment, and
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advertising. Direct typically enters into three year publishing agreements with
independent developers, with provisions for renewal upon mutual consent.
Direct's existing publishing agreements are scheduled to expire at various
dates through the year 2000. The failure to obtain the renewal of any single
publishing agreement will not have a material impact on Direct's future
performance, particularly since most titles will be obsolete without significant
programming enhancements by the time of the conclusion of the publishing
agreements.
SALES AND MARKETING. During 1996, Direct shipped approximately 55,000
orders, with an average order size of $106. Sales are recognized upon shipment
of the order.
The majority of Direct's sales are to end-user domestic customers (as
opposed to sales to dealers and international sales), including individuals,
home offices, small businesses, large corporations and educational institutions.
In 1996, 70% of the company's sales were derived from domestic orders, of which
92% were sales to end-users. In 1996, dealer sales represented approximately 22%
of Direct's total sales. No individual dealer represented a material percentage
of total dealer sales.
Historically, a large percentage of Direct's customers have been users of
Apple Macintosh hardware. During 1996, 65% of Direct's sales were sales to
Macintosh hardware users.
Direct markets its software through the distribution of print catalogs to
existing and potential buyers of CD-ROM multimedia software. In 1996, Direct
mailed 5 catalog editions for a total mailing volume of 2.9 million direct mail
pieces. Direct obtains new customers by renting mailing lists of computer
owners, advertising in computer magazines, exhibiting at trade shows,
advertising on the Internet, soliciting bids for institutional purchases, and
cooperative marketing with other publishers.
During 1997, Direct expects to expand its current marketing efforts to
target users of IBM PC-compatible hardware and focus on potential buyers of
multimedia software for the adult consumer, higher education and corporate
market segments. Direct plans to be more selective in choosing the timing and
the mailing list for mailings of its catalogs. Additionally, Direct has
introduced specialty Explore catalogs focusing only on educational CD-ROM's for
the home and schools. Direct intends to mail more than 2 million catalogs in
1997, to more than 500,000 potential customers.
HighText markets its products through wholesale distributors to college and
specialty bookstores, libraries, and through catalog resellers to retail
end-users. Representative distributors include Independent Publishers Group and
Quality Books. Sales of HighText software of $89,152 in 1996 were minimal due to
the limited number of completed titles available for sale and the limited number
of wholesale distributors handling HighText's products. Sales are expected to
increase during 1997 due to a larger number of completed titles being available
and additional distribution channels.
DISTRIBUTION. Direct operates a full-service distribution center in San
Diego, CA. The distribution center is approximately 12,000 square feet and
includes warehousing, fulfillment, telemarketing, customer service, creative
design, MIS, accounting and administration functions. The centralized
distribution operations allow most orders accepted by 2:30 p.m. Pacific time to
be shipped the same day to the customer via the carrier of their choice. Direct
maintains the HighText and Gazelle Studios software inventories.
Direct warrants products against defects and incompatibility with a
customer's computer system. During 1996, Direct accepted returns equal to 3% of
total sales. Direct has no material backlog, since it generally fills orders
from inventory within 24 hours of the receipt of an order. Direct has an
established domestic and international dealer network, comprised of
approximately 200 resellers in 24 countries in Europe, North America and Asia.
COMPETITION. The market for multimedia CD-ROM products is intensely
competitive, characterized by rapid technological change and a growing diversity
of products. The Company believes that the principal competitive factors in the
multimedia CD-ROM industry include quality and originality of products, price,
brand name recognition, marketing capabilities, access to distribution channels,
product ease of use, and quality of support services.
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Educorp competes primarily against other companies that publish or
distribute multimedia CD-ROM software in the education, entertainment, and
reference categories. Most of Educorp's competitors are substantially larger
than the Company, better capitalized, and offer a wide assortment of software as
well as hardware products.
As a distributor of third party titles, Educorp competes with other direct
marketing companies such as Micro Warehouse, Tiger Direct, Multiple Zones, and
Creative Computers. On the retail level, Educorp competes with large computer
retailers such as Comp USA, Computer City, Best Buy, and Micro Center; software
vendors such as Egghead; and mass merchants such as Toys R Us, Walmart,
Price/Costco and Sears. However, in the catalog distribution of multimedia
software for PCs and Macs, Educorp through its Direct subsidiary has developed a
loyal following of customers who appreciate the diversity of products that the
company offers and its competitive prices. This is especially true as regards
Direct's customers for Macintosh software.
As a software developer and publisher, Educorp competes indirectly against
developers and publishers that sell multimedia titles outside of the company's
subject focus, and directly against software developers and publishers that
offer multimedia product for the adult consumer, higher education, and corporate
management and training markets. Examples of established competitors include
Softkey, Cliff Studyware, Princeton Review, and Export Software. Educorp's
competitive strategy in this market has been to develop high quality interactive
education programs for the adult consumer, higher education, and corporate
markets. Educorp has developed eleven such titles to date through its HighText
subsidiary. However, HighText has not yet realized significant revenues for the
CD-ROM titles that it has developed.
Educorp's future success depends in large part on its ability to identify
and obtain for resale, or develop and publish, multimedia products that will
meet the changing requirements of the marketplace. There can be no assurance
that Educorp will be able to identify or develop products to remain competitive,
or to avoid losses related to obsolete inventory.
INTELLECTUAL PROPERTY. Educorp holds copyrights on the products, manuals,
advertising and other materials used by Direct and HighText, and maintains
trademark rights on the names of products published by HighText. Educorp does
not hold any patents. The Company regards the software developed by HighText as
proprietary and relies primarily on a combination of trademark, copyright and
trade secret laws, employee and third party nondisclosure agreements, and other
methods to protect its proprietary rights. Educorp does not include in its
products any mechanism to prevent or inhibit unauthorized copying. Unauthorized
copying is common within the software industry, and if a significant amount of
unauthorized copying of Educorp's products were to occur, Educorp's business,
operating results and financial condition could be adversely affected.
Although Educorp is not currently the subject of any intellectual property
litigation, there has been substantial litigation regarding copyright, trademark
and other intellectual property rights involving computer software companies.
Identifying unauthorized use of Educorp's products is difficult, and while
Educorp is unable to determine the extent to which piracy of its software
products exist, software piracy can be expected to be a persistent problem. In
selling its products, Educorp relies primarily on "shrink wrap" licenses that
are not signed by the licensee and therefore may be unenforceable under the laws
of certain jurisdictions.
SEASONALITY. As a retail vendor, Educorp experiences seasonality in its
sales. The primary sales season for Educorp exists in the months from August to
January of each year, during which Direct experiences a surge in demand for the
"back to school" and Christmas seasons. With the introduction of HighText's
CrashCourse(TM) products to the higher education market, Educorp is hopeful that
an increasing percentage of total sales will correspond to the college academic
year.
EMPLOYEES. As of December 31, 1996 the Company employed at its Educorp,
Direct and HighText subsidiaries an aggregate of 44 people on a full time basis,
including 13 in new product development, 18 in sales and marketing, 6 in
operations and fulfillment and 7 in finance and administration. Competition for
highly skilled employees with technical, management, marketing, sales, product
development and other specialized training is intense, and there can be no
assurance that the Company will be successful in attracting
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and retaining such personnel. The employees and the Company are not parties to
any collective bargaining agreements.
Subsequent to year end, the Company took steps to reduce payroll costs by
reducing the workforce. Currently, Educorp, Direct and HighText employ in total
23 employees, down from 44 at year-end.
POLISH LIFE IMPROVEMENT S.A. ("PLI")
PLI was formed in February 1993 for the purpose of engaging in various
retail businesses in Poland. Hariston provided the initial expansion capital to
open new stores in exchange for an 80% ownership position in PLI. In December
1994 PLI completed its initial public offering, raising $2,900,000 in new
capital. In February 1996 PLI's shares of common stock were approved by the
Polish Securities Commission for trading on the parallel market to the Warsaw
Stock Exchange.
Following share issuances by PLI, sales by Hariston of its PLI stock, and
Hariston's receipt of PLI shares on the settlement of a note in default, as of
December 31, 1996 Hariston owned 1,820,566 PLI common shares or approximately
26% of the issued and outstanding stock of PLI. Due to further PLI share sales
by Hariston during the first quarter of 1997, the Company presently owns 60,566
PLI common shares or less than 1% of the outstanding capital stock of PLI.
Management is of the opinion that due to the Company's minority ownership
position in PLI over the period January 1, 1995 to December 31, 1996 the Company
has not been able to exercise significant influence over the operating,
investing and financial policies of PLI, and therefore Hariston's investment in
PLI shares has been accounted for using the cost method.
PLI began operations with a supermarket, grocery store/delicatessen, and
consumer electronics store in Kielce, Poland. Shortly after the company's
formation, PLI converted the electronics store into a small do-it-yourself store
and focused future expansion efforts on retail supermarkets and home improvement
stores. As of December 31, 1996, PLI operated six NOMI home-improvement stores,
ranging in size from 80 to 1400 square meters. The NOMI stores carry building
materials, plumbing and electrical supplies, hardware, paint, gardening
supplies, and home decorating items. As of December 31, 1996 the supermarket
stores were no longer held by PLI. In December 1995, PLI sold a 51% interest in
its supermarket subsidiary to a joint venture controlled by Royal Ahold NV, one
of the world's largest food retailers, for $10.5 million. In July, 1996, PLI
sold the remaining 49% interest to the Royal Ahold joint venture for $9.4
million.
ITEM 2. PROPERTIES.
PRESENT OPERATIONS
The Company's registered head office is located in Vancouver, British
Columbia. The Company's principal executive offices are located in Vancouver,
British Columbia in facilities occupied pursuant to a lease expiring in November
1998. During 1996, the Company, through its subsidiaries, also leased a facility
in San Diego, California, of approximately 12,000 square feet, housing its
direct marketing and distribution operations, and a separate facility, also in
San Diego, of approximately 3,400 square feet housing certain of its software
development and publishing operations. Both facilities were occupied pursuant to
short-term leases. Subsequent to year-end, the Company took steps to reduce
overhead costs by terminating the lease of the smaller (3,400 square feet)
facility effective March 31, 1997. The Company continues to lease the larger
(12,000 square feet) facility. Should the proposed sale of the multimedia
operations to Legacy be completed as presently contemplated (as discussed in
Item 1 herein), Legacy will assume any remaining obligation as regards the lease
of the larger facility.
ITEM 3. LEGAL PROCEEDINGS.
CAPOZZI, ET AL. V. HARISTON CORPORATION, ET AL.
In this action, originally filed in the United States Federal District
Court, District of Connecticut, the plaintiffs originally claimed that the
Company deprived them of options to acquire stock to which they were
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allegedly entitled, that they did not receive their rightful share of proceeds
of a settlement between the Company and Telecom USA, and that the Company and
Mr. Irving Kott, another defendant in this matter, failed to provide them with
correct information concerning the Company, causing them to lose money in
purchasing and selling the Company's stock on the open market. The damages
claimed in this matter were an aggregate of approximately $800,000, together
with treble damages as to certain of the alleged claims. The Company's motion to
dismiss this action on the grounds of improper venue was granted on March 29,
1995, subject to the plaintiffs' rights to appeal this ruling or recommence this
action in another forum.
The plaintiffs recommenced this action on September 22, 1995 in the
Superior Court of the Province of Quebec, District of Montreal (Case No. CSM:
500-05-010184-958) against the Company and Mr. Irving Kott, alleging that Mr.
Irving Kott failed to provide them with correct information concerning the
Company, thereby causing them to lose money in the purchase and sale of the
Company's stock on the open market. Plaintiffs seek damages of approximately
$83,000 (CDN $111,857). As refiled, the plaintiffs allege that Mr. Kott
controlled the Company and that he made misrepresentations concerning the
Company on behalf of himself and the Company which caused the plaintiffs to
suffer a loss in 1990 in connection with the plaintiffs' transactions in the
stock of the Company. The Company intends to vigorously defend this matter.
The plaintiffs also filed an action on February 24, 1997 in the Supreme
Court of the Province of British Columbia, Vancouver Registry (Case No. C971045)
against the Company and Mr. Irving Kott, alleging that the Company deprived them
of options to acquire stock to which they were legally entitled. Plaintiffs seek
damages of $560,000. As refiled, the plaintiffs allege that Mr. Kott controlled
the Company and that he made misrepresentations on behalf of the Company
concerning the exercisability of stock options granted by the Company, which
caused the plaintiffs to suffer a loss in 1993 when the Company did not allow
the plaintiffs to exercise the stock options on the grounds that the plaintiffs
had left the employ of the Company. The Company intends to vigorously defend
this matter.
MEADLOCK, ET AL. V. HARISTON CORPORATION, ET AL.
In this action, filed in January 1997 in the Circuit Court of Brevard
County, Florida, State of Florida, the plaintiffs claim that in 1993 the Company
committed fraud, negligent misrepresentations, civil theft and other wrongful
acts pursuant to the law of the State of Florida in that the Company deprived
them of their shares in Bullion International, Inc. by willful
misrepresentations made by Mr. Irving Kott et al. on behalf of themselves and
the Company. The defendants include the Company and Messrs. Irving Kott and
Michael Kott. The damages claimed in this lawsuit are in an unspecified amount.
However, legal counsel for the plaintiffs has separately proposed by letter to
Hariston settlement of the lawsuit if Hariston pays $3,000,000 to the
plaintiffs, being threefold the damages purported in the letter to have been
sustained by the plaintiffs. The Company believes that it has been indemnified
by co-defendant Michael Kott or an entity controlled by him against any
liability in this matter. The Company intends to deny the material allegations
of the lawsuit and to vigorously defend this matter.
FORMER MONTANA OPERATIONS
Until mid-1995, the Company's former subsidiary Metanetix Corporation
("Metanetix") was engaged in the business of developing technology for the
removal of minerals and other inorganic compounds from water, soil and sludge.
In connection with these development efforts, Metanetix and affiliated
corporations operated a laboratory and plant in Butte, Montana, at the site of a
former copper mine which held large volumes of contaminated water. The Metanetix
operations involved, among other things, treating contaminated water extracted
from the mine, and returning the treated water to the mine shaft. This mine and
surrounding areas are part of a Superfund Area designated by the Environmental
Protection Agency ("EPA") under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 ("CERCLA"). Under CERCLA, EPA designates
"potentially responsible parties," including current and former owners of
property or property rights in the Superfund Area, and operators in connection
therewith, as parties who may be jointly and severally liable for clean-up costs
attributable to hazardous materials on and from their properties.
9
<PAGE> 10
In April 1994 and May 1995, the Company received letters from the EPA
indicating that the EPA believes Metanetix to be a "potentially responsible
party." As of June 1995, the EPA was undertaking "remedial investigations" and
"feasibility studies" to define the nature of the contamination and to evaluate
alternatives to the remedial actions to remove or contain hazardous substances
in areas including the properties at which the former Metanetix operations were
conducted. No further correspondence has been received from the EPA.
Because of the Company's status as former parent corporation to Metanetix,
and as a result of Metanetix' amalgamation with the Company in January 1995, the
Company may be a "potentially responsible party" with respect to clean-up costs
and other statutory liabilities (including fines) relating to the Butte
operations. In June 1995 the Company sold all of its stock in Metanetix'
operating subsidiaries to Consolidated Western and Pacific Resources Corp.
(since renamed Synergy Resource Technologies Inc.), its joint venture partner in
the development of, and the legal owner of the property underlying, the Butte
plant.
The designation of a party as a "potentially responsible party" under
CERCLA does not necessarily mean that the party is liable under CERCLA, or that
the EPA has decided to assert a CERCLA claim against that party. Neither the EPA
nor any other governmental agency has made any formal claim that the Company is
liable under CERCLA or any other similar statute with respect to the Butte
operations. No assurance can be given, however, that such a claim will not be
made in the future. If such a claim is made and is successful, the costs,
damages and fines that may be imposed on the Company as a result could be
material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's security holders
during the quarter ended December 31, 1996.
10
<PAGE> 11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Until and including March 7, 1997 the Company's Common Stock traded on the
SmallCap Market tier of The Nasdaq Stock Market in the United States. Effective
March 10, 1997 the Company's Common Stock began trading on the "Pink Sheets"
inter-dealer market in the United States. Effective April 10, 1997 the Company's
Common Stock began trading on the OTC Bulletin Board in the United States, an
over-the-counter market regulated by the NASD. The Company's trading symbol
remains "HRSNF".
At March 31, 1997 there were approximately 3,970 shareholders of record,
some of which are street name holders and depository trusts representing an
unknown number of beneficial holders of Common Stock. The Company has not
historically paid cash dividends on its Common Stock and intends to retain
earnings for the foreseeable future for use in its business.
The following table sets forth the price range of the high and low sale
price per share of Common Stock for each of the quarterly periods shown below:
<TABLE>
<CAPTION>
HIGH LOW $
(U.S.) (U.S.)
------ ------
<S> <C> <C>
1995:
First Quarter..................................... 4 1/4 2 5/8
Second Quarter.................................... 2 15/16 2 1/8
Third Quarter..................................... 4 1/6 2 1/4
Fourth Quarter.................................... 4 11/16 2 5/8
1996:
First Quarter..................................... 3 7/8 2 1/8
Second Quarter.................................... 2 1
Third Quarter..................................... 1 3/4 1
Fourth Quarter.................................... 1 7/16 1/4
</TABLE>
There are no governmental laws, decrees or regulations in Canada relating
to restrictions on the import of capital or affecting the remittance of
interest, dividends or other payments to non-resident holders of the Company's
shares, except for withholding tax provisions discussed below. There are no
limitations on the right of non-resident or foreign owners to hold or vote the
shares of the Company, except as provided in the Investment Canada Act (the
"Act"). The Act provides for the review and approval by the Canadian government
of direct or indirect acquisitions of control of Canadian businesses where the
investment exceeds specified thresholds, and for the divestment of investments
which have not been approved. The Company is not aware of any such control
positions held by United States investors.
Generally, dividends paid by Canadian corporations to non-resident
shareholders are subject to a withholding tax of 25% of the gross amount of such
dividends. However, Article X of the reciprocal tax treaty between Canada and
the United States reduces to 15% the withholding tax on the gross amount of
dividends paid to residents of the United States. A further reduction in the
withholding tax rate is applicable when a U.S. corporation owns a least 10% of
the voting stock of the Canadian corporation paying the dividends. The Company
is not aware of any corporation which owns 10% or more of the Company's voting
stock.
A nonresident who holds shares of the Company as capital property will not
be subject to tax in Canada on capital gains realized on the disposition of such
shares unless such shares are "taxable Canadian property" within the meaning of
the Income Tax Act (Canada) and no relief is afforded under any applicable tax
treaty. The shares of the Company would be taxable Canadian property of a
nonresident if at any time during the five year period immediately preceding a
disposition by the nonresident of such shares not less than 25% of the issued
shares of any class of the Company belonged to the nonresident and/or to a
person with whom the nonresident did not deal at arm's length.
11
<PAGE> 12
Shares of stock in the Company held by a citizen or resident of the United
States would normally be subject to tax on capital gains upon disposition under
the laws of the United States.
ITEM 6. SELECTED FINANCIAL DATA.
Set forth below is selected financial data for the Company for the fiscal
years ended December 31, 1992 to December 31, 1996. Following such data is
selected financial data for the Company's predecessor, Gazelle Technologies,
Inc. and Affiliates, for the fiscal years ended February 28, 1993 to February
28, 1995 (being the last full fiscal years prior to the Company's acquisition of
such predecessor in August 1995).
12
<PAGE> 13
SELECTED FINANCIAL DATA FOR
HARISTON CORPORATION AND SUBSIDIARIES
(in thousands except per share data)(1)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------------- -----------------------
ADJUSTED TO ADJUSTED TO
CANADIAN CONFORM TO CANADIAN CONFORM TO
GAAP U.S. GAAP GAAP U.S. GAAP
-------- ----------- -------- -----------
<S> <C> <C> <C> <C>
OPERATING REVENUE:
Software Sales.................................. $ 5,817 $ 5,817 $ 2,676 $ 2,676
Book Sales...................................... 412 412 0 0
Software Royalties.............................. 80 80 122 122
Rent and Other.................................. 25 25 28 28
------- ------- ------- -------
Total Revenue (2)............................... 6,334 6,334 2,826 2,826
Loss Before Discontinued Operations............. (4,965) (5,046) (1,803) (1,879)
DISCONTINUED OPERATIONS INCOME (LOSS):
Gain (loss) on Disposal of Factoring
Operation..................................... 0 0 (5) (5)
Loss on Disposal of Mineral Recovery Project.... 0 0 (321) (321)
Income from Oil and Gas Working Interests....... 0 0 166 166
Gain on Disposal of Oil and Gas Interests....... 0 0 1,140 1,140
------- ------- ------- -------
Total......................................... 0 0 980 980
NET LOSS........................................ (4,965) (5,046) (823) (899)
NET LOSS PER SHARE:
Continuing Operations........................... (0.42) (0.43) (0.17) (0.18)
Discontinued Operations......................... 0 0 0 .09 0.09
------- ------- ------- -------
Total Loss Per Share.......................... (0.42) (0.43) (0.08) (0.09)
Total Assets(3)................................. 7,910 7,910 10,188 10,188
Long-Term Debt(3)............................... 201 201 3,500 3,500
Cash Dividends Per Common Share................. $ 0 $ 0 $ 0 $ 0
======= ======= ======= =======
</TABLE>
- ---------------
(1) All amounts in U.S. dollars.
(2) Excluded are revenues from discontinued oil and gas operations ($0 in 1996,
$562,000 in 1995).
(3) As of December 31 of the year indicated.
13
<PAGE> 14
SELECTED FINANCIAL DATA FOR
HARISTON CORPORATION AND SUBSIDIARIES
(in thousands except per share data)(1)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1994 DECEMBER 31, 1993
---------------------------------- ----------------------------------
ADJUSTED TO ADJUSTED TO
CANADIAN CONFORM TO CANADIAN CONFORM TO
GAAP U.S. GAAP GAAP U.S. GAAP
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
OPERATING REVENUE:
Rent and Other................................ 22 22 62 62
--------------- --------------- --------------- ---------------
Total Revenue (2)............................. 22 22 62 62
Loss Before Discontinued Operations........... (1,736) (1,511) (1,374) (1,995)
DISCONTINUED OPERATIONS INCOME (LOSS):
Polish retail................................. (1,289) (1,289) (399) (399)
Factoring Operation........................... 65 65 (115) (115)
Gain on Disposal of Factoring Operation....... 63 63 0 0
Loss on Disposal of Mineral Recovery
Project..................................... (12,478) (9,185) 0 (3,382)
Income from Oil and Gas Working Interests..... 678 678 565 565
--------------- --------------- --------------- ---------------
Total....................................... (12,961) (9,668) 51 (3,331)
NET LOSS...................................... (14,697) (11,179) (1,323) (5,326)
NET LOSS PER SHARE:
Continuing Operations......................... (0.16) (0.14) (0.19) (0.27)
Discontinued Operations....................... (1.19) (0.89) 0.01 (0.45)
--------------- --------------- --------------- ---------------
Total....................................... (1.35) (1.03) (0.18) (0.72)
Total Assets (3).............................. 7,829 7,646 24,639 21,491
Long-Term Debt (3)............................ 1,238 1,238 1,238 1,238
Cash Dividends Per Common Share............... $ 0 $ 0 $ 0 $ 0
=============== =============== =============== ===============
</TABLE>
- ---------------
(1) All amounts in U.S. dollars.
(2) Excluded are revenues from discontinued Polish retail operations ($5,179,000
in 1994, $5,689,000 in 1993), revenues from discontinued factoring
operations ($576,000 in 1994, $637,000 in 1993) and revenues from
discontinued oil and gas operations ($1,586,000 in 1994, $1,575,000 in
1993).
(3) As of December 31 of the year indicated.
14
<PAGE> 15
SELECTED FINANCIAL DATA FOR
HARISTON CORPORATION AND SUBSIDIARIES
(in thousands except per share data)(1)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1992
-----------------------
ADJUSTED TO
CANADIAN CONFORM TO
GAAP U.S. GAAP
-------- -----------
<S> <C> <C>
OPERATING REVENUE:
Rent and Other.............................................. $ 22 $ 22
------- -------
Total Revenue (2)........................................... 22 22
Loss Before Discontinued Operations......................... (2,356) (2,369)
DISCONTINUED OPERATIONS INCOME (LOSS):
Factoring Operation......................................... 50 52
Income from Oil and Gas Working Interests................... 486 510
------- -------
Total..................................................... 535 562
NET LOSS.................................................... (1,821) (1,913)
NET LOSS PER SHARE:
Continuing Operations....................................... (0.70) (0.71)
Discontinued Operations..................................... 0.16 0.14
------- -------
Total..................................................... (0.54) (0.57)
Total Assets (3)............................................ 10,430 10,931
Long-Term Debt (3).......................................... 3,154 3,338
Cash Dividends Per Common Share............................. $ 0 $ 0
======= =======
</TABLE>
- ---------------
(1) All amounts in U.S. dollars.
(2) Excluded are revenues from discontinued factoring operations of $50,000
(Canadian GAAP) and $52,000 (U.S. GAAP) and revenues from oil and gas
operation of $524,000 (Canadian GAAP) and $551,000 (U.S. GAAP).
(3) As of December 31 of the year indicated.
15
<PAGE> 16
SELECTED FINANCIAL DATA FOR PREDECESSOR
(in thousands)
<TABLE>
<CAPTION>
TEN MONTHS
ENDED YEAR ENDED YEAR ENDED YEAR ENDED
12/31/95(2) 2/28/95 2/28/94 2/28/93
----------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Net revenues............................... $ 6,798 $ 9,751 $ 11,573 $ 8,761
Net income (loss)(3)....................... $ (695) $ 539 $ (13) $ 16
Total assets............................... $ 7,173 $ 2,810 $ 2,137 $ 900
Long term debt............................. $ 0 $ 0 $ 0 $ 0
Cash dividends(3).......................... $ 0 $ 0 $ 20 $ 10
</TABLE>
- ---------------
(1) The foregoing selected financial data presents certain information
concerning the Company's corporate predecessor, Gazelle Technologies, Inc.
and Affiliates.
(2) The predecessor was acquired August 25, 1995. The ten month amounts include
data for operations both prior to and after the date of the acquisition. The
results from the date of acquisition (August 25, 1995) through December 31,
1995 are also included in the Company's consolidated results for the year
ended December 31, 1995
(3) Net income (loss) per share and cash dividend per share information is not
provided because the predecessor consisted of a group of affiliated
companies with different numbers of shares outstanding.
16
<PAGE> 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following information should be read in conjunction with the
consolidated financial statements and the notes thereto included, or
incorporated by reference, in Item 8.
OVERVIEW
During 1996, Hariston completed one full calendar year as primarily a
multimedia CD-ROM publisher and distributor. Previously, the Company had
participated in such diverse businesses and investments as environmental
remediation technology, oil and gas working and royalty interests, receivables
factoring, and retailing of sports memorabilia and commemorative coins.
As a result of Hariston's divestiture of its Canadian oil and gas interests
and its subsequent acquisition of a U.S. based multimedia software business, the
U.S. dollar became the Company's functional currency on August 25, 1995.
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 name "Educorp". These affiliated businesses now operate under the name
Educorp Direct ("Direct"), as part of the Company's wholly-owned subsidiary
Educorp Multimedia, Inc. ("Educorp"). Effective January 1, 1996, the Company
acquired substantially all of the assets and selected liabilities of HighText
Publications, Inc. This business now operates as a subsidiary of Educorp under
the name HighText Interactive ("HighText").
Founded in 1984, Direct is a San Diego, California based publisher and
direct mail distributor of multimedia consumer software offered on CD-ROMs.
Through its catalogs, Direct offers what is believed to be one of the largest
selections of consumer CD-ROM software titles in the industry. Last year, Direct
mailed 2.9 million catalogs and newsletters to its customer base. Direct is also
involved in the development and publishing of software titles as well as
wholesale and international distribution.
Founded in 1990, HighText is a San Diego, California based developer and
publisher of books and educational CD-ROM titles. HighText has eleven completed
educational CD-ROM titles currently available for sale.
Effective July 19, 1996 Hariston appointed a new Chairman and Chief
Executive Officer, Nuno Brandolini, and a new President, Kevin McCarthy. The new
management team completed a review of the Company's operations and concluded
that a change in strategic direction would be in the best interests of
shareholders. Given the disappointing results of the Company's multimedia
software operations, management has considered various alternatives in order to
maximize long-term shareholder value. After careful consideration, management
and Hariston's Board have determined that the multimedia operations should be
sold.
As announced in a release dated March 3, 1997, the Company has entered into
a non-binding letter of intent with Legacy Software, Inc. ("Legacy"), to sell
certain of the assets, and transfer certain of the liabilities, of Educorp and
its subsidiaries, Direct and HighText, for proceeds of $1.8 million, such amount
to be received entirely in the form of common shares of Legacy. Legacy's shares
trade on the Nasdaq SmallCap Market tier of The Nasdaq Stock Market under the
symbol "LGCY". The number of Legacy shares Hariston will receive under the terms
proposed in the letter of intent will be based on the average closing price of
Legacy stock for the thirty calendar days following the closing of the
transaction, but will not be less than 425,000 Legacy shares.
Also as announced in the March 3, 1997 release, Hariston has entered into a
non-binding letter of intent to acquire certain assets, and assume certain
liabilities, of a manufacturer of aerospace products which has reported
preliminary 1996 revenues in excess of $58 million. As presently contemplated,
Hariston will take a controlling interest in a company to be formed for the
purpose of effecting the acquisition. The purchase price is under negotiation
and is not expected to exceed $23 million. Hariston expects to commit $3 million
of its current cash position to funding the purchase, with the remainder of the
purchase price to be funded by
17
<PAGE> 18
borrowings secured by the assets to be acquired. Hariston will not issue shares
as part of the purchase consideration.
During 1996, the Company significantly reduced its ownership position in
Polish Life Improvement S.A. ("PLI"). See "-- Investments: Polish Life
Improvement S.A."
CHANGES IN CORPORATE STRUCTURE
During June 1995, Hariston incorporated a wholly-owned California
subsidiary, CD-Soft Corporation, to pursue a strategy of focusing on the
multimedia software publishing and distribution business. During July 1995,
CD-Soft Corporation incorporated a wholly-owned California subsidiary, CD-Soft
Source Corporation, for the purpose of acquiring substantially all of the assets
of a group of businesses operating under the 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., 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 multimedia CD-ROM development, publishing and distribution
operations.
In October 1995, Hariston formed a wholly-owned Delaware subsidiary,
EuroEastern Investment Corp. ("EuroEastern"), for the purpose of pursuing
investment opportunities in central and eastern Europe. This company has been
largely inactive to date.
CHANGES IN MANAGEMENT AND BOARD OF DIRECTORS
Effective July 19, 1996 James V. McGoodwin resigned as Hariston's President
and Chief Executive Officer. He also resigned from the Company's Board, and from
his positions with Hariston's affiliated and subsidiary companies. Mr. McGoodwin
had served as a Director and Officer of the Company since December 1994 and left
to pursue other interests. Concurrent with Mr. McGoodwin's departure, Nuno
Brandolini, a Hariston Director and President of Hariston's wholly-owned
subsidiary EuroEastern Investment Corporation, was appointed as Hariston's Chief
Executive Officer and was elected Chairman of the Board, and Kevin R. McCarthy
was appointed as Hariston's President and was elected to the Board.
RESULTS OF OPERATIONS
COMPARISON OF TWELVE MONTH PERIOD ENDED DECEMBER 31, 1996 TO TWELVE MONTH PERIOD
ENDED
DECEMBER 31, 1995
The Company incurred a consolidated net loss of $4,965,994 for the fiscal
year ended December 31, 1996. Excluding a $1.8 million writedown of the value of
goodwill in Direct and a $2,353,545 net gain on the sale of PLI shares, the
Company incurred a net loss of $5,519,539. Of this consolidated net loss total,
$3,718,570 was attributable to Educorp and its subsidiaries, $1,660,684 to
Hariston, and $140,285 to EuroEastern. Of the $3,718,570 loss attributable to
the Company's multimedia software operations, $2,120,876 arose from the Direct
operations, $977,986 from the HighText operations, and the remainder $619,708
was due to operating and corporate expenses incurred at the Educorp level. Of
the $1,660,684 loss incurred at the Hariston legal entity level (before
consideration of the gain on sale of PLI shares), $302,880 was attributable to
interest expense on debt, and the remainder related primarily to corporate
administration and overhead costs.
An analysis of the 1996 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 Affiliates, which had been doing business under the name "Educorp".
18
<PAGE> 19
EDUCORP DIRECT
On August 25, 1995, Hariston, through a wholly-owned subsidiary, acquired
substantially all of the assets and assumed certain liabilities of a group of
businesses now operated under the name Educorp Direct for a purchase price of
$6,067,071. This transaction was accounted for as a purchase.
Direct generated revenues of $5,807,172 for the twelve months ended
December 31, 1996, comprised of $4,454,379 from retail sales to end-users,
$1,272,517 from sales to dealers, and $80,276 from software royalties and
license fees. Excluding the effect of a $1.8 million writedown of goodwill,
Direct realized gross profit of $1,113,706 for the twelve months ended December
31, 1996, incurred a loss for the period of $1,151,879 before interest,
depreciation and amortization, and incurred a net loss after these items of
$2,120,879.
RETAIL SOFTWARE SALES
Retail software sales for the twelve months ended December 31, 1996 of
$4,454,379 declined 14% relative to retail software sales of $5,178,503 for the
same period during 1995. The primary reasons for the decline in same period
sales were, first, the 14% decline in the average CD-ROM retail price realized
by Direct in 1996, $29.60 as compared to $34.29 in the same period in 1995; and
second, the discontinuance, in the second half of 1995, of sales of certain
software titles that were incompatible with the Company's future business plans.
Second quarter 1996 sales were also aversely affected by a delay in the
mailing of a catalog due to the implementation of a new Management Information
System by Direct. Implementation of the new system required an allocation of
resources for both training and problem resolution.
Other factors adversely affecting 1996 sales included a significant
slowdown in the software industry in general, especially during the first half
of 1996, and with respect to sales of Macintosh CD-ROM titles, the widely
publicized problems at Apple Computer.
International retail software sales were $749,911, or 17% of total retail
sales, for the twelve months ended December 31, 1996, versus $682,996 or 13% of
total retail sales for the comparable prior year period. The increase in
international retail sales as a percentage of total retail sales was primarily
due to the decline of domestic retail software sales as described above.
DEALER SOFTWARE SALES
Dealer software sales of $1,272,517 for the twelve months ended December
31, 1996 declined 42% relative to dealer software sales of $2,199,529 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 15% decrease in the
average CD-ROM dealer price realized by Direct. The average price realized was
$25.30 for 1996 as compared to $29.92 for 1995.
International dealer software sales were $981,652, or 77% of total software
sales to dealers, for the twelve months ended December 31, 1996, versus
$1,658,628 or 75% for the comparable prior year period. The 40% decline in
international dealer sales reflected smaller international order sizes due to an
increasing number of publishers seeking direct distribution to foreign dealers.
However, international dealer sales represented a larger percentage of the
Company's sales to dealers reflecting the fact that there were more distribution
sources available to domestic dealers then 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 twelve months ended
December 31, 1996. During the comparable period of 1995, retail hardware sales
were $107,900. The decision to terminate this product line was based on the
relatively low gross profit margins realized by hardware relative to CD-ROM
software, and the relatively high inventory maintenance costs of hardware as
compared to those of CD-ROM software.
19
<PAGE> 20
ROYALTIES AND LICENSE FEES
Royalties and license fees of $80,276 for the twelve months ended December
31, 1996 decreased 82% relative to royalty and license fees of $440,774 for the
same period of 1995. The primary reason for the decrease was the expiration
during 1996 of a bundling license the Company had negotiated with Apple
Computer. Under the terms of the license, Apple Computer had bundled educational
software titles published by the Company with sales of certain computers.
GROSS PROFIT
Direct realized a gross profit of $1,113,706 for the twelve months ended
December 31, 1996, representing 19% of revenues. Excluding the effect of a
$354,000 increase in provision for excess and obsolete inventory, Direct
realized gross profit of $1,467,706, representing 25% of revenues. Comparative
twelve month figures for 1995 are not readily available; however, historically
the Educorp operations have realized a higher gross profit. For the ten months
ended December 31, 1995, gross profit was $1,892,719, or 28% of revenues. For
the ten months ended December 31, 1994, gross profit was $4,056,083, or 45% of
revenues. The decline of 1996 results from historical levels primarily reflects
the lower realized prices per title as a result of increased competition, the
discontinuance of a higher margin product line that was incompatible with the
Company's business plans, and the reduced share of higher margin self-published
titles.
OPERATING AND CORPORATE EXPENSES
Operating and corporate expenses were $3,124,779 for the twelve months
ended December 31, 1996, representing approximately 54% of revenues for the
year. This figure includes amortization of goodwill and other intangibles
arising from the August 25, 1995 acquisition of the Direct operations. After
adjusting for this amortization expense of $873,122, operating and corporate
expenses were $2,251,657 or 39% of total revenues for the year.
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 $469,080. This transaction
was accounted for as a purchase.
HighText generated revenues of $526,817 for the twelve months ended
December 31, 1996, comprised of $159,200 from retail sales to end-users,
$342,355 from sales to dealers, and $25,262 from technical documentation fees.
HighText realized a gross profit of $162,633 for 1996, and incurred a net loss
for the period of $977,986.
SOFTWARE SALES
Software sales for 1996 were $89,152, comprised of $40,108 sales to
end-users and $49,044 sales to dealers. HighText realized an average CD-ROM
title price of $21.59. Comparable results for 1995 are not available.
HighText's first CD-ROM title was published in May, 1995, followed by two
additional titles in November, 1995. As of December 31, 1996, HighText had
eleven software titles available for sale. For purposes of this discussion,
Windows and Macintosh versions are counted as separate titles.
HighText's software sales were minimal in 1996 relative to the development
costs of the completed titles. This was largely due to the availability of
titles for sale over the course of the year and the need to develop distribution
relationships with established suppliers to the target consumer markets, such as
educational institutions. On a quarter by quarter basis, sales did increase
significantly in the third quarter with "back to school" sales, but these sales
likely would have been substantially higher had HighText had more titles
available for sale in that period and had established additional distribution
relationships. In the fourth quarter, sales declined back to second quarter
levels. Software sales were $12,063 in the first quarter, $14,733 in the second
quarter, $48,733 in the third quarter and $13,623 in the fourth quarter of 1996.
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BOOK SALES
Sales for 1996 were $412,403, consisting of $119,092 retail sales to
end-users and $293,311 sales to dealers. HighText realized an average book price
of $19.31 during 1996. Comparable results for 1995 are not readily available.
HighText published its first book title in June 1991. As of January 1,
1996, HighText had published fifteen book titles. During 1996, HighText
published one additional book title. As of December 31, 1996, HighText had three
book titles under development.
Subsequent to year end, Hariston and HighText agreed to transfer ownership
of HighText's book publishing operations back to the former principals of
HighText Publications, Inc., in return for a release of Hariston's obligation,
under the terms of the agreement by which the book publishing operations were
acquired by HighText on January 1, 1996, to issue Hariston shares to the former
principals with a value equal to the after tax income of the book publishing
operations. Such obligation would have existed for five years, had such transfer
of ownership not been concluded.
OPERATING AND CORPORATE EXPENSES
The most significant components of HighText's $1,136,663 of operating and
corporate expenses for 1996 were salary costs totaling $478,238, marketing and
trade show costs of $304,804, and depreciation and amortization expense of
$142,354. HighText expenses the costs of developing new software and book titles
as they are incurred.
EDUCORP MULTIMEDIA OPERATING AND CORPORATE EXPENSES
The majority of Educorp's $605,685 of non-consolidated operating and
corporate expenses for 1996 arose from general, administrative and salary costs,
including $101,849 of accounting and legal fees, $437,659 of salaries and
consultant's fees, and $31,250 of recruiting fees. These costs reflected legal
and accounting costs incurred in connection with the January 1, 1996 acquisition
of HighText, and costs attributable to management, accounting and administrative
activities at the Educorp level. There are no prior year comparable figures for
Educorp as it was incorporated in January, 1996 and although its predecessor,
CD-Soft Corporation, was incorporated in June, 1995, it was largely an inactive
holding company during 1995.
HARISTON AND EUROEASTERN OPERATING AND CORPORATE EXPENSES
Due to the divestitures of Hariston's operating businesses during 1995 and
the August 25, 1995 and January 1, 1996 acquisitions of the Direct and HighText
operations, respectively, Hariston's non-consolidated operating and corporate
expenses for 1996 of $1,364,343 are not directly comparable to the $1,274,422 of
costs for 1995. The majority of Hariston's non-consolidated operating and
corporate expenses for 1996 consisted of $493,521 of salaries and consultants
fees, $313,702 of legal fees, $130,475 of accounting, audit and tax return
preparation fees, $126,680 of shareholder communication costs including transfer
agent and investor relations firm fees, $76,523 of insurance costs, $48,571 of
travel costs, $45,024 of rent expense, and $25,850 of directors fees. Hariston
incurred exceptional salaries and consultants fees during the third and fourth
quarters due to the closure of its Costa Mesa, California offices. Hariston
incurred significant non-recurring legal and accounting fees during the first
and second quarters as a consequence of the filings and disclosures required in
connection with the August 25, 1995 acquisition of the Direct operations and the
January 1, 1996 acquisition of the HighText operations. Hariston also incurred
significant non-recurring legal, accounting and other professional fees during
1996 due to the restructuring proposals under examination by the Company.
The majority of EuroEastern's non-consolidated operating and corporate
expenses, totaling $140,285, consisted of $72,899 of consultant's fees and
$38,686 of rent expense. There are no comparable prior year figures for
EuroEastern as it was incorporated in October, 1995.
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HARISTON CONSOLIDATED OPERATING AND CORPORATE EXPENSES
Operating and corporate expenses were $6,468,086 and $2,399,222 for the
years ended December 31, 1996 and December 31, 1995 respectively. These figures
represented 102% and 85%, respectively, of revenues from continuing operations.
Excluding the effect of depreciation and amortization, operating and corporate
expenses were $5,341,055 in 1996 and $2,080,701 in 1995, or 84% and 74%
respectively of revenues from continuing operations. This increase in operating
and corporate expenses as a percentage of revenues was due primarily to the
HighText operations acquired January 1, 1996. This is because HighText did not
achieve significant sales of CD-ROM multimedia software titles during 1996,
while it expended significant funds developing a suite of such titles. HighText
expenses the costs of developing CD-ROM titles as they are incurred. Excluding
HighText's $526,817 of sales and $1,136,663 of operating and corporate expenses,
Hariston's consolidated operating and corporate expenses were $4,346,746 or 75%
of revenues in 1996, slightly higher than the comparable 74% of revenues figure
for 1995.
COMPARISON OF AUGUST 25, 1996 TO DECEMBER 31, 1996 PERIOD TO AUGUST 25, 1995 TO
DECEMBER 31, 1995 PERIOD
EDUCORP DIRECT
On August 25, 1995 Hariston, through its subsidiary Direct, acquired
substantially all of the assets of Gazelle Technologies, Inc. and Affiliates,
which had been doing business under the name "Educorp", for a purchase price of
$6,067,071. This transaction was accounted for as a purchase.
Direct generated revenues of $2,000,629 for the period August 25, 1996 to
December 31, 1996, of which $1,540,484 was from retail sales, $381,024 was from
dealer sales, and $79,121 was from software royalties and license fees. Over the
same period in 1995, Direct generated revenues of $2,797,292, of which
$1,869,000 was from retail sales, $806,685 was from dealer sales and $121,607
was from software royalties and license fees. The 18% decrease in 1996 retail
sales as compared to the 1995 figure was due primarily to the decline in the
average realized CD-ROM price, as well as softness in the CD-ROM market. The 53%
decrease in 1996 dealer sales as compared to the 1995 figure was due to a
significant reduction in the number of domestic dealers and smaller
international order sizes due to the increasing availability of software titles
in foreign countries.
COMPARISON OF AUGUST 25, 1995 TO DECEMBER 31, 1995 PERIOD TO AUGUST 25, 1994 TO
DECEMBER 31, 1994 PERIOD
EDUCORP DIRECT
On August 25, 1995 Hariston, through its subsidiary Direct, acquired
substantially all of the assets of Gazelle Technologies, Inc. and Affiliates
("the Predecessor"), which had been doing business under the name "Educorp", for
a purchase price of $6,067,071. This transaction was accounted for as a
purchase.
Direct generated revenues of $2,797,292 for the period August 25, 1995 to
December 31, 1995, of which $1,869,000 was from retail sales, $806,685 was from
dealer sales and $121,607 was from software royalties and license fees. Over the
same period in 1994, the Predecessor generated revenues of $2,690,503 from
retail sales, $974,096 from dealer sales and $29,700 from royalties and license
fees. The 30.5% decline in 1995 retail revenues as compared to the 1994 figure
for the same period was due primarily to two factors. The first of these was the
low number of catalogs in circulation during August and September 1995, as
compared to the same period a year earlier. The second factor was the decrease
in the average realized CD-ROM title price that occurred during 1995. The
smaller decline in dealer revenues, 17.2%, reflects the fact that while dealer
sales were affected by the decrease in average title price, they were less
dependent on the number of catalogs in circulation. Both retail and dealer sales
were also, to a lesser extent, adversely affected by smaller international order
sizes due to the increasing availability of software titles in foreign
countries, and by the discontinuation of computer hardware sales by Direct
during 1995.
For the period August 25, 1995 to December 31, 1995, Direct incurred a net
loss of $459,216. This loss included $297,000 of recurring noncash depreciation
and amortization expenses arising from the acquisition of Educorp and $200,465
of a further one-time expense relating to inventory and also arising from the
application of purchase accounting on the acquisition. Taking these noncash
charges into consideration, Direct produced a positive operating cash flow for
the approximately four month period ended December 31, 1995.
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The results of operations for the Predecessor for its fiscal years ended
February 25, 1994 and February 25, 1995, together with the combined results of
operations for Direct and the Predecessor for the ten month period ended
December 31, 1995, are discussed below. See "-- Predecessor Operations".
INVESTMENTS: POLISH LIFE IMPROVEMENT S.A.
PLI is a retail operator of six home improvement stores in Poland. PLI is a
public Polish company whose shares began trading on the parallel market to the
Warsaw Stock Exchange on February 5, 1996.
During 1996, Hariston sold 143,481 PLI shares on the open market, settled a
note receivable by receiving 1.1 million PLI shares, and sold 793,158 PLI shares
in private transactions.
As of December 31, 1996, 1,820,566 shares of PLI were reported on the
Company's balance sheet, at an average cost of approximately $0.66 per share,
representing a 25.8% ownership interest in PLI. Subsequent to year-end, Hariston
disposed of all but 60,566 of its PLI shares, retaining a nominal shareholding
in PLI of less than 1%.
Management is of the opinion that due to the Company's minority ownership
position in PLI over the period January 1, 1995 to December 31, 1996, the
Company has not been able to exercise significant influence over the operating,
investing, and financial policies of PLI and therefore Hariston's investment in
PLI shares was accounted for using the cost method. As a result, the Company has
not included in its results for the year ended December 31, 1996, a
proportionate share of PLI's results for the year.
INVESTMENTS: MADISON HOLDINGS LIMITED.
Madison Holdings Limited ("Madison") was formerly a supplier of proprietary
home medical products. A public company based in Toronto, Canada, Madison's
shares traded on the Canadian Dealing Network, an over-the-counter market
associated with the Toronto Stock Exchange.
Hariston owns 233,591 shares of Madison common stock, representing an 8.6%
interest in that company. These shares are recorded on Hariston's balance sheet
at a cost of $7,304, or approximately $0.03 per share. In January, 1996
Madison's secured lenders seized its assets, leaving Madison with no significant
assets other than its publicly traded status and several million dollars of tax
loss balances. Madison's management has indicated that it is committed to
creating value for Madison's shareholders and has undertaken steps to locate
businesses that may be acquired by Madison, and that such acquisitions are
likely to be made through the issuance of a substantial number of treasury
shares resulting in a reverse take over. There is no assurance that Madison will
be successful in its endeavour to acquire another operating business. Madison is
up to date in its securities commission filings and its shares remain eligible
to trade on the Canadian Dealing Network subject to Madison becoming an
operating business again. Madison's shares last traded in January, 1996 at
approximately $0.04 per share on extremely low trading volume relative to
Hariston's shareholding.
DISCONTINUED OPERATIONS
EDUCORP MULTIMEDIA. On January 29, 1997 Hariston's Board resolved to seek
a buyer for the Company's multimedia software operations. As this event occurred
subsequent to year end, the multimedia software operations are presented as
continuing operations for purposes of the disclosure in this Annual Report on
Form 10-K. On February 24, 1997 Hariston entered into a letter of intent to sell
substantially all of the assets, and transfer certain of the liabilities, of
Educorp and its subsidiaries, Direct and HighText, to Legacy for proceeds of
$1.8 million, such amount to be received entirely in the form of common shares
of Legacy.
OIL AND GAS INTERESTS. On August 14, 1995 Hariston disposed of its oil and
gas royalty and working interests for cash proceeds of approximately $2.4
million and the assumption by the purchaser of approximately $979,000 of debt.
In 1995, Hariston earned net income of approximately $166,000 from its oil and
gas royalty and working interests prior to their disposition.
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METANETIX DIVISION. On July 28, 1995 Hariston reached an agreement to sell
its Metanetix Division and related technology to Consolidated Western and
Pacific Resources Corp. ("Consolidated") for a purchase price of up to $9
million, to be paid as a royalty from any profits that may be generated from
Consolidated's use of the Metanetix minerals recovery process and the Butte,
Montana recovery plant. Consolidated subsequently informed Hariston that it did
not wish to acquire the related technology license, thereby reducing the maximum
purchase price to $7 million. No proceeds have been recognized on the sale of
the Metanetix Division due to management's belief that the ultimate realization
of proceeds cannot be reasonably determined at this time.
In order to retain its interest in the technology license referred to
above, Hariston was required to pay by December 31, 1995 an advance royalty
payment of approximately $183,000 to an agency of the Government of Ontario. As
a result of Consolidated's decision, management determined that the technology
license had limited commercial value to Hariston and accordingly made no payment
to the agency.
PREDECESSOR OPERATIONS
Audited financial statements were prepared for the Company's predecessor,
Gazelle Technologies, Inc. and Affiliates ("Predecessor") for its fiscal years
ending February 28, 1994, February 28, 1995 and for the stub period March 1,
1995 to August 24, 1995. To assist with comparability, for purposes of this
discussion and the selected financial information disclosure presented elsewhere
in this Report, the Predecessor's stub period results have been combined with
Direct's results for the period August 25, 1995 to December 31, 1995. Such
combined results are presented on the same basis as the Predecessor's audited
statements for the prior years.
COMPARISON OF TEN MONTH PERIOD ENDED DECEMBER 31, 1995 TO TEN MONTH PERIOD ENDED
DECEMBER 31, 1994
RETAIL SOFTWARE SALES. Sales for the ten month period ended December 31,
1995 of $4,232,841 declined approximately 14% relative to sales of $4,905,405
for the same period during 1994. There were three primary reasons for the
decline in same period sales. First, there were a low number of catalogs in
circulation during August and September 1995 as compared to the same period a
year earlier. Second, the average CD-ROM retail price in 1995 decreased to
$42.90 as compared to $49.60 in 1994. Third, and related to the second reason, a
particularly competitive environment existed during 1995 as a result of the
liquidation during that year of inventories by competitors which had entered the
industry in the previous several years, particularly 1994, and exited the
industry during 1995. Because international sales were not as dependent on
catalogs in circulation and were unaffected by the competitive U.S. environment,
international sales did not decline, and in fact marginally increased.
International sales were $692,802, or 16% of total retail sales, for the 10
months ended December 31, 1995, versus $593,172 and 12% for the comparable prior
year period.
DEALER SOFTWARE SALES. Sales for the ten month period ended December 31,
1995 of $1,814,133 declined 10% relative to sales of $2,006,438 for the same
period during 1994. The primary reason for the decline in same period sales was
the decrease in the average 1995 CD-ROM dealer price to $25.78, as compared to
$28.65 in 1994. Total international sales were $1,369,441, or 75% of total
software sales to dealers, for the 10 month period ended December 31, 1995,
versus $1,347,523 and 67% for the comparable prior year period.
HARDWARE SALES. Dealer hardware sales were not a significant component of
total computer hardware sales, due to the ability of dealers to purchase
hardware directly from the manufacturer. The following discusses only retail
hardware sales.
The Company decided in early 1995 to discontinue selling computer hardware
and, as a result, retail sales of hardware for the ten month period ended
December 31, 1995 declined 95%, to $38,442, as compared to retail hardware sales
of $749,240 for the same period during 1994. Hardware inventories were
eliminated during 1995 through returns to suppliers or sales at a discount. The
decision to terminate this product line was based on the relatively low gross
profit margins realized by hardware relative to CD-ROM software titles, and the
relatively high inventory maintenance costs as compared to those of CD-ROM
software titles.
ROYALTIES AND LICENSE FEES. Royalties and license fees of $391,907 for the
ten month period ended December 31, 1995 increased 684% relative to royalty and
license fees of $49,987 for the same period during
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1994. The primary reason for the increase was the Company's December 1, 1994
arrangement with Apple Computer to bundle several of the Company's
self-published educational titles with sales of Apple computers.
GROSS PROFIT. The Company realized gross profit of $1,892,719 for the ten
month period ended December 31, 1995, a 53% decrease as compared to gross profit
of $4,056,083 for the same period of 1994. Gross profit for the year ended
February 28, 1995 was $4,400,000. Total gross profit declined primarily because
of reduced total sales of CD-ROM titles and the discontinuation of hardware
sales. Gross profit as a percentage of revenues for the ten month period ended
December 31, 1995 was 28%, as compared to approximately 45% for the same period
of 1994 and 45% for the year ended February 28, 1995. The amortization of the
inventory write-up relating to inventory on hand at the time of the purchase of
the Direct operations contributed 3% to the decline. The remaining decline was
due primarily to a reduction in percentage markups due to the increased
competitive environment, as well as to discontinued sales of a line of mature
adult titles on which markups had been particularly high. These factors were
somewhat offset by the Company's decision to discontinue selling hardware, which
earned a lower margin than CD-ROM titles.
OPERATING AND CORPORATE EXPENSES. Operating and corporate expenses were
$2,587,597 and approximately $2,880,000 for the ten month periods ended December
31, 1995 and December 31, 1994, respectively, and $3,460,700 for the year ended
February 28, 1995. These figures represented approximately 38%, 36%, and 35% of
revenues for those periods, respectively. The increase in operating expenses as
a percentage of revenues was due primarily to the incurrence of approximately
$200,000 of nonrecurring legal and professional fees during the ten month period
to December 31, 1995 in connection with the purchase of Direct. After adjusting
for these nonrecurring fees, operating and corporate expenses would be 35% of
total revenues for the ten month period to December 31, 1995.
COMPARISON OF TWELVE MONTH PERIOD ENDED FEBRUARY 28, 1995 TO TWELVE MONTH PERIOD
ENDED FEBRUARY 28, 1994
RETAIL SOFTWARE SALES. Sales for the year ended February 28, 1995 of
$5,832,202 increased 4% relative to retail software sales of $5,613,609 for the
year ended February 28, 1994. The primary reason for the increase in same period
sales was higher unit volume sales due to the rapid increase in the installed
base of CD-ROM drives during 1995. This unit volume increase more than offset
the effect of the decline in the average CD-ROM title price. The average CD-ROM
retail price during the year ended February 28, 1995 decreased 40% to $47.06 as
compared to $78.51 for the prior year. To a lesser extent, sales were adversely
affected by smaller international order sizes due to the increasing availability
of software titles in foreign countries. International sales were $876,922, or
15% of total retail sales, for the year ended February 28, 1995 versus $978,918
or 17% for the prior year.
DEALER SOFTWARE SALES. Sales for the year ended February 28, 1995 of
$2,407,725 declined 12% relative to dealer software sales of $2,727,423 for the
year ended February 28, 1994. The decline in same period sales was attributable
in part to a decrease in the average CD-ROM dealer price during the year ended
February 28, 1995, to $28.10, as compared to $31.98 during the prior year, and
to increased competition. During calendar year 1994 many new distribution
channels were opened for the supply of CD-ROM titles to dealers. These new
channels included a trend towards publishers selling their titles directly to
dealers, and large software distributors commencing to sell CD-ROM titles.
HARDWARE SALES. Dealer hardware sales are not a significant component of
total computer hardware sales, due to the ability of dealers to purchase
hardware directly from the manufacturer. The following discusses only retail
hardware sales.
Retail hardware sales for the year ended February 28, 1995 of $953,373
declined 64% relative to retail hardware sales of $2,662,968 for the year ended
February 28, 1994. The primary reason for the decline in same period sales was a
69% reduction in the average retail sales price of computer hardware products
sold by the Company due to a shift in inventory mix. The average retail price
for hardware products sold during the year ended February 28, 1995 was $198, as
compared to $642 during the year ended February 28, 1994.
ROYALTIES AND LICENSE FEES. Royalties and license fees of $107,300 for the
year ended February 28, 1995 increased 445% relative to fees of $19,700 for the
year ended February 28, 1994. The primary reason for the
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increase was the Company's December 1, 1994 arrangement with Apple Computer to
bundle several of the Company's self-published educational titles with sales of
Apple computers.
GROSS PROFIT. The Company realized gross profit of $4,400,000 for the year
ended February 28, 1995, a 15% decrease as compared to gross profit of
$5,204,200 for the year ended February 28, 1994. Gross profit declined primarily
because of the reduced sales, as described above. Gross profit as a percentage
of revenues was approximately 45% for each of the years ended February 28, 1995
and 1994. Even though average title prices declined, the Company was able to
maintain its margins, in large part due to two factors: price protection
agreements that the Company had negotiated with its suppliers, and increased
royalty and license fee revenue earned in the year ended February 28, 1995 as
compared to the prior year.
OPERATING AND CORPORATE EXPENSES. Operating and corporate expenses totaled
$3,460,700 and $5,216,700 for the years ended February 28, 1995 and 1994,
respectively, and represented approximately 35% and 45% of revenues. The 10%
decrease in operating and corporate expenses as a percentage of revenues was due
primarily to exceptionally high compensation paid to the former owner of the
Predecessor during 1994. Owner's compensation for the year ended February 28,
1994 totaled $2,424,000, as compared to $709,600 for the year ended February 28,
1995.
After eliminating owner's compensation, operating and corporate expenses as
a percentage of revenues were 28% for the year ended February 28, 1995 and 24%
for the year ended February 28, 1994. The increase in this figure as compared to
the figure for 1994 was due primarily to the increased cost of catalog
operations, including increased paper and postage costs.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996 the Company had cash balances in excess of $2.8
million, comparing favorably with cash of $1.4 million at December 31, 1995 and
$1.1 million at December 31, 1994. However, the Company's December 31, 1996
working capital ratio of 0.87 compared unfavorably with 1.38 at December 31,
1995 and 1.14 at December 31, 1994. This primarily reflects the fact that the
$3.2 million of notes issued in 1995 to partially fund the purchase of the
Direct operations came due in January, 1997 and were accordingly classified as
current at December 31, 1996. The effect of the $3.2 million notes on the
December 31, 1996 working capital ratio was partially offset by the treatment of
the Company's $1,208,439 investment in PLI shares as current, reflecting the
fact that during the fourth quarter the Company began significant sales of PLI
shares.
The overall debt/equity ratio of 4.62 at December 31, 1996 compared
unfavorably with 1.39 at December 31, 1995 and 0.72 at December 31, 1994. The
increase from 1994 to 1995 primarily reflects the $3.2 million of debt incurred
in 1995 to effect the acquisition of the Direct operations. The increase from
1995 to 1996 primarily reflects declining shareholders' equity due to the
$5,518,570 of losses incurred in 1996 by the multimedia software operations.
In summary, while cash balances improved, the working capital and
debt/equity ratios showed significant worsening during 1996.
In order to finance the Company's working capital needs and the repayment
of a $374,000 short-term note that arose from the acquisition of the Direct
operations, during the first quarter of 1996 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 and realized proceeds of
$500,000.
In order to finance the working capital needs of Educorp and its
subsidiaries, during the second quarter of 1996 the Company borrowed $250,000
from McGoodwin James & Co. pursuant to two short-term notes. See Item 13.
Also in order to finance working capital needs, during the first three
quarters of 1996 Hariston sold 143,481 PLI shares on the parallel market to the
Warsaw Stock Exchange, raising net proceeds of $670,016.
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The proceeds of these sales were primarily invested in the operations of Educorp
and its subsidiaries. These share sales also served to demonstrate the liquidity
and value of the Company's investment in PLI.
In order to finance working capital needs, during the third quarter the
Company raised $1,200,000 from the private placement of shares and share
purchase warrants.
During the fourth quarter of 1996, Hariston's management determined that it
would not be in the best interests of Hariston's shareholders for Hariston to
continue to hold a passive minority shareholding in PLI, since long-term
shareholder value will likely be best increased by reinvesting a portion of the
proceeds from sales of PLI shares in the acquisition of a business that can be
actively managed. Accordingly, in December 1996 Hariston settled its claims with
respect to a $7 million note receivable in default by agreeing to receipt of 1.1
million PLI shares, and sold 793,158 PLI shares in private transactions,
retaining at year-end 1,820,566 PLI shares or a 25.8% interest in PLI. These
December PLI share sales raised proceeds of $2,436,889. During the first quarter
of 1997, an additional 1,760,000 PLI shares were sold, primarily in private
transactions, for proceeds of in excess of $6.5 million (of which $1.5 million
consisted of short-term notes receivable and the remainder was received in
cash), leaving Hariston currently with 60,566 PLI shares representing a nominal
shareholding in PLI of less than 1%. A portion of the proceeds was used to repay
$3.2 million of notes issued in 1995 to effect the acquisition of the Direct
operations.
The Company's principal continuing capital requirements include working
capital to finance the multimedia software operations until a sale of these
operations can be concluded, and costs which may be incurred in connection with
the acquisition of a business in the future. To effect the proposed acquisition
of a manufacturer of aerospace products, Hariston expects to commit $3 million
of its current cash position.
Historically, the Company has also required capital to finance operating
losses, having incurred operating losses in each year after 1990. As of December
31, 1996, the Company had an accumulated deficit of $30,590,978. The Company has
continued to experience negative operating cash flows.
Based on historical results and management's expectations for future
operations, the Company expects the multimedia software operations will require
modest further capital infusion to cover their operating requirements until a
sale of the operations can be concluded. However, the operations have required
$235,500 of capital infusion from Hariston during 1997 to date.
The ability of the Company to continue to effectively manage its working
capital and ultimately, to attain profitability, is dependent upon a number of
factors including but not limited to: competitive conditions in the marketplace,
general economic conditions, the efficiency of the Company's operations, the
timely development and introduction of new products which address market needs,
continuing access to investment capital, and the successful conclusion of
proposed transactions.
There is no assurance that cash flows from operations will be sufficient to
meet operating requirements, that additional debt or equity financing will be
available as required, or will be available on terms acceptable to the Company,
or that the Company will be able to conclude the sale of the multimedia software
operations or the purchase of the aerospace products manufacturer on terms
acceptable to the Company.
FORWARD-LOOKING INFORMATION
This Annual Report on Form 10-K includes forward-looking information,
including information concerning the Company's business strategies, financing
plans, plans and objectives for product development, and marketing plans. These
forward-looking statements are subject to risks and uncertainties, including
technological uncertainties in the development of new products, the impact of
competitive products and pricing, the Company's ability to recruit and retain
qualified personnel, the Company's continued access to investment capital, and
the successful conclusion of proposed transactions, which could cause actual
results to differ from those projected.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements of the Company follow hereafter. Following the
Company's financial statements are the financial statements of the Predecessor
for the period March 1, 1995 to August 24, 1995. See Financial Statement Index
at Item 14(a).
The financial statements of the Predecessor for the fiscal years ended
February 28, 1995, 1994 and 1993 are incorporated herein by this reference to
Exhibit 7(a) of the Company's Current Report on Form 8-K filed September 11,
1995 (as amended by Form 8-K/A filed November 8, 1995).
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HARISTON CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
AS AT DECEMBER 31, 1996 AND 1995
TOGETHER WITH AUDITORS' REPORT
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AUDITORS' REPORT
To the Shareholders of
HARISTON CORPORATION:
We have audited the consolidated balance sheets of Hariston Corporation (a
Canada corporation) as at December 31, 1996 and 1995 and the consolidated
statements of loss and deficit and changes in financial position for the years
then ended. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the Company as at December 31,
1996 and 1995 and the results of its operations and the changes in its financial
position for the years then ended in accordance with generally accepted
accounting principles.
Vancouver, British Columbia
March 7, 1997, except with respect to Note 18(c) which is dated April 10, 1997.
ARTHUR ANDERSEN & CO.
30
<PAGE> 31
HARISTON CORPORATION
CONSOLIDATED BALANCE SHEETS -- DECEMBER 31, 1996 AND 1995
(Amounts in thousands of U.S. dollars)
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................... $ 2,805 $ 1,419
Short-term investments (Notes 6 and 18)..................... 1,208 --
Receivables, net of allowance for doubtful accounts of $58
(1995 -- $40) (Note 5).................................... 421 457
Inventory, net of reserve for obsolescence of $470 (1995 --
$74)...................................................... 559 1,335
Prepaid expenses............................................ 207 147
-------- --------
5,200 3,358
INVESTMENTS (Note 6)........................................ 8 1,956
EQUIPMENT AND LEASEHOLDS (Note 7)........................... 363 207
INTANGIBLE ASSETS (Note 8).................................. 2,339 4,667
-------- --------
$ 7,910 $ 10,188
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accruals............................... $ 2,349 $ 1,829
Deferred revenue............................................ 113 185
Current portion of term debt (Note 9)....................... 3,539 413
-------- --------
6,001 2,427
TERM DEBT (Note 9).......................................... 201 3,200
PUT OPTION (Notes 10 and 18)................................ 300 300
-------- --------
6,502 5,927
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 11)
SHAREHOLDERS' EQUITY:
Share capital (Note 12)..................................... 31,999 29,887
Deficit..................................................... (30,591) (25,626)
-------- --------
1,408 4,261
-------- --------
$ 7,910 $ 10,188
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
31
<PAGE> 32
HARISTON CORPORATION
CONSOLIDATED STATEMENTS OF LOSS AND DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(Amounts in thousands of U.S. dollars)
<TABLE>
<CAPTION>
1996 1995 1994
--------------- --------------- ---------------
(NOTE 19)
<S> <C> <C> <C>
REVENUE:
Software sales............................................ $ 5,817 $ 2,676 $ --
Book sales................................................ 412 -- --
Software royalties and license fees....................... 80 122 --
Other..................................................... 25 28 22
--------------- --------------- ---------------
6,334 2,826 22
COST OF SALES............................................. 5,058 2,195 --
--------------- --------------- ---------------
1,276 631 22
OPERATING AND CORPORATE EXPENSES (Note 13)................ 6,467 2,399 1,047
WRITE-DOWN OF GOODWILL (Note 8)........................... 1,800 -- --
--------------- --------------- ---------------
Loss before the following items........................... (6,991) (1,768) (1,025)
INTEREST INCOME (EXPENSE), net............................ (331) (132) 167
SHARE OF NET LOSS OF MADISON.............................. -- -- (96)
GAIN (LOSS) ON INVESTMENTS AND LOANS (Note 14)............ 2,354 161 (526)
FOREIGN EXCHANGE GAIN (LOSS).............................. 3 (64) (256)
--------------- --------------- ---------------
Loss from continuing operations........................... (4,965) (1,803) (1,736)
--------------- --------------- ---------------
INCOME (LOSS) FROM DISCONTINUED OPERATIONS (Note 4):
Results of Polish retail operation........................ -- -- (1,027)
Share of net loss of Polish retail operation.............. -- -- (482)
Non-controlling interest in losses of Polish retail
operation............................................... -- -- 220
Results of factoring operation............................ -- -- 65
Gain (loss) on disposal of factoring operation............ -- (5) 63
Loss on disposal of minerals recovery project............. -- (321) (12,478)
Income from oil and gas royalty and working interests..... -- 166 678
Gain on disposal of oil and gas royalty and working
interests............................................... -- 1,140 --
--------------- --------------- ---------------
Income (loss) from discontinued operations................ -- 980 (12,961)
--------------- --------------- ---------------
Net loss.................................................. (4,965) (823) (14,697)
DEFICIT, beginning of year................................ (25,626) (24,803) (10,106)
--------------- --------------- ---------------
DEFICIT, end of year...................................... $ (30,591) $ (25,626) $ (24,803)
=============== =============== ===============
NET LOSS PER SHARE
Loss from continuing operations........................... $ (0.42) $ (0.17) $ (0.16)
Income (loss) from discontinued operations................ -- 0.09 (1.19)
--------------- --------------- ---------------
Net loss per share $ (0.42) $ (0.08) $ (1.35)
=============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
32
<PAGE> 33
HARISTON CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(Amounts in thousands of U.S. dollars)
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- ---------------
(NOTE 19)
<S> <C> <C> <C>
CASH PROVIDED FROM (USED IN) OPERATING ACTIVITIES:
Loss from continuing operations............................. $ (4,965) $ (1,803) $ (1,736)
Add (deduct) items not affecting cash--
Depreciation and amortization............................. 1,127 319 179
Write-down of goodwill.................................... 1,800 -- --
Share in net loss of Madison.............................. -- -- 96
(Gain) loss on investments and loans...................... (2,354) (161) 526
------------- ------------- ---------------
(4,392) (1,645) (935)
Changes in non-cash working capital accounts from continuing
operations................................................ 1,202 476 (979)
------------- ------------- ---------------
(3,190) (1,169) (1,914)
------------- ------------- ---------------
Income (loss) from discontinued operations.................. -- 980 (12,961)
Add (deduct) items not affecting cash--
Depreciation and amortization............................. -- 107 732
Share of net loss of Polish retail operation.............. -- -- 482
Non-controlling interest in losses of Polish retail
operation.............................................. -- -- (220)
(Gain) loss on disposal of discontinued operations........ -- (814) 12,478
------------- ------------- ---------------
-- 273 511
------------- ------------- ---------------
(3,190) (896) (1,403)
------------- ------------- ---------------
CASH PROVIDED FROM FINANCING ACTIVITIES:
Issuance of common shares for acquisition of multimedia
software business......................................... 412 500 --
Amount payable upon exercise of put option by sellers of
Educorp Multimedia........................................ -- 300 --
Issuance of short-term seller's note for acquisition of
multimedia software business.............................. -- 374 --
Net cash proceeds from share issuance....................... 1,700 39 3,704
Proceeds from term debt, net................................ 127 1,119 227
Subscriptions receivable.................................... -- -- 37
------------- ------------- ---------------
2,239 2,332 3,968
------------- ------------- ---------------
CASH PROVIDED FROM (USED IN) INVESTING ACTIVITIES:
Acquisition of multimedia software business................. $ (469) $ (6,067) $ --
Disposal (acquisition) of property, equipment and
leaseholds, net........................................... (287) 37 (115)
Issuance of notes receivable................................ -- 1,170 645
Recovery of finders' fee.................................... -- 230 --
Proceeds from disposal of investments....................... 3,101 157 941
Acquisition of Madison shares............................... (8) -- --
Proceeds from disposal of oil and royalty interests,
net of costs of disposition............................... -- 3,318 --
Minerals recovery project................................... -- (61) (4,203)
------------- ------------- ---------------
2,337 (1,216) (2,732)
------------- ------------- ---------------
Increase (decrease) in cash and cash equivalents............ 1,386 220 (167)
CASH AND CASH EQUIVALENTS, beginning of year................ 1,419 1,199 1,366
------------- ------------- ---------------
CASH AND CASH EQUIVALENTS, end of year...................... $ 2,805 $ 1,419 $ 1,199
============= ============= ===============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
33
<PAGE> 34
HARISTON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(Dollar amounts in thousands of U.S. dollars unless otherwise stated)
1. ORGANIZATION AND CONTINUANCE OF OPERATIONS
Hariston Corporation (the "Company") is incorporated under the Canada
Business Corporations Act. Prior to 1996, the Company was engaged in various
business activities, including the exploitation of technology for the extraction
of metals from water and other media, and the holding and management of royalty
and working interests in oil and gas production. During 1995, the Company
changed its business strategy and disposed of its minerals recovery project and
its royalty and working interests in oil and gas production and acquired
operations engaged in the publishing, distribution and marketing of multimedia
CD-ROM titles for use with both Macintosh and IBM-compatible computers. Sales
were predominantly generated through catalog direct marketing to consumers. The
majority of sales were cash sales to individual customers. The Company is
contemplating the disposition of its multimedia software business (see Note 18).
The Company has experienced substantial losses from its operations since
the change in business strategy in 1995, which were primarily financed from cash
raised from the issue of common shares and the disposal of the Company's
investment in the Polish retail operation. The Company's continuance depends on
its ability to successfully restructure its operations, acquire the necessary
financing for working capital needs and future acquisitions, and achieve
profitable future operations.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Company's accounting and reporting policies conform to generally
accepted accounting principles in Canada.
PRINCIPLES OF CONSOLIDATION
These consolidated financial statements include the accounts of the Company
and its subsidiaries while the Company had a controlling interest. Investments
in affiliated companies where the Company has significant influence but not
control are accounted for using the equity method. All other investments in
affiliates are accounted for on the cost basis. Material intercompany
transactions have been eliminated. As at December 31, 1996, the primary
operating subsidiary is Educorp Direct, Inc. ("Educorp").
AMALGAMATION
On January 1, 1995, the Company was amalgamated with its wholly-owned
subsidiaries, Metanetix Corporation and Canadian Capital Financial Markets
(C.C.F.M.) Inc., the businesses of which were discontinued. As the amalgamation
was between companies under common control, the combination was accounted for
using the pooling-of-interests method. The assets and liabilities in the
Company's financial statements are accounted for at historical cost and the
reported results of operations include the operations of the predecessor
companies as if they had been combined since inception.
INVESTMENTS
POLISH LIFE IMPROVEMENT S.A. ("PLI")
During 1994, the Company reduced its investment in PLI from 76% to 23.5%
and beginning January 1, 1995, the Company has had little influence over the
operating, financing and investing decisions related to PLI. Accordingly, these
consolidated financial statements include the operations of PLI on a
consolidated basis for the period January 1, 1994 to June 24, 1994. The
consolidated financial statements from June 24,
34
<PAGE> 35
HARISTON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(Dollar amounts in thousands of U.S. dollars unless otherwise stated)
1994 to December 31, 1994 account for PLI on the equity method and for the years
ended December 31, 1995 and 1996 using the cost method.
MADISON HOLDINGS LIMITED ("MADISON")
The Company's investment in Madison (formerly known as "Madison Partners
Limited") was accounted for by the equity method until July 20, 1994 when the
Company ceased to exercise significant influence. It was then recorded at cost.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of liquid investments with a maturity of
three months or less when purchased. As of December 31, 1996, certificates of
deposits amounting to $10 (1995 -- $253) were held as collateral by a bank for
certain credit services provided.
INVENTORY
Inventory consists of books and multimedia CD-ROM titles and is valued at
the lower of cost (first-in, first-out method) or net realizable value.
PREPAID EXPENSES
Prepaid expenses consist primarily of production and distribution costs of
sales catalogs to be mailed in the future. These costs, net of cooperative
marketing reimbursements, are charged in the month in which the catalogs are
mailed since the benefit period for such costs is short and the amount of such
future benefit is not practically measurable.
EQUIPMENT, LEASEHOLDS AND DEPRECIATION
Furniture and equipment and leasehold improvements are recorded at cost.
Depreciation is provided on the straight-line basis over the estimated useful
lives of the assets at the following rates:
<TABLE>
<S> <C>
Furniture and equipment........................ 5 years
Computer equipment............................. 2-3 years
Leasehold improvements......................... Term of relevant leases
</TABLE>
INTANGIBLE ASSETS
Intangible assets are recorded at cost. Amortization is provided on the
straight-line basis over the estimated useful lives of the intangible assets as
follows:
<TABLE>
<S> <C>
Goodwill....................................... 8 years
Customer mailing lists......................... 4 years
Computer software licenses..................... 3 years
Copyrights/intellectual property............... 3 years
Covenant not to compete........................ 3 years
</TABLE>
Intangible assets are written down where there has been a permanent
impairment in the value of unamortized intangibles. A permanent impairment in
intangibles is determined by comparison of the carrying value of unamortized
intangibles with undiscounted future earnings of the related business.
35
<PAGE> 36
HARISTON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(Dollar amounts in thousands of U.S. dollars unless otherwise stated)
Goodwill represents the excess of the purchase price of the subsidiaries
over the fair market value of identifiable net assets acquired.
REVENUE RECOGNITION
Revenue is recognized upon shipment of products to customers. The Company
permits the return of products under certain circumstances. Products that are
defective are generally handled on a warranty return basis with the Company's
vendors. The Company provides an allowance for the estimated costs of returns at
the time the product is shipped. Cash on sales received in advance of shipment
is deferred until the related products are shipped.
FOREIGN CURRENCY TRANSLATION
Prior to August 25, 1995, the operations of the Company were primarily
based in Canada and the Canadian dollar was the currency of measurement and
reporting. Transactions denominated in currencies other than the Canadian dollar
were translated under the temporal method. Monetary assets and liabilities were
translated at the exchange rate at the balance sheet date; non-monetary assets
and liabilities were translated at the exchange rate at the transaction date.
Revenue and expense items were translated at the average monthly exchange rate.
Gains and losses resulting from changes in exchange rates were reflected in the
statement of loss for the year.
Subsequent to August 25, 1995, the operations of the Company were primarily
based in the United States of America, and the United States dollar became the
currency of the primary economic environment in which the Company operates and
therefore the currency of measurement and reporting. The change of currency of
measurement and reporting was necessitated by events that are clearly different
in substance from those previously occurring, and as a result the change was
applied prospectively. Prior year comparative figures were translated from
Canadian dollar amounts to U.S. dollar amounts under the method of convenience
using the exchange rate in effect on August 25, 1995, the effective date of
change. Following the change in currency of measurement and reporting,
transactions denominated in currencies other than U.S. dollars are translated
under the temporal method.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingencies at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
LOSS PER SHARE
Loss per share is calculated on the basis of the weighted average number of
share outstanding during the year of 11,731,427. The effect of potential
conversions of common share equivalents on loss per share is either immaterial
or anti-dilutive. As a result, no adjusted or fully diluted loss per share is
presented.
RECLASSIFICATION
Certain figures for 1995 and 1994 have been reclassified to conform to
current year's presentation. In addition, as detailed above, the prior year
comparative figures have been translated from Canadian dollar
36
<PAGE> 37
HARISTON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(Dollar amounts in thousands of U.S. dollars unless otherwise stated)
amounts to U.S. dollar amounts under the method of convenience using the
exchange rate in effect on the effective date of change of the Company's
currency of measurement and reporting.
3. ACQUISITION OF MULTIMEDIA SOFTWARE BUSINESS
EDUCORP DIRECT, INC.
On August 25, 1995, a wholly-owned subsidiary of the Company, CD-Soft
Corporation (now known as Educorp Multimedia, Inc.), through a wholly-owned
subsidiary (now known as Educorp Direct, Inc.), acquired substantially all the
assets and assumed certain liabilities of a company and its affiliates engaged
in the multimedia software business with the trade name of Educorp. The
acquisition was accounted for by the purchase method and these consolidated
financial statements include the results of the operations from the date of
acquisition. The net assets acquired were as follows:
<TABLE>
<S> <C>
Current assets.............................................. $ 1,240
Property and equipment...................................... 80
Other assets................................................ 637
Liabilities................................................. (843)
--------
Net tangible assets acquired........................... 1,114
Customer mailing lists...................................... 1,000
Licenses.................................................... 570
Covenant not to compete..................................... 25
--------
Net identifiable assets acquired....................... 2,709
Goodwill purchased.......................................... 3,358
--------
Consideration.......................................... $ 6,067
========
Satisfied by--
Cash...................................................... $ 4,893
Short-term seller's notes (Note 9)........................ 374
Put option to acquire 5% of outstanding stock of Educorp
(Note 10).............................................. 300
Common shares of the Company (Note 12).................... 500
--------
$ 6,067
========
</TABLE>
In addition, the Company issued warrants for purchase of 250,000 common
shares of the Company with an exercise price of $2.25 per share to certain
parties who brokered the acquisition. These warrants expired on December 31,
1996.
Subsequent to December 31, 1996, the Company entered into a non-binding
letter of intent to sell certain of the assets and transfer certain of the
liabilities of Educorp for proceeds of $1,800 (see Note 18).
HIGHTEXT INTERACTIVE, INC.
Effective January 1, 1996, the Company, through a wholly-owned subsidiary
now known as HighText Interactive, Inc. ("HighText") 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
software titles on CD-ROM. The acquisition has been accounted for by the
purchase method and these consolidated financial statements include the results
of operations from the date of acquisition.
37
<PAGE> 38
HARISTON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(Dollar amounts in thousands of U.S. dollars unless otherwise stated)
The estimated fair value of assets and liabilities as of the date of
acquisition as follows:
<TABLE>
<S> <C>
Current assets.............................................. $179
Property and equipment...................................... 7
Liabilities................................................. (172)
----
Net tangible assets acquired........................... 14
Identifiable intangibles and other assets................... 313
----
Net identifiable assets acquired....................... 327
Goodwill purchased.......................................... 142
----
Consideration.......................................... $469
====
Satisfied by--
146,139 common shares of the Company valued at $2.82 per
share.................................................. $412
20,000 common shares valued at $2.82 per share which are
unissued and recorded as a liability................... 57
----
$469
====
</TABLE>
In addition, the purchase agreement provided for the issuance of up to $60
of the common stock of the Company valued at the average sale price for the
twenty trading days prior to issuance of a patent, as defined, if such patent is
issued no later than December 31, 1998. The agreement also provides for
additional shares of common stock of the Company to be paid, with a value equal
to the after-tax income of the book publishing operations for each of the five
fiscal years beginning with the year ending December 31, 1996. In the event that
the book publishing operations acquired are sold prior to December 31, 2000, the
Company will be required to issue common shares of the Company equal to the net
after-tax value of consideration received by the Company for such operations,
based on a formula as defined in the agreement.
Subsequent to December 31, 1996, the Company entered into an agreement with
the previous owners of HighText Publications, Inc. whereby the Company has
agreed to transfer to them substantially all of the assets and certain
liabilities of the book publishing operations. The transfer represents payment
in full of the contingent consideration and the loss on sale has been recorded
as at December 31, 1996.
4. DISCONTINUED OPERATIONS
During 1994, the Company adopted a formal plan to dispose of its minerals
recovery project and wrote it down to its estimated realizable value. The
minerals recovery project was disposed of in 1995. The write-down in 1994 and
the loss on disposal in 1995, which total in aggregate $12,799, are included in
results of discontinued operations.
The Company sold its oil and gas royalty and working interests for a gain
of $1,140 effective August 1, 1995. As part of the sale agreement, a debenture
secured by the oil and gas interests was assumed by the purchaser of the oil and
gas interests. The results of operations from the oil and gas royalty and
working interests are included in results of discontinued operations.
38
<PAGE> 39
HARISTON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(Dollar amounts in thousands of U.S. dollars unless otherwise stated)
5. RECEIVABLES
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Trade....................................................... $ 403 $ 238
Software royalties.......................................... -- 106
Receivable from a seller of Educorp......................... -- 98
Other....................................................... 18 15
--------- ---------
$ 421 $ 457
========= =========
</TABLE>
6. INVESTMENTS
<TABLE>
<CAPTION>
OWNERSHIP % TOTAL
------------- ---------------
1996 1995 1996 1995
----- ----- ------ ------
<S> <C> <C> <C> <C>
PLI --
1,820,566 (1995 -- 1,657,205) shares, at cost............ 25.8% 23.5% $1,208 $1,123
Collateral interest in 1,400,000 shares under a pledge
agreement............................................. -- 19.9% -- 833
------ ------
1,208 1,956
Madison --
233,591 (1995 -- 80,000) common shares................... 8.6% 4.1% 8 --
------ ------
1,216 1,956
Less -- Portion classified as short-term investments
(Note 18)............................................. (1,208) --
------ ------
$ 8 $1,956
====== ======
</TABLE>
By an agreement dated June 22, 1994, the Company sold 1.5 million shares of
PLI in return for a $7.5 million note. An amount of $500 was received on the
note and the collectibility of the remaining $7 million was uncertain.
Accordingly, the Company took a collateral interest in 1.4 million shares of PLI
under a pledge agreement between the Company and the purchaser. Due to the
uncertainty of realization, the Company did not record the sale of the shares or
the gain thereon in the December 31, 1994 and 1995 financial statements. In
1996, the Company received 1.1 million shares of PLI from the purchaser in
satisfaction of the note and the collateral interest in the shares of PLI.
During the year, the Company transferred 43,158 shares of PLI to the
holders of the $3,200 promissory notes (see Notes 9 and 17) as partial payment
of interest expense thereon.
During the year, the Company converted a previously written off note
receivable from Madison into 86,925 common shares of Madison and acquired an
additional 66,666 shares.
39
<PAGE> 40
HARISTON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(Dollar amounts in thousands of U.S. dollars unless otherwise stated)
7. EQUIPMENT AND LEASEHOLDS
<TABLE>
<CAPTION>
1996 1995
-------------------------------- --------
ACCUMULATED NET BOOK NET BOOK
COST DEPRECIATION VALUE VALUE
---- ------------ -------- --------
<S> <C> <C> <C> <C>
Furniture and equipment.......................... $ 80 $ 29 $ 51 $ 92
Computer equipment............................... 427 129 298 108
Leasehold improvements........................... 18 4 14 7
---- ---- ---- ----
$525 $162 $363 $207
==== ==== ==== ====
</TABLE>
8. INTANGIBLE ASSETS
<TABLE>
<CAPTION>
1996 1995
-------- --------
(NOTE 3) (NOTE 3)
<S> <C> <C>
Goodwill.................................................... $1,700 $3,358
Customer mailing lists...................................... 1,015 1,000
Licenses.................................................... 570 570
Copyrights/intellectual property............................ 234 --
Covenant not to compete..................................... 98 25
------ ------
3,617 4,953
Less -- Accumulated amortization.......................... (1,278) (286)
------ ------
$2,339 $4,667
====== ======
</TABLE>
The goodwill arising upon acquisition of the multimedia software business
has been written down by $1,800 to reflect an estimated permanent impairment in
value based on a non-binding letter of intent for the sale of the multimedia
software business entered into subsequent to year end (see Note 18).
9. TERM DEBT
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Loan payable bearing interest at prime plus 1% per annum.... $ 30 $ 30
Promissory notes bearing interest at 10% per annum.......... 3,200 3,200
Short-term notes bearing interest at 6% per annum........... -- 374
Promissory note bearing interest at 10% per annum repayable
in monthly instalments of $21 and due on February 15,
1998...................................................... 250 --
Capital lease obligations................................... 260 --
Other....................................................... -- 9
------- -------
3,740 3,613
Less -- Current portion..................................... (3,539) (413)
------- -------
$ 201 $ 3,200
======= =======
</TABLE>
The promissory notes of $3,200 are secured by the outstanding share capital
of Educorp, the Company's investment in PLI and certain receivables. The notes
were fully paid subsequent to year end.
40
<PAGE> 41
HARISTON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(Dollar amounts in thousands of U.S. dollars unless otherwise stated)
Future minimum lease payments for capitalized lease obligations at December
31, 1996 are as follows:
<TABLE>
<S> <C>
1997....................................................... $ 85
1998....................................................... 74
1999....................................................... 69
2000....................................................... 59
2001....................................................... 31
-----
318
Less -- Imputed interest................................. (58)
-----
Present value of net minimum lease obligations............. $ 260
=====
</TABLE>
10. PUT OPTION
The parties that brokered the purchase of Educorp in 1995 were granted an
option to purchase 26,316 shares in Educorp, being a 5% interest therein, with
an initial exercise price of U.S.$0.10 per share. The same parties have a put
option to require Educorp to repurchase the option for a price of $300 within
the period from February 25, 1997 to February 25, 1998. The put option and the
option to purchase shares in Educorp were settled for $175 subsequent to year
end (see Note 18).
11. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
The Company has entered into operating leases for its facilities expiring
at various dates up to 1998. Minimum annual payments, including operating costs,
under these leases over the next two years are as follows:
<TABLE>
<S> <C>
1997........................................................ $25
1998........................................................ 23
</TABLE>
ENVIRONMENTAL CONTINGENCIES
The Company disposed of its minerals recovery project in 1995 (see Note 4).
In connection with this project, the Company was subject to various United
States federal, state and local statutes, rules and regulations relating to
environmental matters, including provisions related to mine reclamation and the
discharge of materials into the environment. The Company may still be held
liable for environmental clean-up costs notwithstanding indemnifications
obtained from the property lessor and property owners. Currently, no
environmental liabilities have been identified or accrued in these consolidated
financial statements.
LITIGATION
The Company is being sued by certain former option holders for $560 for its
refusal during 1993 to issue shares under the relevant options. The Company
believes the options had expired and, accordingly, no shares should have been
issued. The outcome of the lawsuit is currently not determinable.
The Company is being sued by a former insider for approximately $83 on
account of losses incurred by the individual's spouse on the purchase during
1989 and sale during 1990 of Company shares. The Company believes the claim is
without merit; however, the outcome of the lawsuit is not currently
determinable.
41
<PAGE> 42
HARISTON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(Dollar amounts in thousands of U.S. dollars unless otherwise stated)
The Company is being sued by the former owners of a business acquired and
sold by Hariston in 1993. The former owners allege that Hariston committed civil
theft due to willful misrepresentation and breach of contract, and are claiming
loss and damages in the suit of an unspecified amount. Separately, legal counsel
to the plaintiffs has sent a letter to the Company proposing settlement of the
case for $3,000, which sum was purported in the letter to represent three times
the estimated damages suffered by the plaintiffs. The Company does not intend to
respond to this proposal and intends to rigorously defend itself in the lawsuit.
However, the Company believes that it has been indemnified by its co-defendant
in the suit, or an entity controlled by him, against any liability in this
matter. The outcome of the lawsuit is not currently determinable.
12. SHARE CAPITAL
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Authorized --
Unlimited number of common shares
Issued and outstanding --
Fully paid common shares.................................. $ 32,001 $ 29,889
Shares held in treasury (1,000 shares).................... (2) (2)
------------- -------------
$ 31,999 $ 29,887
============= =============
</TABLE>
Changes in the Company's issued share capital for the years ended December
31, 1994, 1995 and 1996 were:
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------
NUMBER
OF SHARES AMOUNT
--------- -------------
(NOTE 19) (NOTE 19)
<S> <C> <C>
Balance, December 31, 1993.................................. 8,614,809 $ 25,051
Shares issued for cash on exercise of stock option and
warrants............................................... 120,000 361
Shares issued for cash, less finders' fees of $372........ 850,000 3,343
Shares issued in settlement of $595 of a convertible
debenture of wholly-owned subsidiary, Canadian Capital
Financial Markets (C.C.F.M.) Inc....................... 266,667 595
Shares issued to acquire 25% minority interest in
75%-owned subsidiary company, Metanetix Corporation,
recorded at nominal value.............................. 1,000,000 --
--------- -------------
Balance, December 31, 1994.................................. 10,851,476 29,350
Shares issued to one of the sellers of Educorp as part of
the purchase price pursuant to the Purchase and Sale
Agreement.............................................. 200,000 500
Shares issued for cash on exercise of stock options....... 15,500 39
Cancelled shares.......................................... (2) --
--------- -------------
Balance, December 31, 1995.................................. 11,066,974 29,889
Shares issued for acquisition of HighText Interactive,
Inc. (Note 3).......................................... 146,139 412
Shares issued for cash on exercise of warrants............ 250,000 500
Shares issued for cash in a private placement............. 1,200,000 1,200
--------- -------------
Balance, December 31, 1996.................................. 12,663,113 $ 32,001
========= =============
</TABLE>
42
<PAGE> 43
HARISTON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(Dollar amounts in thousands of U.S. dollars unless otherwise stated)
As at December 31, 1996, the Company had outstanding vested stock options
and warrants as follows:
<TABLE>
<CAPTION>
NUMBER
OF VESTED EXERCISE
SHARES PRICE EXPIRATION DATE
--------- ----------- ------------------
<S> <C> <C> <C>
Options
Employee..................................... 10,000 Cdn. $ 2.50 November 30, 1997
Employee..................................... 10,000 Cdn. $ 4.25 February 17, 1998
Director..................................... 20,000 Cdn. $ 4.75 March 31, 1998
Employee..................................... 140,000 U.S. $ 1.25 July 17, 2003
Director..................................... 120,000 U.S. $ 1.25 July 17, 2003
Employee..................................... 296,666 U.S. $ 1.25 August 16, 2003
Director..................................... 80,000 U.S. $ 1.25 August 16, 2003
---------
676,666
=========
Warrants
Share warrants............................... 250,000 U.S. $ 2.25 December 31, 1996
Share warrants............................... 600,000 U.S. $ 1.75 September 27, 1997
Share warrants............................... 625,000 U.S. $ 4.00 November 21, 1997
Share warrants............................... 600,000 U.S. $ 2.50 September 27, 1998
Share warrants............................... 1,000,000 U.S. $ 2.50 August 24, 2000
---------
3,075,000
=========
Weighted average exercise price......... U.S. $ 2.41
===========
</TABLE>
13. OPERATING AND CORPORATE EXPENSES
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ---------
(NOTE 19)
<S> <C> <C> <C>
Administration, office and travel........................... $ 722 $ 496 $199
Consulting fees, salaries and employee benefits............. 2,631 885 220
Directors fees.............................................. 26 -- --
Marketing, catalog and trade show costs..................... 1,119 65 --
Professional fees........................................... 609 424 347
Rent and other.............................................. 233 210 126
Depreciation and amortization............................... 1,127 319 155
------ ------ ---------
$6,467 $2,399 $1,047
====== ====== =========
</TABLE>
Consulting fees, salaries and employee benefits of $2,631 for 1996 include
$108 paid to Scorpion Holdings, Inc. ("Scorpion"), a private financial advisory
company. By agreement between Hariston and Scorpion, Scorpion is paid $20 per
month for providing the services of Nuno Brandolini as Chairman and Chief
Executive Officer and Kevin McCarthy as President of the Company.
43
<PAGE> 44
HARISTON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(Dollar amounts in thousands of U.S. dollars unless otherwise stated)
14. GAIN (LOSS) ON INVESTMENTS AND LOANS
<TABLE>
<CAPTION>
1996 1995 1994
------ ----- ---------
(NOTE 19)
<S> <C> <C> <C>
Provision for loss on Madison shares........................ $ -- $ (59) $(952)
Gain on disposition of Madison shares....................... -- 123 --
Write-off of receivable from Madison........................ -- (133) --
Groothandelsmarkt Gemar B.V................................. -- -- (291)
Recovery (write-off) of finders' fees on PLI................ -- 230 (378)
Gain on sale of investment in PLI........................... 2,354 -- 1,324
Other....................................................... -- -- (229)
------ ----- -----
$2,354 $ 161 $(526)
====== ===== =====
</TABLE>
15. INCOME TAXES
The Company has losses carried forward of approximately $ 5,600
(1995-$4,100) for Canadian income tax purposes, which expire at various dates
from 1999 to 2003. They may be utilized to offset taxable income of future
years. The Company also has net capital losses of approximately $ 8,200 (1995 --
$9,000) for Canadian income tax purposes which may be carried forward
indefinitely and may be applied only against capital gains.
For U.S. income tax purposes, no provision for federal and state income
taxes has been recorded as the Company incurred net operating losses through
December 31, 1996. At December 31, 1996, the Company had approximately $3,500 of
federal net operating loss carryforwards for tax reporting purposes available to
offset future taxable income until 2010. Under the Tax Reform Act of 1986, the
amounts of and benefits from net operating losses carried forward may be
impaired or limited in certain circumstances. Events which may cause limitations
in the amount of net operating losses that the Company may utilize in any one
year include, but are not limited to, a cumulative ownership change of more than
50% over a three-year period. At December 31, 1996, the effect of such
limitation, if imposed, is not expected to be material.
The tax benefits of these losses for Canadian and U.S. income tax purposes
have not been recognized in these consolidated financial statements.
16. SEGMENTED INFORMATION
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- ---------
(NOTE 19)
<S> <C> <C> <C>
BY INDUSTRY SEGMENT
Revenue --
Computer software....................................... $6,334.. $ 2,805 $ --
Financing and investments............................... -- 21 22
------- ------- --------
Total revenues..................................... $ 6,334 $ 2,826 $ 22
======= ======= ========
</TABLE>
44
<PAGE> 45
HARISTON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(Dollar amounts in thousands of U.S. dollars unless otherwise stated)
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- ---------
(NOTE 19)
<S> <C> <C> <C>
Operating loss --
Computer software....................................... $(3,719) $ (507) $ --
Write-down of goodwill.................................. (1,800) -- --
Financing and investments............................... 2,354 (7) (600)
------- ------- --------
(3,165) (514) (600)
Less -- Corporate expenses.............................. 1,800 1,289 1,136
------- ------- --------
Loss from continuing operations.................... (4,965) (1,803) (1,736)
Discontinued operations --
Polish retail........................................... -- -- (1,289)
Minerals recovery project............................... -- (321) (12,478)
Factoring............................................... -- (5) 128
Oil and gas royalty and working interests............... -- 1,306 678
------- ------- --------
Net loss........................................... $(4,965) $ (823) $(14,697)
======= ======= ========
Identifiable assets --
Computer software....................................... $ 4,101 $ 7,314 $ --
Financing and investments............................... 1,216 1,956 3,352
Oil and gas royalty and working interests............... -- -- 2,515
Minerals recovery project............................... -- -- 260
------- ------- --------
5,317 9,270 6,127
Corporate............................................... 2,593 918 1,702
------- ------- --------
Total assets....................................... $ 7,910 $10,188 $ 7,829
======= ======= ========
Amortization of property, equipment, leaseholds, and
royalty interests --
Computer software....................................... $ 1,108 $ 297 $ --
Financing and investments............................... -- -- 134
Oil and gas royalty and working interests............... -- 107 618
Retail.................................................. -- -- 114
------- ------- --------
1,108 404 866
Corporate............................................... 19 22 45
------- ------- --------
Total amortization................................. $ 1,127 $ 426 $ 911
======= ======= ========
Additions to property, equipment, leaseholds, and royalty
interests --
Computer software....................................... $ 279 $ 117 $ --
Financing and investments............................... -- -- 115
Minerals recovery project............................... -- -- 4,203
------- ------- --------
279 117 4,318
Corporate............................................... 8 97 --
------- ------- --------
Total additions.................................... $ 287 $ 214 $ 4,318
======= ======= ========
</TABLE>
45
<PAGE> 46
HARISTON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(Dollar amounts in thousands of U.S. dollars unless otherwise stated)
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- ---------
(NOTE 19)
<S> <C> <C> <C>
BY GEOGRAPHIC AREA
Revenue --
Canada.................................................. $ -- $ 21 $ 22
United States of America................................ 6,334 2,805 --
------- ------- --------
Total revenues....................................... $ 6,334 $ 2,826 $ 22
======= ======= ========
Operating loss --
Canada --
Continuing operations................................ $(1,800) $(1,296) $ (2,218)
Discontinued operations.............................. -- 1,301 (2,397)
Poland.................................................. 2,354 -- (807)
United States of America --
Continuing operations................................ (5,519) (507) --
Discontinued operations.............................. -- (321) (9,275)
------- ------- --------
Net loss........................................... $(4,965) $ (823) $(14,697)
======= ======= ========
Identifiable assets --
Canada.................................................. $ 2,589 $ 918 $ 5,613
Poland.................................................. 1,208 1,956 1,956
United States of America 4,113 7,314 260
------- ------- --------
Total assets $ 7,910 $10,188 $ 7,829
======= ======= ========
</TABLE>
17. DIFFERENCES IN ACCOUNTING POLICIES BETWEEN
THE UNITED STATES AND CANADA
In certain respects, Canadian generally accepted accounting principles
("Canadian GAAP") differ from United States of America generally accepted
accounting principles ("U.S. GAAP"). The financial statements have been prepared
in accordance with Canadian GAAP, which are in agreement with U.S. GAAP, except
as set forth below.
CONSOLIDATED STATEMENTS OF LOSS AND DEFICIT
<TABLE>
<CAPTION>
1996 1995 1994
--------- ------- ------------
(NOTE 19)
<S> <C> <C> <C>
Net loss according to Canadian GAAP......................... $ (4,965) $(823) $ (14,697)
Development costs (Note 17(a)).............................. -- -- 3,293
Non-cash compensation expense (Note 17(b)).................. (81) (63) --
Difference due to exchange rate fluctuation (Note 17(c)).... -- (13) 225
--------- ----- ------------
Net loss according to U.S. GAAP........................... $ (5,046) $(899) $ (11,179)
========= ===== ============
</TABLE>
There are no differences in the consolidated balance sheets as at December
31, 1996 and 1995.
(a) Canadian GAAP permits the deferral of development costs if certain
criteria are met. Under U.S. GAAP, development costs are charged to expense as
incurred. All such costs were written off in 1994.
46
<PAGE> 47
HARISTON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(Dollar amounts in thousands of U.S. dollars unless otherwise stated)
(b) Options to purchase shares of the Company were issued to employees at
prices which were below the estimated fair market value of the options at the
date of granting. Under Canadian GAAP, the issuance of these shares is recorded
as an increase to the capital stock of the Company at the issue price of the
shares. Under U.S. GAAP, the difference between the estimated fair market value
of the shares subject to the option at the date of granting and the exercise
price of the options is required to be charged to expense, with the
corresponding amount being credited to capital stock.
(c) Under the relevant U.S. SEC regulations, a change in the reporting
currency requires that the financial statements for all the periods for which
financial information continues to be presented be restated, but the cumulative
effect of the change on periods prior to those restated need not be recognized.
The restatement was performed by using an appropriately weighted average
exchange rate for the statements of loss and deficit.
ADDITIONAL DISCLOSURES UNDER U.S. GAAP
INTANGIBLE ASSETS
The book value of the intangible assets is associated with the acquisition
of the multimedia software business. The Company assesses the recoverability of
its intangible assets by determining whether the amortization of the asset
balance over its remaining life can be recovered through projected nondiscounted
future cash flows over the remaining amortization period. If projected future
cash flows indicate that unamortized intangible assets will not be recovered, an
adjustment is made to reduce the net asset to an amount consistent with
projected future cash flows discounted at the Company's incremental borrowing
rate. Cash flow projections, although subject to a degree of uncertainty, are
based on trends of historical performance and management's estimate of future
performance, giving consideration to existing and anticipated competitive and
economic conditions.
In March 1995, The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of". This standard
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The Company has adopted this standard effective January 1, 1996.
INCOME TAXES
In accordance with SFAS No. 109, "Accounting for Income Taxes", U.S. GAAP
requires that the Company use the liability method of accounting for income
taxes. Deferred income taxes are recognized on the difference between financial
statement and income tax bases of assets and liabilities using enacted tax rates
in effect for the year in which the differences are expected to reverse. The
provision for income taxes represents the total of income taxes paid or payable
for the current year, plus the change in deferred taxes during the year.
Deferred tax assets totalling approximately $2.4 million at December 31,
1996 consist primarily of the tax effect of net operating loss carryforwards and
reserves and accrued expenses which are not yet deductible for tax purposes. The
Company has provided a full valuation allowance on the deferred tax asset
because of uncertainty regarding realizability.
47
<PAGE> 48
HARISTON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(Dollar amounts in thousands of U.S. dollars unless otherwise stated)
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially expose the Company to a
concentration of credit risk, as defined by SFAS No. 105, "Disclosure of
Information about Financial Instruments with Off-Balance-Sheet Risk and
Financial Instruments with Concentrations of Credit Risk," consist primarily of
cash and cash equivalents and trade receivables. At times, such investments may
be in excess of the FDIC insurance limit. Concentrations of credit risk with
respect to trade receivables are limited. Generally, the Company utilizes
thirty-day sales terms and does not require collateral or other security to
support customer receivables. Credit is extended to selected foreign and
domestic wholesalers, retailers, and governmental agencies. Management
continually monitors the financial condition of these companies to reduce the
risk of loss.
FAIR VALUE INFORMATION
The following disclosure of the estimated fair value of financial
instruments at December 31, 1996, is made in accordance with the requirements of
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments". The
estimated fair value amounts have been determined by the Company using available
market information and appropriate valuation methodologies. However,
considerable judgement is required in interpreting market data to develop
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Company could realize in a current
market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
The carrying amounts of cash and cash equivalents, trade receivables,
investments, accounts payable and term debt are a reasonable estimate of their
fair value.
The fair value information presented herein is based on pertinent
information available to management as of December 31, 1996. Although management
is not aware of any factors that would significantly affect the estimated fair
value amounts, such amounts have not been comprehensively revalued for purposes
of these consolidated financial statements since that date, and current
estimates of fair value may differ significantly from the amounts presented
therein.
UNAUDITED PRO FORMA INFORMATION
The following table presents the unaudited pro forma results of operations
of the Company for the year ended December 31, 1995, assuming the acquisition of
Educorp and HighText Interactive, Inc. (see Note 3) had occurred on January 1,
1995:
<TABLE>
<CAPTION>
EDUCORP FOR HIGHTEXT FOR COMPANY FOR PRO FORMA
THE PERIOD FROM THE YEAR ENDED THE YEAR ENDED RESULTS OF
JANUARY 1 TO DECEMBER 31, DECEMBER 31, PRO FORMA OPERATIONS
AUGUST 25, 1995 1995 1995 ADJUSTMENTS FOR 1995
--------------- -------------- -------------- ----------- -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue.................... $ 5,250 $ 408 $ 2,877 $ -- $ 8,535
Income (loss) from
continuing operations.... (146) 12 (1,803) -- (1,937)
Net income (loss).......... (146) 12 (823) (734) (1,691)
Loss per share from
continuing operations $ (0.18)
============
Net loss per share $ (0.16)
============
</TABLE>
48
<PAGE> 49
HARISTON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(Dollar amounts in thousands of U.S. dollars unless otherwise stated)
No pro forma results of operations for the year ended December 31, 1996 are
presented since the results of operations of the subsidiaries have been
consolidated since January 1, 1996. The pro forma information is presented for
informational purposes only and is not necessarily indicative of the operating
results that would have occurred had the acquisition been consummated as of
January 1, 1995, nor are they necessarily indicative of future operating
results.
STOCK OPTION PLAN ACTIVITIES
The following table summarizes stock option plan activities for the years
ended December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
--------- ----------
<S> <C> <C>
Stock options, beginning of year............................ 1,759,500 125,000
Less --
Stock options cancelled................................ (2,059,500) --
Stock options expired.................................. (35,000) (50,000)
Stock options exercised................................ -- (15,500)
Add --
Stock options granted.................................. 1,765,000 1,700,000
--------- ---------
Stock options, end of year.................................. 1,430,000 1,759,500
--------- ---------
</TABLE>
375,000 options granted in 1996 were cancelled in the same year. In
addition, 636,666 of the options granted during the year were vested in August
1996, while one-half of the rest will be vested by August 1997 and the remainder
by August 1998.
As permitted, the Company has adopted the disclosure only provisions of
SFAS No. 123 effective January 1, 1996. Accordingly, no compensation expense has
been recognized for the stock option plans except to the extent of the excess of
the estimated fair market value of the shares subject to the option at the date
of granting and the option exercise price. Had compensation expense for the
Company's stock option plans been determined based on the fair value at the date
of grant for 1996 and 1995 awards consistent with the provisions of SFAS No.
123, the Company's net income and earnings per share would have been reduced to
the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Net loss, as reported according to U.S. GAAP................ $ (5,046) $ (899)
Net loss, pro forma according to U.S. GAAP.................. (6,115) (1,624)
Loss per share, as reported according to U.S. GAAP.......... (0.43) (0.09)
Loss per share, pro forma according to U.S. GAAP............ (0.52) (0.16)
</TABLE>
Because the SFAS No. 123 method of accounting has not been applied to
options prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years. The fair value of
each option grant was estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions used: risk
free interest rate of 7%, expected option life of 7 years, expected volatility
of 85% and a dividend ratio of zero. The weighted average fair value of options
granted in 1996 and 1995 was $0.97 and $2.16, respectively. The weighted average
exercise price of options granted in 1996 and 1995 was $1.25 and $3.90,
respectively.
49
<PAGE> 50
HARISTON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(Dollar amounts in thousands of U.S. dollars unless otherwise stated)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ---------
(NOTE 19)
<S> <C> <C> <C>
Interest paid............................................... $ 34 $ 100 $ 83
Taxes paid.................................................. $ -- $ 19 $--
Other non-cash activities --
Interest on term debt paid by transfer of PLI shares (Note
6)..................................................... $ 155 $ -- $--
Equipment acquired and financed by capital leases......... 260 -- --
Term debt assumed by purchaser of oil and gas interests... -- 1,273 --
Shares issued in settlement of debt....................... -- -- 595
</TABLE>
18. SUBSEQUENT EVENTS
(A) PROPOSAL FOR SALE OF MULTIMEDIA SOFTWARE BUSINESS
Subsequent to December 31, 1996, the Company entered into a non-binding
letter of intent to sell certain of the assets and transfer certain of the
liabilities of its multimedia software business (excluding the book publishing
operations of HighText Publications, Inc.) for proceeds of $1,800. Such amount
is to be received in the form of common shares of the proposed buyer.
Furthermore, the Company entered into an agreement to dispose of the book
publishing operations of HighText Publications, Inc. (see Note 3).
UNAUDITED PRO FORMA INFORMATION
The following table presents the unaudited pro forma financial position for
the Company as of December 31, 1996, assuming the disposition of the multimedia
software operations had occurred on December 31, 1996:
Pro Forma Balance Sheet
<TABLE>
<CAPTION>
PRO FORMA
BALANCE SHEET DISPOSITION BALANCE SHEET
AS AT OF EDUCORP PRO FORMA AS AT
DECEMBER 31, 1996 AND HIGHTEXT ADJUSTMENTS DECEMBER 31, 1996
----------------- ------------- ----------- -----------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Current assets..................... $ 5,200 $ (1,159) $-- $ 4,041
Investments........................ 8 1,800 -- 1,808
Other assets....................... 2,702 (2,691) -- 11
Liabilities........................ 6,502 (2,050) -- 4,452
Shareholders' equity............... 1,408 -- -- 1,408
</TABLE>
50
<PAGE> 51
HARISTON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(Dollar amounts in thousands of U.S. dollars unless otherwise stated)
The following table presents the unaudited pro forma results of operations
for the Company for the year ended December 31, 1996, assuming the disposition
of the multimedia software operations had occurred on January 1, 1996:
Pro Forma Results of Operations
<TABLE>
<CAPTION>
RESULTS OF PRO FORMA RESULTS
FOR THE YEAR OPERATIONS OF OPERATIONS
ENDED OF EDUCORP PRO FORMA FOR THE YEAR ENDED
DECEMBER 31, 1996 AND HIGH TEXT ADJUSTMENTS DECEMBER 31, 1996
----------------- ------------- ----------- ------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenue.............................. $ 6,334 $(6,334) $-- -$-
Net income (loss).................... (4,965) 3,719 1,958 712
Net loss per share, as reported...... $(0.42)
=======
Net income per share, pro forma...... $ 0.06
=======
</TABLE>
The pro forma results of operations presented do not include the $1,800
write-down of goodwill and $158 of legal fees incurred in 1996, in view of the
proposed sale of the multimedia software business.
The pro forma information is presented for information purposes only and is
not necessarily indicative of the financial position and the operating results
that would have occurred had the disposition been consummated as of the
respective dates stated above, nor are they necessarily indicative of future
operating results.
(B) SALE OF INTEREST IN POLISH LIFE IMPROVEMENT S.A.
Subsequent to December 31, 1996, the Company sold 1,760,000 PLI shares for
net proceeds of $6,522. $1,500 of the proceeds are to be settled in three equal
instalments of $500 on March 28, 1997, August 28, 1997 and February 28, 1998,
respectively.
(C) DELISTING FROM NASDAQ
The Company's shares were delisted from trading on the SmallCap Market tier
of The NASDAQ Stock Market effective March 10, 1997.
The Company's shares commenced trading on the NASD Bulletin Board
over-the-counter market effective April 10, 1997.
(D) SETTLEMENT OF PUT OPTION
In February 1997, the Company agreed with the holders of the put option of
$300 (see Note 10) to redeem the put option and other related rights to purchase
the shares of Educorp for a consideration of $175.
19. 1994 COMPARATIVE FIGURES
The consolidated statement of loss and deficit of the Company for the year
ended December 31, 1994, which is presented for comparative purposes, was
audited by another firm of Chartered Accountants who rendered an unqualified
opinion on that statement dated March 24, 1995.
51
<PAGE> 52
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors of
HARISTON CORPORATION:
I have audited the combined statements of operations, retained earnings,
and cash flows of Gazelle Technologies and its affiliates (the "Company"), for
the period March 1, 1995 to August 24, 1995. These financial statements are the
responsibility of the Company's management. My responsibility is to express an
opinion on these financial statements based on my audit.
I conducted my audit in accordance with generally accepted auditing
standards. Those standards require that I plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
I believe that my audit provides a reasonable basis for my opinion.
In my opinion, the financial statements referred to above presents fairly,
in all material respects, the combined results of operations of the Company and
cash flows for the period ended March 1, 1995 to August 24, 1995 in conformity
with generally accepted accounting principles.
Encino, California JAY J. SHAPIRO, C.P.A.
March 20, 1996 A Professional Corporation
52
<PAGE> 53
GAZELLE TECHNOLOGIES, INC. AND AFFILIATES
COMBINED STATEMENT OF OPERATIONS
AND RETAINED EARNINGS
FOR THE PERIOD MARCH 1, 1995 TO AUGUST 24, 1995
<TABLE>
<CAPTION>
1995
---------
<S> <C>
Revenue:
Sales..................................................... $3,409,300
Royalties and license fees................................ 270,300
Postage and handling...................................... 165,400
----------
Total.................................................. 3,845,000
Cost of Sales............................................... 2,555,500
----------
Gross Profit................................................ 1,289,500
----------
Operating Expenses:
Promotion and trade shows................................. 360,900
Bad debts................................................. 15,300
Wages and fringe benefits................................. 536,400
Administrative including professional fees (Note 6)....... 374,700
Telephone................................................. 59,100
Royalties................................................. 185,400
----------
Total.................................................. 1,531,800
----------
Operating Loss............................................ (242,300)
----------
Other Income:
Depreciation and amortization............................. (24,000)
Net income from non-business operations (Note 4).......... 19,700
Reimbursement by EduComp, L.P. (Note 4)................... 13,600
----------
9,300
Net loss before provision for income taxes................ (233,000)
Provision for income taxes................................ (2,400)
----------
Net income................................................ (235,400)
Retained Earnings -- beginning of period.................... 262,600
----------
Retained Earnings -- end of period.......................... $ 27,200
==========
</TABLE>
The accompanying notes to combined financial statements are an integral part
hereof.
53
<PAGE> 54
GAZELLE TECHNOLOGIES, INC. AND AFFILIATES
COMBINED STATEMENT OF CASH FLOWS
FOR THE PERIOD MARCH 1, 1995 TO AUGUST 24, 1995
<TABLE>
<CAPTION>
1995
-----------------
<S> <C>
Operating Activities:
Combined loss............................................. $ (235,400)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization.......................... 24,000
Provision for bad debts................................ 15,300
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable.................................. (47,000)
Inventory............................................ 349,500
Other................................................ 188,400
Increase (decrease) in:
Accounts payable and accrued expenses................ (381,400)
Checks issued in excess of bank balance.............. (635,400)
Deferred income...................................... (20,200)
-----------------
(506,800)
-----------------
Net combined cash used by operating activities......... (742,200)
Investing Activities:
Purchase of business property............................. (11,000)
-----------------
Net cash used in investing activities..................... (11,000)
Financing Activities:
Advances from shareholder................................. 288,700
-----------------
Net cash provided by financing activities................. 288,700
-----------------
Decrease in combined cash................................... (464,500)
Net combined cash -- beginning of period.................... 555,800
-----------------
Net combined cash -- end of period.......................... $ 91,300
=================
</TABLE>
The accompanying notes to combined financial statements are an integral part
hereof.
54
<PAGE> 55
GAZELLE TECHNOLOGIES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Combined Financial Statements include the accounts of Gazelle
Technologies, Inc. ("Gazelle") and its affiliates -- BodyCello, Inc. ("BC"),
Manta Distribution Company ("Manta") and the mailing list formerly owned by
EduComp L.P. ("EduComp"). For the period March 1, 1995 to August 25, 1995
Gazelle had no expense accrual for EduComp mailing list usage and other
significant intercompany transactions have been eliminated. All entities were
owned or controlled by the same stockholder. The financial statements do not
include operations of EduComp whose general partner was Manta.
On August 25, 1995, the Company's net assets were acquired by CD-SOFT
Acquisition Corporation (a California corporation and 100% owned subsidiary of
Hariston Corporation) ("CD-SOFT"), see Note 7.
Gazelle, a California corporation, was incorporated in 1987. Gazelle is a
distribution organization that sells approximately 1,100 titles of CD-Rom
merchandise and related products.
Manta, a California S corporation, was incorporated in 1991. Manta is an
owner of certain CD Rom rights that it distributes to Gazelle and BC.
BC, a California corporation, was incorporated in 1992. BC distributes
CD-ROM titles to mail order customers and dealers.
Cash includes cash and liquid investments with original maturities of three
months or less.
Inventory is stated at lower of cost (first in, first out) or market.
Property is recorded at cost and depreciation and amortization are computed
using tax accelerated methods over the estimated useful life of each asset.
Useful lives range from 3 to 7 years.
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes."
Accordingly, deferred income tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying value and tax basis, net operating loss carryforward and tax
credit carryforward.
Accounts receivable are recorded based on sales to distributors and
mailorder customers under normal credit terms.
2. LEASE COMMITMENT:
The office facilities were leased under an arrangement through February 25,
1996, from the former stockholder and chief executive officer of the Company.
The minimum future lease payments on this operating lease are $2,800 per month.
This lease can be extended at the Company's option on a month-to-month lease
with thirty days notice to the Lessor.
3. INCOME TAXES:
The tax benefit from the losses from Manta (an S corporation) and BC cannot
be offset against the taxable income of Gazelle. There were no significant
temporary differences and therefore no deferred taxes are recorded.
The provision for income taxes for the period is calculated as follows:
<TABLE>
<S> <C>
Federal.................................................... $ 0
State...................................................... 2,400
-----------
Total...................................................... $ 2,400
===========
</TABLE>
55
<PAGE> 56
GAZELLE TECHNOLOGIES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. INCOME FROM NET ASSETS NOT USED IN BUSINESS OPERATIONS:
These assets generated income that is included in the statement of
operations as follows:
<TABLE>
<S> <C>
Investment income -- net.................................. $ 8,700
Rental income -- net...................................... 16,000
Depreciation expense...................................... (5,000)
-------------
$ 19,700
=============
</TABLE>
The Company collects rent and overhead reimbursement from EduComp for
providing that company with a facility and personnel. Accordingly, $13,600 are
included in the statement of operations for the period.
5. EMPLOYEE BENEFIT PLANS:
The Company has a profit-sharing plan and a defined pension plan provided
to its two employees commencing February 1, 1993. Such pension plan provides for
full vesting after six years of service and the computed benefit is equivalent
to 3.00% of average annual compensation multiplied by the number of years
credited service. There was no contribution or expense accrual for either plan
during the period March 1, 1995 to August 24, 1995.
6. CATALOG OPERATIONS:
During the period the Company generated revenues from co-op advertising
that is offset against catalog printing and mailing costs in the accompanying
statement of operations. The amounts reflected in administrative expenses are as
follows:
<TABLE>
<S> <C>
Revenues from co-op advertising.......................... $ 559,100
Catalog printing and mailing costs....................... (412,000)
---------------
Net catalog income..................................... $ 147,100
===============
</TABLE>
7. SUBSEQUENT EVENT -- ACQUISITION BY HARISTON CORPORATION:
On August 25, 1995, substantially all of the assets and certain of the
liabilities of Gazelle, Manta, BC and the EduComp mailing list (the "New
Company") were acquired by CD-SOFT, a wholly-owned subsidiary of Hariston
Corporation, in exchange for $5,500,000, (adjusted for $125,600) including a
promissory note of $374,000 and a put obligation for 200,000 shares of Hariston
common stock valued at $2.50 per share. The note bears interest at 6% with
interest and principal payable in full on March 1, 1996. Payment of principal is
subject to offset from adjustments to the purchase price, as defined. The excess
purchase price will be amortized as goodwill over a period of 8 years.
56
<PAGE> 57
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
For the Company's fiscal year ended December 31, 1994, the Company's
financial statements were audited by Doane Raymond of Vancouver, British
Columbia.
Following the completion of the audit for the Company's fiscal year ended
December 31, 1994, and because of the increasingly international nature of the
Company's operations, including its acquisition of the "Educorp" group of
businesses described herein, the Company dismissed Doane Raymond effective June
30, 1995 as its independent accountant. The Company engaged the firm of Arthur
Andersen & Co. to audit its financial statements for the fiscal year ended
December 31, 1995.
The Company's independent accountants' report on its financial statements
for the fiscal year ended December 31, 1994 did not contain an adverse opinion
or disclaimer of opinion, or qualification or modification as to uncertainty,
audit scope or accounting principles, and during such period there was no
disagreement between the Company and its former accountants on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope of procedure which, if not resolved to the satisfaction of such former
accountant, would have caused it to make reference to the subject matter of the
disagreement in connection with its report. However, the report on the financial
statements for the year ended December 31, 1994 did refer the reader to two
footnotes to the financial statements which described uncertainties. The report
stated that no additional explanatory paragraph was contained because the report
was expressed in accordance with Canadian reporting standards which do not
permit a reference to such uncertainties when the uncertainties are adequately
disclosed in the financial statements.
The decision to change the Company's accountants was recommended and
approved by the Company's Board of Directors.
57
<PAGE> 58
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The directors and executive officers of the Company and their ages as of
March 31, 1997 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Nuno Brandolini(1)........................ 43 Chairman, Director, Chief Executive Officer
Kevin R. McCarthy......................... 36 President, Director
L. James Porter(2)........................ 32 Chief Financial Officer, Corporate Secretary, Director
James E. Meyer............................ 51 President and Secretary of Direct
James P. Angus(1)(2)...................... 50 Director
Neil S. MacKenzie(1)(2)................... 52 Director
</TABLE>
- ---------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
All directors hold office until the next Annual Meeting of Shareholders or
the election and qualification of their successors. Officers are elected
annually by the Board of Directors and serve at the discretion of the Board.
NUNO BRANDOLINI, Chairman of the Board and Chief Executive Officer, has
held these offices since July, 1996. He has been a Director since July, 1995. He
is also Chief Executive Officer of Scorpion Holdings, Inc., a private financial
advisory company. In addition, Mr. Brandolini is a Director of Arabella, S.A., a
publicly traded Luxembourg company, a Director of Sonex Research, Inc., a U.S.
publicly traded company, and a Director of National Insurance Group, Inc., a
U.S. publicly traded company. From 1993 to 1995, Mr. Brandolini was Managing
Director of Rosecliff, Inc., a leveraged buy-out company, and from 1991 to 1993,
Mr. Brandolini was Vice President of Solomon Brothers, a diversified financial
services, investment and securities brokerage company.
KEVIN R. MCCARTHY was appointed the Company's President and to the Board of
Directors in July 1996. Mr. McCarthy is also President of Scorpion Holdings,
Inc., a private financial advisory company, and a Director of National Insurance
Group, Inc., a U.S. publicly traded company. From October 1993 to November 1995,
Mr. McCarthy was Chief Financial Officer of Rosecliff, Inc., a leveraged buy-out
company, and from 1982 to October 1993, Mr. McCarthy was a Partner and held
various other positions with Ernst & Young, Certified Public Accountants. Mr.
McCarthy is a Certified Public Accountant.
L. JAMES PORTER was appointed the Company's Chief Financial Officer and
Corporate Secretary, and to the Board of Directors, in February 1995. From
September 1987 to February 1995, Mr. Porter was employed as a Senior Tax Manager
and held various other positions with Arthur Andersen, Chartered Accountants.
Mr. Porter is a Chartered Accountant and a Chartered Financial Analyst.
JAMES E. MEYER was appointed President of Direct in March 1996 and was
appointed Secretary of Educorp and Chief Executive officer of HighText in July
1996. Prior to his joining the Company, Mr. Meyer was President of Sunwear
Direct, a private marketer of swimwear, from 1994 through 1996, a partner of
Minwok Associates, an international catalog marketing and management consulting
firm, during 1993 and Vice President of Inmac Corp., a public company engaged in
the worldwide distribution of computer hardware and software products, from 1992
through 1993.
JAMES P. ANGUS was appointed to the Company's Board of Directors in
December 1994. Mr. Angus has been President of Angroup Holdings Limited, a
private investment holding company since 1988. Mr. Angus is also a director of
Koala Beverages Limited, a Canadian publicly traded company.
NEIL S. MACKENZIE, was appointed to the Board of Directors in December
1994. Mr. MacKenzie is also President of NS MacKenzie & Company Limited, a
management consulting firm, a position he has held since 1991, a partner with
the Chancellor Partners, a company engaged in management consulting,
Secretary/Treasurer of Canadian Fine Papers (B.C.) Corp., a private merchant of
fine papers, President of
58
<PAGE> 59
509306 B.C. Limited, a private children's software developer, President of
Interlearn Holdings Ltd., a public holding company, a Director of ATS Wheel
Inc., a Canadian publicly traded Company engaged in the manufacture of advanced
automobile tire and wheel systems, a Director of RTDS Technologies, Inc., a
private manufacturer of software and hardware for the electric utility industry,
and a Director of Advanced Process Control Ltd., a private manufacturer of
software for computer controlled industrial processes. From 1976 to 1991, Mr.
MacKenzie was a Partner and held various other positions with Ernst & Young,
Management Consultants.
Section 16(a) of the Securities Exchange Act of 1934, and the regulations
thereunder, require the Company's directors, executive officers and persons who
own more than 10% of a registered class of the Company's equity securities to
file with the Securities and Exchange Commission initial reports of ownership
and reports of changes in ownership of Common Stock and other equity securities
of the Company, and to furnish the Company with copies of all Section 16(a)
forms they file. To the Company's knowledge, based solely on review of the
copies of such reports furnished to the Company and written representations that
no other reports were required, during the two fiscal years ended December 31,
1995 and 1996, all Section 16(a) filing requirements applicable to the Company's
officers, directors and greater than 10% beneficial owners were complied with.
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth certain summary information concerning
compensation paid or accrued for services rendered to the Company in all
capacities during the years ended December 31, 1995 and 1996 to Messrs.
McGoodwin and Brandolini, who served as Chief Executive Officer of the Company
during 1996 and Messrs. Porter and Meyer, who were the Company's only executive
officers whose total salary and bonus for 1996 exceeded $100,000 (collectively,
the "Named Executive Officers").
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION AWARDS
--------------------------
ANNUAL SECURITIES
COMPENSATION UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS(#) COMPENSATION
--------------------------- ---- ------------ ------ ---------- ------------
($) ($)
<S> <C> <C> <C> <C> <C>
James V. McGoodwin, Chief Executive
Officer(1).......................... 1995 $110,000 $ 0 1,000,000(2) $11,000
1996 $ 77,000 $ 0 0 $ 4,527
Nuno Brandolini, Chairman and Chief
Executive Officer................... 1996(3) (4) (4) 440,000 (4)
L. James Porter, Chief Financial
Officer, Corporate Secretary........ 1995(5) $ 64,167 $7,000 250,000(2) $ 0
1996 $ 95,833 $7,000 240,000 $ 0
James E. Meyer, President of Direct... 1996(6) $104,167 $ 0 0 $ 0
</TABLE>
- ---------------
(1) Mr. McGoodwin resigned as Chief Executive Officer of the Company in July
1996.
(2) All outstanding option grants under the 1995 Stock Option Plan were
cancelled on July 17, 1996.
(3) Mr. Brandolini was appointed Chief Executive Officer of the Company in July
1996. Prior to such appointment, Mr. Brandolini received directors fees from
the Company of $4,777 in 1996 and $4,766 in 1995.
(4) Mr. Brandolini receives no salary or bonus payments from the Company. As
described below, Mr. Brandolini's services are rendered through an
arrangement between the Company and Scorpion Holdings, Inc. During 1996, the
Company paid $107,741 to Scorpion Holdings, Inc. pursuant to this
arrangement.
(5) Mr. Porter was appointed Chief Financial Officer and Corporate Secretary of
the Company in February 1995.
(6) Mr. Meyer was appointed President of Direct in March 1996.
59
<PAGE> 60
The following table sets forth certain information with respect to options
granted to the Named Executive Officers during the fiscal year ended December
31, 1996. No Named Executive Officers, other than those shown in the following
table, were granted any options during such year.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------
NUMBER OF PERCENTAGE OF
SECURITIES TOTAL OPTIONS POTENTIAL REALIZABLE VALUE AS
UNDERLYING GRANTED TO EXERCISE OR ASSUMED ANNUAL RATES OF STOCK
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION PRICE APPRECIATION FOR OPTION
GRANTED(1) FISCAL YEAR(2) ($/SH) DATE TERM(3)
----------- --------------- ----------- ---------- -----------------------------
NAME 0% 5% 10%
- --------------------- --- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Nuno Brandolini...... 40,000 N/A(4) $1.25 7/17/2003 $ 0 $ 20,355 $ 47,436
400,000 28% $1.25 8/16/2003 $ 0 $203,550 $474,358
L. James Porter...... 50,000 3% $1.25 7/17/2003 $ 0 $ 25,444 $ 59,295
190,000 11% $1.25 8/16/2003 $ 0 $ 96,686 $225,320
</TABLE>
- ---------------
(1) Options to purchase 113,333 shares are exercisable immediately upon grant,
and the remaining options become exercisable at the rate of 63,333 at August
16, 1997 and 63,334 at August 16, 1998. The term of the options is seven
years.
(2) Based on 1,405,000 options granted to employees during fiscal 1996. An
additional 360,000 options were granted to nonemployee directors during such
fiscal year.
(3) The potential realizable value is based on assumed rates of appreciation of
the fair market value of the underlying shares from the date of grant. It is
calculated assuming that the stock price on the date of grant appreciates at
the indicated rate compounded annually for the entire term of the option and
the option is exercised and sold on the last day of its term for the
appreciated stock price. The 5% and 10% assumed rates are mandated by the
rules of the Securities and Exchange Commission and do not represent the
Company's projection of the future price of the Company's Common Stock.
There can be no assurance that any of the values reflected in this table
will be achieved.
(4) Options granted to Mr. Brandolini as a director, prior to his appointment as
Chief Executive Officer of the Company.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION VALUES
The following table sets forth information with respect to exercises of
stock options by the Named Executive Officers during the fiscal year ended
December 31, 1996 and the number and value of securities underlying unexercised
options held by the Named Executive Officers as of December 31, 1996. No Named
Executive Officer other than those listed in the following table held any
options as of December 31, 1996.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-
SHARES OPTIONS AT THE-MONEY OPTIONS AT
ACQUIRED ON VALUE DECEMBER 31, 1996 (#) DECEMBER 31, 1996 ($)(1)
NAME EXERCISE (#) REALIZED ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ------------ ------------ ------------------------- -------------------------
<S> <C> <C> <C> <C>
Nuno Brandolini........... 0 0 173,333/266,667 $0/ $0
L. James Porter........... 0 0 113,333/126,667 $0/ $0
</TABLE>
- ---------------
(1) Based on the closing price of the Common Stock of $0.47 on December 31,
1996.
DIRECTOR COMPENSATION
Directors, other than Messrs. Brandolini, McCarthy and Porter, receive a
fee from the Company equal to CDN $1,000 per month plus CDN $500 per meeting
attended. As described below, Messrs. Brandolini and McCarthy's services are
rendered to the Corporation through an arrangement between Hariston and Scorpion
Holdings, Inc. See Item 13.
STOCK OPTIONS
1995 STOCK OPTION PLAN. In July 1995, the Company adopted the 1995 Stock
Option Plan (the "1995 Plan") covering an aggregate of 3,000,000 shares of the
Company's Common Stock. This plan was cancelled on July 17, 1996, as were all
outstanding option grants under the plan.
60
<PAGE> 61
1996 STOCK OPTION PLAN. In July 1996, the Company adopted the 1996 Stock
Option Plan (the "1996 Plan") covering an aggregate of 260,000 shares of the
Company's Common Stock. The purpose of the 1996 Plan is to attract and retain
qualified personnel, to provide additional incentives to employees, officers,
directors and consultants of the Company and to promote the success of the
Company's business. Pursuant to the 1996 Plan, the Company may grant incentive
and nonstatutory (nonqualified) stock options to key employees, officers,
directors or consultants of the Company.
The 1996 Plan is administered by the Board of Directors, which has sole
discretion and authority, consistent with the provisions of the 1996 Plan, to
determine which eligible participants will receive options, the time when
options will be granted, the terms of options granted and the number of shares
which will be subject to options granted under the 1996 Plan. The Board may also
appoint a committee to administer the 1996 Plan and, subject to applicable law,
to exercise all of the powers of the Board under the 1996 Plan. As of December
31, 1996, 260,000 options were outstanding under the 1996 Plan at a weighted
average exercise price equal to $1.25 per share.
The maximum term of a stock option under the 1996 Plan is seven years. If
an optionee terminates his or her service to the Company, the optionee may
exercise only those option shares vested as of the date of termination. The
exercise price of incentive stock options granted under the 1996 Plan must be at
least equal to the fair market value of the Common Stock subject to the option
on the date of grant. The exercise price of incentive stock options granted to
an optionee who owns stock possessing more than 10% of the voting power of the
Company's outstanding capital stock must equal to at least 110% of the fair
market value of the Common Stock subject to the option on the date of grant. The
exercise price of nonstatutory stock options granted under the 1996 Plan shall
be determined by the Board. Payment of the exercise price under an option may be
made in cash, previously acquired shares of the Company's Common Stock or such
other consideration as may be determined by the Board of Directors.
The 1996 Plan may be amended at any time by the Board of Directors,
although certain amendments would require stockholder approval. The 1996 Plan
will terminate in July 2006 unless earlier terminated by the Board.
1996 STOCK OPTION PLAN NO. 2. In August 1996, the Company adopted the 1996
Stock Option Plan No. 2 (the "1996 Plan No.2") covering an aggregate of
2,000,000 shares of the Company's Common Stock. The purpose of the 1996 Plan
No.2 is to attract and retain qualified personnel, to provide additional
incentives to employees, officers, directors and consultants of the Company and
to promote the success of the Company's business. Pursuant to the 1996 Plan
No.2, the Company may grant incentive and nonstatutory (nonqualified) stock
options to key employees, officers, directors or consultants of the Company.
The 1996 Plan No.2 is administered by the Board of Directors, which has
sole discretion and authority, consistent with the provisions of the 1996 Plan
No.2, to determine which eligible participants will receive options, the time
when options will be granted, the terms of options granted and the number of
shares which will be subject to options granted under the 1996 Plan No.2. The
Board may also appoint a committee to administer the 1996 Plan No.2 and, subject
to applicable law, to exercise all of the powers of the Board under the 1996
Plan No.2. As of December 31, 1996, 1,130,000 options were outstanding under the
1996 Plan No.2 at a weighted average exercise price equal to $1.25 per share.
The maximum term of a stock option under the 1996 Plan No.2 is seven years.
If an optionee terminates his or her service to the Company, the optionee may
exercise only those option shares vested as of the date of termination and must
effect such exercise within three months, although the Board may set longer
periods for exercise of supplemental stock options. The exercise price of
incentive stock options granted under the 1996 Plan No.2 must be at least equal
to the fair market value of the Common Stock subject to the option on the date
of grant. The exercise price of incentive stock options granted to an optionee
who owns stock possessing more than 10% of the voting power of the Company's
outstanding capital stock must equal to at least 110% of the fair market value
of the Common Stock subject to the option on the date of grant. The exercise
price of nonstatutory stock options granted under the 1996 Plan No.2 shall be
determined by the Board. Payment of the exercise price under an option may be
made in cash, previously acquired shares of the Company's Common Stock or such
other consideration as may be determined by the Board of Directors.
61
<PAGE> 62
The 1996 Plan No.2 may be amended at any time by the Board of Directors,
although certain amendments would require stockholder approval. The 1996 Plan
No.2 will terminate in August 2006 unless earlier terminated by the Board.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Except as provided herein, based on review of the registered shareholders
listing, SEC filings, and limited inquiry, the Company is not aware of any
person (individual or corporate), or group of persons who have pre-arranged to
vote in unison, owning beneficially more than 5% of the outstanding shares of
the Company's voting securities.
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of March 31, 1997 by the Company's
directors, by the Named Executive Officers (none of whom except the individuals
listed beneficially owns any shares of Common Stock), by each person who is
known to be the beneficial owner of 5% or more of the Company's Common Stock and
by all directors and officers as a group. Unless otherwise indicated, the
persons named in the table possess sole voting and investment power with respect
to the shares listed (except to the extent such authority is shared with spouses
under applicable law).
<TABLE>
<CAPTION>
SHARES OWNED BENEFICIALLY AS OF
MARCH 31, 1997
--------------------------------------
NO. OF SHARES PERCENT OF CLASS(1)
------------- -------------------
<S> <C> <C>
Nuno Brandolini............................................ 274,333(2) 2.1%
Kevin R. McCarthy.......................................... 200,000(3) 1.6%
L. James Porter............................................ 163,333(4) 1.3%
James P. Angus............................................. 80,000(5) *
Neil S. MacKenzie.......................................... 80,000(5) *
Pierre Anthamatten......................................... 900,000(6) 7.1%
JB Oxford & Company........................................ 934,508(7) 7.4%
All Directors and Officers as a Group (6 Persons).......... 887,666(8) 6.7%
</TABLE>
- ---------------
* Represents less than 1% of the outstanding shares.
(1) Based on 12,663,113 shares of Common Stock, outstanding as of March 31,
1997.
(2) Includes 173,333 shares issuable upon exercise of options which are
exercisable within 60 days.
(3) Includes 100,000 shares issuable upon exercise of options which are
exercisable within 60 days.
(4) Includes 113,333 shares issuable upon exercise of options which are
exercisable within 60 days.
(5) Consists solely of shares issuable upon exercise of options which are
exercisable within 60 days.
(6) As reported on Schedule 13D filed by Mr. Anthamatten dated January 15, 1993,
which Schedule 13D has not been amended. According to such Schedule 13D,
such shares are owned directly by Olinka, S.A., a Luxembourg corporation,
all of the outstanding shares of which are owned by Mr. Anthamatten.
According to such Schedule 13D, Olinka, S.A.'s business address is 3, Rue
Adames, L-1114 Luxembourg.
(7) Includes 636,666 shares issuable upon exercise of options which are
exercisable within 60 days.
Based on review of the registered shareholders listing, JB Oxford & Company
is the registered holder of 934,508 shares of the Company's Common Stock,
representing a 7.4% interest in the Company. JB Oxford & Company was previously
a market maker in the Company's stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In June 1996 under the terms of two $125,000 short-term notes the Company
borrowed $250,000 from McGoodwin James & Co., a company controlled by Hariston's
then President and Chief Executive Officer, James V. McGoodwin. The proceeds
were used to fund the working capital needs of the Company's multimedia software
operations. The notes bore simple interest at a rate of 10%. In January 1997,
payment on
62
<PAGE> 63
the two $125,000 notes was extended by way of conversion into a new $250,000
note, also bearing interest at 10%. Under the terms of the new note, payments of
principal and interest are being made by Hariston monthly with the note to be
fully repaid by December 15, 1997. As of April 15, 1997, $166,667 of the
principal balance on the note remains to be paid.
In July 1996 James V. McGoodwin resigned as an officer and Director of the
Company. Under the terms of his resignation, the Company agreed to pay Mr.
McGoodwin, through his private company McGoodwin James and Co., an aggregate of
$69,000 in monthly payments of $11,500 for the period July through December,
1996. Such payments have been made in full. Additionally, the Company agreed to
sell to McGoodwin James & Co. certain furniture and equipment in the Company's
former Costa Mesa, California office at the Company's net book value. Under this
sale arrangement, the Company will receive total proceeds of $59,873, paid in
monthly instalments, of which $34,926 has been received as of April 15, 1997.
Upon the resignation in July 1996 of James V. McGoodwin, Nuno Brandolini
replaced Mr. McGoodwin as Chairman and Chief Executive Officer and Kevin R.
McCarthy replaced Mr. McGoodwin as President of the Company. The services of
Messrs. Brandolini and McCarthy are being rendered to the Company through an
arrangement between Hariston and Scorpion Holdings, Inc. ("Scorpion"). Under the
terms of this arrangement, Scorpion is paid a monthly fee of $20,000. During
1996, the Company paid $107,741 to Scorpion pursuant to this arrangement. As of
April 15, 1997, the Company has paid $80,000 to Scorpion in 1997 pursuant to
this arrangement.
Mr. Meyer and the Company are parties to an employment letter agreement
(the "Meyer Agreement") dated March 5, 1996, pursuant to which Mr. Meyer serves
as President of Direct. The Meyer Agreement provided that Mr. Meyer's base
salary will initially be $125,000 and that he would participate in a bonus plan
whereby he can earn up to 50% of his base salary on an annual basis, based on
achievement of Direct's operating budget and certain non-financial goals. The
Meyer Agreement also provided for certain relocation benefits, travel
reimbursement, health benefits, expense reimbursement and four weeks paid
vacation per year. The Meyer Agreement provided for the grant to Mr. Meyer of
certain options in Educorp on the same basis as other executives of Educorp,
which options have not been granted as of April 15, 1997. Pursuant to the Meyer
Agreement, Mr. Meyer would be entitled to three months base salary upon the
termination of his employment by the Company without cause.
63
<PAGE> 64
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K.
(a) FINANCIAL STATEMENTS AND SCHEDULES. The following financial statements
are included in, or incorporated by reference in, Part II, Item 8:
(1) FINANCIAL STATEMENTS FOR HARISTON CORPORATION
(i) Independent Auditors Report;
(ii) Consolidated Balance Sheets at December 31, 1996 and 1995;
(iii) Consolidated Statements of Loss and Deficit for the years ended
December 31, 1996, 1995 and 1994;
(iv) Consolidated Statements of Changes in financial position for the
years ended December 31, 1996, 1995 and 1994;
(v) Notes to Consolidated Financial Statements.
(2) COMBINED FINANCIAL STATEMENTS FOR GAZELLE TECHNOLOGIES, INC. AND
AFFILIATES
A. Financial Statements of Gazelle Technologies, Inc. and Affiliates
for period ended August 24, 1995 (incorporated herein by
reference). (See Item 8).
B. Financial statements for Gazelle Technologies, Inc. and Affiliates
for three fiscal years ended February 28, 1995 (incorporated herein
by reference). (See Item 8).
(b) REPORTS ON FORM 8-K. No reports on Form 8-K were filed by the Company
during the last quarter of the period covered by this report.
(c) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT DESCRIPTION
- ------- -------------------
<C> <S>
2.1 Asset Purchase and Sale Agreement among CD-Soft Acquisition
Corporation, Bodycello, Inc., Gazelle Technologies, Inc.,
Manta Distribution Co., Educorp, L.P., and Vahe Guzelimian
dated August 1, 1995 (incorporated herein by this reference
to Exhibit 2.1 to the Registrant's current report on Form
8-K filed September 11, 1995).
2.2 Agreement of Purchase and Sale dated August 1, 1995 between
Hariston Corporation and 3147479 Canada, Inc. (with included
indemnity agreement) (incorporated herein by this reference
to Exhibit 2.2 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1995).
2.3 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
(incorporated herein by this reference to Exhibit 2.1 to the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1996).
3.1 Articles of Amalgamation of Hariston Corporation
(incorporated herein by this reference to Exhibit 3.1 to the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1995).
3.2 Amended and Restated Bylaws of Hariston Corporation
(incorporated herein by this reference to Exhibit 3.2 to the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1996).
4.1 Series 1995 Promissory Note between the Company and Privatim
Finanz A.G. (incorporated herein by this reference to
Exhibit 4.1 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1995).
</TABLE>
64
<PAGE> 65
<TABLE>
<CAPTION>
Exhibit
No. Exhibit Description
------- -------------------
<S> <C>
4.2 Series 1995 Promissory Note between the Company and Zocal Foundation (incorporated herein by this
reference to Exhibit 4.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995).
4.3 Series 1995 Promissory Note between the Company and Kinaro S.A. (incorporated herein by this reference
to Exhibit 4.3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30,
1995).
4.4 Series 1995 Promissory Note between the Company and Neval Management, Ltd. (incorporated herein by this
reference to Exhibit 4.4 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995).
4.5 Form of Pledge and Security Agreement between the Registrant and the holders of the Registrant's Series
1995 Promissory Notes (incorporated herein by this reference to Exhibit 4.5 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1995).
4.8 1996 Hariston Corporation Stock Option Plan (incorporated herein by this reference to Exhibit 4.8 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996).
4.9 1996 Hariston Corporation Stock Option Plan No. 2 (incorporated herein by this reference to Exhibit 4.9
to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996).
10.1 Employment Letter Agreement dated March 5, 1996 between Direct and James E. Meyer (filed herewith).
16.1 Letter from Doane Raymond re change in certifying accountant (filed herewith).
21 Subsidiaries of the Registrant (filed herewith).
23 Consent of Arthur Andersen & Co. (filed herewith).
27 Financial Data Schedule.
99 Financial Statements of Gazelle Technologies, Inc. and Affiliates (predecessor) for the fiscal years
ended February 28, 1995, 1994 and 1993 (filed herewith).
</TABLE>
(d) SCHEDULES.
None
65
<PAGE> 66
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Dated: April 15, 1997 HARISTON CORPORATION
By: /s/ Nuno Brandolini
---------------------------
Nuno Brandolini
Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
<TABLE>
<S> <C>
/s/ Nuno Brandolini Dated: April 15, 1997
- ------------------------------------------
Nuno Brandolini
Director, Chief Executive Officer
(Principal Executive Officer)
/s/ Kevin R. McCarthy Dated: April 15, 1997
- ------------------------------------------
Kevin R. McCarthy
Director, President
/s/ L. James Porter Dated: April 15, 1997
- ------------------------------------------
L. James Porter
Director, Chief Financial Officer,
Corporate Secretary
(Principal Financial Officer,
Principal Accounting Officer)
/s/ James P. Angus Dated: April 15, 1997
- ------------------------------------------
James P. Angus
Director
/s/ Neil S. MacKenzie Dated: April 15, 1997
- ------------------------------------------
Neil S. MacKenzie
Director
</TABLE>
66
<PAGE> 67
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBER
NO. EXHIBIT DESCRIPTION PAGES
- ------- ------------------- ------------
<C> <S> <C>
2.1 Asset Purchase and Sale Agreement among CD-Soft Acquisition *
Corporation, Bodycello, Inc., Gazelle Technologies, Inc.
Manta Distribution Co., Educorp, L.P., and Vahe Guzelimian
dated August 1, 1995 (incorporated herein by this reference
to Exhibit 2.1 to the Registrant's current report on Form
8-K filed September 11, 1995................................
2.2 Agreement of Purchase and Sale dated August 1, 1995 between *
Hariston Corporation and 3147479 Canada, Inc. (with included
indemnity agreement) (incorporated herein by this reference
to Exhibit 2.2 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1995)..............
2.3 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
(incorporated herein by this reference to Exhibit 2.1 to the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1996).......................................
3.1 Articles of Amalgamation of Hariston Corporation *
(incorporated herein by this reference to Exhibit 3.1 to the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1995)...................................
3.2 Amended and Restated Bylaws of Hariston Corporation *
(incorporated herein by this reference to Exhibit 3.2 to the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1996)...................................
4.1 Series 1995 Promissory Note between the Company and Privatim *
Finanz A.G. (incorporated herein by this reference to
Exhibit 4.1 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1995)..............
4.2 Series 1995 Promissory Note between the Company and Zocal *
Foundation (incorporated herein by this reference to Exhibit
4.2 to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1995).......................
4.3 Series 1995 Promissory Note between the Company and Kinaro *
S.A. (incorporated herein by this reference to Exhibit 4.3
to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1995)...........................
4.4 Series 1995 Promissory Note between the Company and Neval *
Management, Ltd. (incorporated herein by this reference to
Exhibit 4.4 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1995)..............
4.5 Form of Pledge and Security Agreement between the Registrant *
and the holders of the Registrant's Series 1995 Promissory
Notes (incorporated herein by this reference to Exhibit 4.5
to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1995)...........................
4.8 1996 Hariston Corporation Stock Option Plan (incorporated *
herein by this reference to Exhibit 4.8 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996..........................................
4.9 1996 Hariston Corporation Stock Option Plan No. 2 *
(incorporated herein by this reference to Exhibit 4.9 to the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1996....................................
10.1 Employment Letter Agreement dated March 5, 1996 between
Direct and James E. Meyer (filed herewith).
16.1 Letter from Doane Raymond re change in certifying accountant
(filed herewith)............................................
21 Subsidiaries of the Registrant (filed herewith).............
23 Consent of Arthur Andersen & Co. (filed herewith)...........
27 Financial Data Schedule.....................................
99 Financial Statements of Gazelle Technologies, Inc. and
Affiliates (predecessor) for the fiscal years ended February
28, 1995, 1994 and 1993 (filed herewith)....................
</TABLE>
- ---------------
* incorporated by reference
<PAGE> 1
EXHIBIT 10.1
[HARISTON LETTERHEAD]
March 5, 1996
Mr. James E. Meyer
66 Platt Avenue
Sausalito, CA 94965
Dear Jim:
On behalf of Hariston Corporation, and its wholly-owned subsidiary, EDUCORP
Direct (the "Company"), I would like to offer to you the position of President
of EDUCORP Direct, pursuant to the following terms, and subject to the formal
approval of these terms by Hariston's Board of Directors at the next Board
meeting scheduled for Tuesday, March 12, 1996.
As President of EDUCORP Direct, your initial base compensation will be $125,000
per year although it is understood and expected that your base will increase in
subsequent years, subject to the Company's performance. You will report to me
and will be responsible for the management and performance of EDUCORP Direct.
A bonus plan will be implemented whereby you can earn up to 50% of your base
compensation ($62,500 in the first year) on an annual basis. The plan, which
will be prepared with your input and agreement, will compensate you based on
your achievement of EDUCORP Direct's operating budget and certain non-financial
goals, including customer list growth, implementation of an MIS system,
establishment of business to business sales capabilities, and employee
productivity. The bonus plan will also take into consideration budget
variances for capital expenditures and the effect of any currently
unanticipated strategic decisions.
With regard to benefits, EDUCORP Direct will provide you with an "allowance" of
up to $16,000 per year to pay for airfare between San Francisco and San Diego,
and an apartment in the San Diego area, as long as you continue to maintain
your primary residence in Sausalito. Should you relocate to the San Diego
area, the Company will reimburse you for reasonable moving expenses not to
exceed $3,000. The travel and apartment expenses will be paid directly by the
Company.
You will also be provided with medical insurance and any other benefits that
are offered to all other employees. EDUCORP Direct will consider extending
medical coverage to "significant others" based on the demands for this added
benefit by the Company's employees.
<PAGE> 2
Mr. James E. Meyer
March 5, 1996
Page 2
As President of the Company, EDUCORP Direct will reimburse you for any
reasonable out-of-pocket expenses that you incur in the course of your
employment. You will also be granted four (4) weeks of paid vacation per
year. This paid vacation will accrue at the rate of one week per quarter. If
the Company has not already done so, it will soon change its policy such that
this benefit must be used before the end of the first quarter following the
subject year or it will be lost.
As you know, it is our intention to legally separate EDUCORP Multimedia, the
parent corporation of EDUCORP Direct, from Hariston. This restructuring will
result in EDUCORP Multimedia becoming a publicly-traded company. Assuming this
restructuring does take place as planned on or before July 30, 1996, you will be
granted stock options at the same price as other executives equal to 2.5% of
EDUCORP Multimedia's outstanding common stock, as measured prior to a public
secondary offering or a size-equivalent offering on a private basis. Subject
to legal and tax constraints, we will endeavor to minimize the exercise price
of these options which shall vest on a monthly basis over a four year term.
The underlying shares, like those of all other executives, will be subject to
the Rule 144 holding period.
If for any reason, EDUCORP Multimedia is unable to be separated from Hariston,
we anticipate emigrating Hariston to the United States and subsequently merging
the emigrated entity with EDUCORP Multimedia. Under these circumstances your
options will be assumed by the new entity under terms and conditions that will
result in your owning options to purchase 250,000 shares of the merged public
entity at an exercise price, and with a vesting schedule, similar to those of
the current executive officers.
In either event your options will become fully vested upon the sale of EDUCORP
Multimedia to an unrelated third party. A draft copy of the option plan and
your agreement is being sent under separate cover.
Your employment with EDUCORP Direct is on an at-will basis. Accordingly,
employment is for no specified term and may be terminated by either the Company
or you at any time with or without cause or notice. Any modification, waiver,
or amendment to your employment on an at-will basis must be in writing and must
be signed by the President of Hariston, or in the event of its successful
restructuring, EDUCORP Multimedia, and by you.
In the event that your employment is terminated without cause at any time in
the future, you will receive severance compensation equal to three (3) months
pay plus any accrued vacation.
<PAGE> 3
Mr. James E. Meyer
March 5, 1996
Page 3
If the foregoing is acceptable to you, please indicate your acceptance of this
offer with your signature below.
We look forward to your joining the team and helping us build a major company
in the multimedia industry.
Sincerely,
J.V. McGoodwin
J.V. McGoodwin
President and CEO
AGREED, on this date 5 - March - 1996
----------------
James E. Meyer
- ------------------------------------
James E. Meyer
<PAGE> 1
EXHIBIT 16.1
LETTER FROM FORMER ACCOUNTANT
[DOANE RAYMOND LETTERHEAD]
April 10, 1997
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
RE: HARISTON CORPORATION (1934 ACT FILE NO. 0-13966)
This firm acted as independent accountants for Hariston Corporation (the
"Company") with respect to its fiscal year ended December 31, 1994. We have been
presented with disclosure prepared by the Company relating to the Company's
dismissal of this firm as independent accountants following that fiscal year
which indicates that there were no disagreements between this firm and that
Company which are reportable under item 304 of Regulation S-K. This will confirm
that we agree with the Company's statements made in such disclosure.
Yours truly,
DOANE RAYMOND
/s/ Gerry Leonard
- ------------------------------------------------
Gerry Leonard, C.A.
Partner
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
STATE OR JURISDICTION
NAME OF INCORPORATION
- ---- ---------------------
<S> <C>
Educorp Multimedia, Inc..................................... Delaware
Educorp Direct, Inc.(1)..................................... California
(formerly named "CD-Soft Acquisition
Corporation" and "CD-Soft Source Corporation")
HighText Interactive, Inc.(1)............................... California
(formerly named "CD-Soft Press Corporation")
EuroEastern Investment Corporation (inactive)............... Delaware
</TABLE>
- ---------------
(1) Wholly owned by Educorp Multimedia, Inc.
<PAGE> 1
EXHIBIT 23
LOGO
CONSENT OF INDEPENDENT ACCOUNTANT
We consent to the incorporation of our report included in this Form 10-K
into the Company's previously filed Registration Statements on Form S-8 (File
No. 333-20109 and File No. 333-20091) and the Company's previously filed
Registration Statement on Form S-3 (File No. 333-07843).
/s/ Arthur Andersen & Co.
- ------------------------------------------------
Vancouver, British Columbia
April 10, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,805
<SECURITIES> 1,208
<RECEIVABLES> 479
<ALLOWANCES> 58
<INVENTORY> 559
<CURRENT-ASSETS> 5,200
<PP&E> 525
<DEPRECIATION> 162
<TOTAL-ASSETS> 7,910
<CURRENT-LIABILITIES> 6,001
<BONDS> 201
0
0
<COMMON> 31,999
<OTHER-SE> (30,591)
<TOTAL-LIABILITY-AND-EQUITY> 7,910
<SALES> 6,229
<TOTAL-REVENUES> 6,334
<CGS> 5,058
<TOTAL-COSTS> 5,058
<OTHER-EXPENSES> 8,267
<LOSS-PROVISION> 64
<INTEREST-EXPENSE> 331
<INCOME-PRETAX> (4,965)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,965)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,965)
<EPS-PRIMARY> (0.42)
<EPS-DILUTED> (0.42)
</TABLE>
<PAGE> 1
EXHIBIT 99
FINANCIAL STATEMENTS OF PREDECESSOR
INDEPENDENT AUDITOR'S REPORT
Board of Directors
HARISTON CORPORATION
I have audited the accompanying combined balance sheet of Gazelle
Technologies, Inc. and affiliates (the "Company") as of February 28, 1995, 1994
and 1993 and the related combined statements of operations, retained earnings,
and cash flows for each of the years then ended. These financial statements are
the responsibility of the Company's management. My responsibility is to express
an opinion on these financial statements based on my audits.
Except as explained in the following paragraphs, I conducted my audits in
accordance with generally accepted auditing standards. Those standards require
that I plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. I believe that my
audits provides a reasonable basis for my opinion.
Because I was not engaged as auditor until after February 28, 1992, I was
not present to observe a physical inventory taken at that date, and I can not
satisfy myself concerning inventory quantities at the Company by other
procedures. Inventory, as of February 28, 1992, enters materially into the
determination of combined net income, retained earnings and cash flows for the
year ended February 28, 1993.
Since I was not present to observe this physical inventory and have not
been able to satisfy myself concerning inventory quantities on that date, the
scope of my work was not sufficient to enable me to express, and I do not
express, an opinion on the accompanying combined statements of operations,
retained earnings and cash flows for the year ended February 28, 1993.
In my opinion, the combined balance sheet referred to above presents
fairly, in all material respects, the combined financial position of the Company
as of February 28, 1995, 1994 and 1993, and the results of operations and cash
flow for each of the years ended February 28, 1994 and 1995 in conformity with
generally accepted accounting principles.
October 31, 1995 JAY J. SHAPIRO, C.P.A.
Encino, California A Professional Corporation
<PAGE> 2
GAZELLE TECHNOLOGIES, INC. AND AFFILIATES
COMBINED BALANCE SHEET
FEBRUARY 28, 1995, 1994 AND 1933
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............................ $ 555,800 $ 442,500 $ 93,700
Accounts receivable, net of allowance for doubtful
accounts of $70,000................................ 315,000 747,600 344,000
Royalties receivable................................. 68,900
Inventory............................................ 1,200,000 767,000 170,200
Note receivable-shareholder.......................... 130,000
Prepaid expenses..................................... 74,200 9,000 3,000
---------- ---------- ---------
Total Current Assets............................... 2,213,900 1,966,100 740,900
Property -- net (Notes 2 and 5)...................... 41,000 64,600 62,900
Other assets (Note 5)................................ 554,800 106,500 96,200
---------- ---------- ---------
Total Assets......................................... $2,809,700 $2,137,200 $ 900,000
========== ========== =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Accounts payable and accrued expenses (Notes 3 and
6)................................................. $ 658,800 $ 779,300 $ 387,500
Checks issued in excess of bank balance (Note 3)..... 635,400 901,300 320,900
Deferred income...................................... 60,200 110,400 77,500
Due to stockholder (Note 8).......................... 662,400 492,600 221,000
Income taxes payable (Note 4)........................ 400,000 7,000
---------- ---------- ---------
Total Current Liabilities.......................... 2,416,800 2,283,600 1,013,900
Commitments (Notes 2 & 8)
Stockholder's Equity:
Common stock (Note 7)................................ 113,100 113,100 113,100
Retained earnings (Accumulated deficit).............. 279,800 (259,500) (227,000)
---------- ---------- ---------
392,900 (146,400) (113,900)
---------- ---------- ---------
Total Liabilities and Stockholder's Equity......... $2,809,700 $2,137,200 $ 900,000
========== ========== =========
</TABLE>
The accompanying notes to combined financial statements are an integral part
hereof.
2
<PAGE> 3
GAZELLE TECHNOLOGIES, INC. AND AFFILIATES
COMBINED STATEMENT OF OPERATIONS AND RETAINED EARNINGS
YEARS ENDED FEBRUARY 28, 1995, 1994 AND 1993
(ACCUMULATED DEFICIT)
<TABLE>
<CAPTION>
1995 1994 1993
--------- ---------- ---------
<S> <C> <C> <C>
Revenue:
Sales............................................... $9,193,300 $11,004,000 $8,419,500
Royalties and license fees.......................... 107,300 19,700
Postage and handling................................ 326,700 323,400 246,200
Other............................................... 123,300 225,500 95,000
--------- ---------- ---------
Total............................................. 9,750,600 11,572,600 8,670,700
Cost of Sales:
General merchandise................................. 5,234,900 6,257,000 4,778,800
Other............................................... 115,700 111,400 87,500
--------- ---------- ---------
5,350,600 6,368,400 4,866,300
--------- ---------- ---------
Gross Profit........................................ 4,400,000 5,204,200 3,894,400
--------- ---------- ---------
Operating Expenses:
Catalog operations -- net (Note 9).................. 198,200 143,500 120,000
Advertising and trade shows......................... 756,100 718,900 852,600
Bad debts........................................... 132,000 67,400 73,000
Wages and fringe benefits........................... 798,900 748,000 694,900
Office operations................................... 590,500 651,100 689,900
Telephone........................................... 148,100 227,800 246,100
Royalties........................................... 250,000 238,900 185,200
--------- ---------- ---------
Total............................................. 2,873,800 2,795,600 2,861,700
--------- ---------- ---------
Operating Income.................................... 1,526,200 2,408,600 1,032,700
--------- ---------- ---------
Other Expenses:
Depreciation and amortization....................... (50,000) (50,000) (54,000)
Officer compensation (Note 8)....................... (709,600) (2,424,000) (991,100)
Net income from non-business operations (Note 5).... 147,300 24,500 20,300
Reimbursement by EduComp, L.P. (Notes 5 and 6)...... 25,400 28,400 15,400
--------- ---------- ---------
(586,900) (2,421,100) (1,009,400)
--------- ---------- ---------
Net income (loss) before provision for income
taxes............................................. 939,300 (12,500) 23,300
Provision for income taxes.......................... (400,000) (7,000)
--------- ---------- ---------
Net income.......................................... 539,300 (12,500) 16,300
Dividends paid...................................... (20,000) (10,000)
Accumulated deficit -- beginning of year............ (259,500) (227,000) (233,300)
--------- ---------- ---------
Retained earnings (Accumulated deficit) -- end of
year.............................................. $ 279,800 $ (259,500) $(227,000)
========= ========== =========
</TABLE>
The accompanying notes to combined financial statements are an integral part
hereof.
3
<PAGE> 4
GAZELLE TECHNOLOGIES, INC. AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOW
YEARS ENDED FEBRUARY 28, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
----------------- ----------------- -----------------
<S> <C> <C> <C>
Operating Activities:
Combined net income (loss)............................ $ 539,300 $ (12,500) $ 16,300
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization......................... 50,000 50,000 54,000
Provision for bad debts............................... 70,000
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable................................. 363,700 (403,600) 9,500
Inventory........................................... (433,000) (596,800) (39,200)
Other............................................... (61,600) 26,800 (25,700)
Increase (decrease) in:
Accounts payable and accrued expenses............... (120,500) 328,300 96,400
Checks issued in excess of bank balance............. (265,900) 580,400 220,900
Deferred income..................................... (50,200) 32,900 48,400
Income taxes payable................................ 400,000 (7,000) (17,000)
----------------- ----------------- -----------------
(117,500) 23,500 433,600
----------------- ----------------- -----------------
Net combined cash provided by operating activities.... 421,800 11,000 449,900
----------------- ----------------- -----------------
Investing Activities:
Purchase of non-business assets....................... (404,700) (21,200) (17,000)
Purchase of business property......................... (73,600) (22,600) (60,000)
----------------- ----------------- -----------------
Net cash used in investing activities................. (478,300) (43,800) (77,000)
Financing Activities:
Dividend to shareholder............................... (20,000) (10,000)
Advances from (to) shareholder........................ 169,800 401,600 (127,700)
----------------- ----------------- -----------------
Net cash provided by financing activities............. 169,800 381,600 (137,700)
----------------- ----------------- -----------------
Increase in combined cash............................. 113,300 348,800 235,200
Net combined cash -- beginning of period.............. 442,500 93,700 (141,500)
----------------- ----------------- -----------------
Net combined cash -- end of period.................... $ 555,800 $ 442,500 $ 93,700
================= ================= =================
Supplemental cash flow disclosure:
Taxes paid.......................................... $ 14,500 $ 17,000 $ 2,400
================= ================= =================
</TABLE>
The Company provided approximately $404,700 and assumed a $247,000 mortgage
payable in fiscal 1995 for the acquisition of land and building from the
Company's owner at a value of $651,700.
The accompanying notes to combined financial statements are an integral part
hereof.
4
<PAGE> 5
GAZELLE TECHNOLOGIES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Combined Financial Statements include the accounts of Gazelle
Technologies, Inc. ("Gazelle") and its affiliates -- BodyCello, Inc. ("BC") as
of January 31, 1995, 1994 and 1993, Manta Distribution Company ("Manta") as of
December 31, 1994, 1993 and 1992, and the mailing list formerly owned by EduComp
L.P. ("EduComp"). All entities were owned or controlled by the same stockholder.
The financial statements do not include operations of EduComp whose general
partner was Manta. All significant intercompany transactions, including mailing
list rental cost paid by Gazelle to EduComp have been eliminated.
On August 25, 1995, the Company's net assets were acquired by CD-SOFT
Acquisition Corporation (a California corporation and 100% owned subsidiary of
Hariston Corporation) ("CD-SOFT"), see Note 10.
Gazelle, a California corporation, was incorporated in 1987. Gazelle is a
distribution organization that sells approximately 1,100 titles of CD-Rom
merchandise and related products.
Manta, a California S corporation, was incorporated in 1991. Manta is an
owner of certain CD-Rom rights that it distributes to Gazelle and BC.
BC, a California corporation, was incorporated in 1992. BC distributes
CD-ROM titles to mail order customers and dealers.
Cash includes cash and liquid investments with original maturities of three
months or less.
Inventory is stated at lower of cost (first in, first out) or market.
Property is recorded at cost and depreciation and amortization are computed
using tax accelerated methods over the estimated useful life of each asset.
Useful lives range from 3 to 7 years.
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes."
Accordingly, deferred income tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying value and tax basis, net operating loss carryforward and tax
credit carryforward.
Accounts receivable are recorded based on sales to distributors and
mailorder customers under normal credit terms.
2. PROPERTY AND LEASE COMMITMENT:
<TABLE>
<CAPTION>
1995 1994 1993
--------- ----------------- -----------------
<S> <C> <C> <C>
Property and equipment consisted of the following:
Computer equipment....................................... $ 246,000 $ 216,200 $ 193,600
Furniture and fixtures................................... 68,100 68,100 68,100
Leasehold improvements................................... 16,700
Property not used in operations.......................... 795,100 111,200 90,000
--------- ----------------- -----------------
1,125,900 395,500 351,700
Less accumulated depreciation and amortization........... (301,500) (239,700) (208,800)
--------- ----------------- -----------------
824,400 155,800 142,900
Net assets not used in business (Note 5)................. (783,400) (91,200) (80,000)
--------- ----------------- -----------------
$ 41,000 $ 64,600 $ 62,900
========= ================= =================
</TABLE>
The office facilities are presently leased under a non-cancelable
arrangement through February 25, 1996, from the former stockholder and chief
executive officer of the Company ("Lessor"). The minimum future
5
<PAGE> 6
GAZELLE TECHNOLOGIES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
lease payments on this operating lease are $2,800 per month. This lease can be
extended at the Company's option on a month-to-month lease with thirty days
notice to the Lessor.
3. LIABILITIES:
Accounts payable and accrued expenses include:
<TABLE>
<CAPTION>
1995 1994 1993
--------------- --------------- ---------------
<S> <C> <C> <C>
Vendors.................................................. $ 428,300 $ 470,800 $ 248,000
Taxes other than income taxes............................ 36,500 139,200 37,500
Accrued compensation, fringe benefits and royalties...... 194,000 169,300 102,000
--------------- --------------- ---------------
Total.................................................... $ 658,800 $ 779,300 $ 387,500
=============== =============== ===============
</TABLE>
Checks issued in excess of bank balance are reflected as Bank overdraft on
the accompanying balance sheets.
4. INCOME TAXES:
The tax benefit from the losses from Manta (an S corporation) and BC cannot
be offset against the taxable income of Gazelle. There were no significant
temporary differences and therefore no deferred taxes are recorded as of
February 28, 1995, 1994, or 1993.
The provision for income taxes is calculated as follows:
<TABLE>
<CAPTION>
1995 1993
--------------- -----------
<S> <C> <C>
Federal..................................................... $ 315,500 $ 5,500
State....................................................... 84,500 1,500
--------------- -----------
Total....................................................... $ 400,000 $ 7,000
=============== ===========
</TABLE>
5. NET ASSETS NOT USED IN BUSINESS OPERATIONS:
Other assets, which includes $12,000 security deposit on the Company's
lease, also reflects net assets not used in business operation consisting of the
following:
<TABLE>
<CAPTION>
1995 1994 1993
----------------- ------------- -------------
<S> <C> <C> <C>
Real estate and personal property at Gazelle net book value
(Note 2)................................................. $ 783,400 $ 91,200 $ 80,000
Less: Mortgage payable..................................... (240,600)
----------------- ------------- -------------
$ 542,800 $ 91,200 $ 80,000
================= ============= =============
</TABLE>
The above assets generated income that is included in the statement of
operations as follows:
<TABLE>
<CAPTION>
1995 1994 1993
--------------- --------------- ---------------
<S> <C> <C> <C>
Investment income -- net.................................. $ 142,100 $ 36,500 $ 30,300
Rental income -- net...................................... 16,900
Depreciation expense...................................... (11,700) (10,000) (10,000)
--------------- --------------- ---------------
$ 147,300 $ 26,500 $ 20,300
=============== =============== ===============
</TABLE>
6
<PAGE> 7
GAZELLE TECHNOLOGIES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The Company collects rent and overhead reimbursement from EduComp for
providing that company with a facility and personnel. Accordingly, $25,400,
$28,400 and $15,400 are included in the statement of operations for the years
ended February 28, 1995, 1994 and 1993, respectively.
6. DUE TO STOCKHOLDER:
The Company has several significant transactions with other entities under
common ownership of the Company's chief executive officer and principal
stockholder. The Company has recorded a liability on its balance sheet as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
--------------- --------------- ---------------
<S> <C> <C> <C>
Due to stockholder from Gazelle........................... $ 14,600
Due to stockholder from BC................................ 70,900 $ 25,400 $ 20,000
Due to Gazelle from EduComp............................... 900 21,200
Due to stockholder from Manta............................. 576,000 446,000 201,000
--------------- --------------- ---------------
Total Payable............................................. $ 662,400 $ 492,600 $ 221,000
=============== =============== ===============
</TABLE>
7. CAPITAL STOCK:
Capital stock (no par value) consists of:
<TABLE>
<CAPTION>
SHARES
-------------------------
ISSUED AND
AMOUNT AUTHORIZED OUTSTANDING
--------------- ---------- -----------
<S> <C> <C> <C>
Gazelle.................................................. $ 61,100 1,000,000 1,000
Manta.................................................... 50,000 1,000,000 50,000
BC....................................................... 2,000 1,000,000 2,000
--------------- -------- -----------
$ 113,100 3,000,000 53,000
=============== ======== ===========
</TABLE>
8. EMPLOYEE BENEFIT PLANS:
The operations of BC reflect an accrual for fiscal 1995 and 1994, relative
to a defined pension plan provided to its two employees commencing February 1,
1993. Such plan provides for full vesting after six years of service and the
computed benefit is equivalent to 3.00% of average annual compensation
multiplied by the number of years credited service.
Pension costs are determined actuarially and funded to the extent allowable
under federal law and regulations utilizing the individual aggregate method with
a discount rate of 6.00%. The components of pension expense included in Officer
Compensation for the year ended February 28th are as follows:
<TABLE>
<CAPTION>
1995 1994
------------- -------------
<S> <C> <C>
Service cost................................................ $ 57,700 $ 51,000
Amortization................................................ 2,900
------------- -------------
Pension expense............................................. $ 60,600 $ 51,000
============= =============
</TABLE>
7
<PAGE> 8
GAZELLE TECHNOLOGIES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The funded status of the defined benefit plan at February 28th are as
follows:
<TABLE>
<CAPTION>
1995 1994
--------------- -------------
<S> <C> <C>
Fair value of plan assets................................... $ 57,000 $ 6,000
--------------- -------------
Actuarial present value of benefit obligations:
Vested benefits........................................... 45,000 11,000
Non-vested benefits....................................... 72,600 46,000
--------------- -------------
Projected accumulated benefit obligation.................... 117,600 57,000
--------------- -------------
Plan assets less than projected obligation.................. $ 60,600 $ 51,000
=============== =============
Accrued pension liability................................... $ 60,600 $ 51,000
=============== =============
</TABLE>
Gazelle also had a defined contribution plan (terminated effective March 1,
1994) which provided profit sharing to all full-time employees. During the years
ended February 28, 1994, and 1993, the Company contributed $57,500, and $50,400,
respectively.
9. CATALOG OPERATIONS:
The Company generated revenues from co-op advertising that is offset
against catalog printing and mailing costs in the accompanying statement of
operations. The amounts are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----------------- ----------------- -----------------
<S> <C> <C> <C>
Revenues from co-op advertising........................ $ 751,500 $ 518,500 $ 245,900
Catalog printing and mailing costs..................... (949,700) (662,000) (365,900)
----------------- ----------------- -----------------
Net catalog costs...................................... $ (198,200) $ (143,500) $ (120,000)
================= ================= =================
</TABLE>
10. SUBSEQUENT EVENT -- ACQUISITION BY HARISTON CORPORATION:
On August 25, 1995, substantially all of the assets and certain of the
liabilities of Gazelle, Manta, BC and the EduComp mailing list (the "New
Company") were acquired by CD-SOFT, a wholly-owned subsidiary of Hariston
Corporation, in exchange for $5,500,000, including a promissory note of $374,000
and a put obligation for 200,000 shares of Hariston common stock. The note bears
interest at 6% with interest and principal payable in full on March 1, 1996.
Payment of principal is subject to offset from adjustments to the purchase
price, as defined. The New Company entered into two-year employment agreements
with three key employees of Gazelle for aggregate annual salaries of $275,000
and bonuses of a least $10,000 each plus percentage of gross profit in excess of
a base level, as defined.
8
