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 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 Renewable Resources 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 (since renamed Northpoint Corporation), a Canadian public company in which as of December 31, 1997 Hariston held 233,591 shares representing a 2.5% interest.
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").
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 was renamed Educorp Direct, Inc. ("Direct").
In January 1996 Educorp, through a wholly-owned subsidiary, purchased certain assets and liabilities of a book and multimedia software publisher known as HighText Publications, Inc. Also located in San Diego, this subsidiary was renamed HighText Interactive, Inc. ("HighText") and focused on the development and publishing of interactive adult education multimedia software. In 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.
Until the sale of their multimedia software assets in December 1997 and February 1998 respectively, Direct and HighText were operated as the sole operating subsidiaries of Educorp.
On December 19, 1997 Direct sold substantially all of its assets and operations, and transferred substantially all of its liabilities, to a wholly-owned subsidiary of Arch Publishers Group, Inc. ("APG"), for consideration consisting solely of a 15% equity interest in APG. APG is a private Elmsford, New York based publisher, reseller and distributor of educational and entertainment software.
On February 13, 1998 HighText sold substantially all of its assets, and transferred substantially all of its liabilities, to Byron Preiss Multimedia Company, Inc. ("Preiss") for consideration consisting solely of 150,000 shares of common stock of Preiss subject to adjustment intended to provide $1.33 in proceeds per share for shares sold during the six months period beginning on February 13, 1999. Preiss is a developer of educational software and a publisher of
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(1) Unless otherwise indicated, all dollar amounts herein are in U.S. Dollars.
books and software for educational and consumer markets. Preiss is a public company whose common shares trade on the Nasdaq SmallCap Market tier of The Nasdaq Stock Market under the symbol "CDRM".
Hariston's other significant asset as of December 31, 1996 was its minority shareholding in Polish Life Improvement S.A. ("PLI"), a Kielce, Poland based 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% interest. PLI is publicly traded on the parallel market to the Warsaw Stock Exchange under the symbol "PLI", and operates a chain of home-improvement stores in Poland under the name "NOMI". During 1997 Hariston sold all of its PLI shares, realizing net proceeds of $6,756,786. 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 Pennsylvania based aerospace products manufacturer but in April 1997 the seller withdrew the operation from sale. A number of other acquisition opportunities were subsequently examined during 1997, including a Massachusetts based food products manufacturer and a Connecticut based shopping incentives marketer, but Hariston was unable to reach acceptable terms for concluding an acquisition.
In September 1997 Hariston commenced discussions with various European parties about investing in business operations in Poland and a related private placement of treasury shares. Certain Polish operations were identified for possible acquisition and were visited by Hariston's management in October and November, 1997. The private placement financing was scheduled to close by year-end but in January 1998 Hariston received notice that the funds would not be forthcoming. In reaction, Hariston both broadened the number of parties with which it was in discussions and streamlined its investment plans for Poland to reduce the amount of immediately required financing. Discussions with these parties are ongoing.
Going forward, Hariston's strategy is to seek acquisition or businesses opportunities that offer the possibility for significant income or capital gains appreciation, to be earned in a manner that utilizes the Company's significant tax losses, while minimizing down-side risk. Management is mindful of the need to avoid both undue equity dilution and undue leverage and will seek to raise only such financing as is necessary to give effect to a particular transaction or series of transactions while maintaining a margin of liquidity.
EDUCORP MULTIMEDIA, INC. ("EDUCORP")
Educorp is an inactive company which as of December 31, 1997 held, and continues to hold, a 15% shareholding in Arch Publishers Group, Inc. ("APG"), a private Elmsford, New York based publisher, reseller and distributor of educational and entertainment software.
During 1996 and most of 1997, Educorp was an early-stage developer, publisher and distributor of interactive multimedia software with a strategic focus on adult education titles. Educorp operated through its two subsidiaries, Direct (primarily engaged in direct response sales and marketing) and HighText (primarily engaged in software development and publishing).
During 1997 in order to conserve cash, Hariston significantly reduced the level of funding it provided to Educorp and in response, both Direct and HighText took measures to reduce their costs. The impact on HighText was relatively severe as it was not generating significant revenues. By March 31, 1997 HighText had ceased all software development activities, laid off all but one employee and closed its offices. Responsibility for the sales and marketing of HighText's product line was transferred to Direct and HighText became essentially inactive though it continued to generate revenues from sales of its inventory.
On December 19, 1997 Direct sold substantially all of its assets and operations, becoming an inactive holding company thereafter. On February 13, 1998 HighText sold substantially all of its assets.
BUSINESS STRATEGY. Hariston's strategy to grow Educorp had been to develop, publish, and distribute interactive "adult education" software titles that satisfied 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 several 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 or 1997. Additionally, Direct experienced disappointing sales and low gross margins in 1996 and 1997 due primarily to a decline in average realized prices for multimedia CD-ROM software titles and an increased number of direct and indirect competitors. Assessing the 1996 results, Hariston's Board and management concluded in January, 1997 that the poor economics of the multimedia software publishing and distribution industry for a small company without a recognized brand name, large distribution network or deep-pockets partner were 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, during 1997 management actively pursued the sale of the Educorp operations and in December 1997 and February 1998 the assets of Direct and HighText were sold.
During 1997 Hariston's Board and management devoted much time and attention to analyzing and pursuing specific acquisition opportunities and business plans in a number of different industries. However, the Company was unable to conclude an acquisition or related financing on satisfactory terms. After Hariston and its subsidiaries became inactive (ceased generating revenues from active business operations) in December 1997, the Board and management redoubled their efforts to locate another business for the Company to engage in. The Board and management are confident that a positive new direction for the Company will be set in 1998.
INDUSTRY BACKGROUND. On the December 19, 1997 sale of Direct's operations, Hariston and its subsidiaries became inactive.
PRODUCTS; PRODUCT DEVELOPMENT; SALES AND MARKETING; DISTRIBUTION. Since the sale of Direct's operations in December 1997, Hariston and its subsidiaries have not produced or sold a product, engaged in product development activities, or engaged in sales and marketing or distribution activities.
COMPETITION. On behalf of the Company, Hariston's Board and management are currently pursuing certain acquisition opportunities and related financing arrangements. Competition for attractive acquisition targets is keen. The amount of capital allocated to financial buyers including venture capital and leveraged buyout funds is at an all-time high. Strategic acquirers are also extremely active. However, the Board and management believe that Hariston will be able to conclude one or more transactions during 1998 on beneficial terms for the Company.
INTELLECTUAL PROPERTY. All intellectual property was disposed of in December 1997 and February 1998 on the sale of the assets of Direct and HighText, respectively.
SEASONALITY. The Company is currently inactive. It is probable that when the Company recommences operations, such operations will be subject to a seasonal effect.
EMPLOYEES. As of December 31, 1996 the Company employed in its Educorp operations 44 people on a full-time basis. This figure declined to 24 by March 31, 1997, 14 by June 30, 1997 and 7 by September 30, 1997. After the sale of Direct's operations in December 1997, one person was left employed by Educorp until March 31, 1998. At the Hariston and EuroEastern legal entities level, five people were employed as of December 31, 1996 and three on December 31, 1997 of which two are full-time. The Board believes that this is the minimum number of employees required to conduct the Company's affairs. The Company and its employees are not parties to any employment or collective bargaining agreements.
POLISH LIFE IMPROVEMENT S.A.
PLI was formed in February 1993 for the purpose of engaging in various retail businesses in Poland. 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 home-improvement store and focused future expansion efforts on retail supermarkets and home-improvement stores. 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 and 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.
As of December 31, 1996 PLI operated six "NOMI" home-improvement stores. The NOMI stores carry building materials, plumbing and electrical supplies, hardware, paint, gardening supplies, and home decorating items. As of December 31, 1996 the supermarkets 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.
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 25.8% of the issued and outstanding stock of PLI.
During the first and second quarters of 1997 Hariston, through private and open market sales, sold all of its remaining PLI shares realizing net proceeds of $6,756,786 including a $1.5 million note receivable of which $500,000 remained to be collected as of December 31, 1997. The $500,000 amount was subsequently received by the Company on April 3, 1998.
ITEM 2.
ITEM 2. PROPERTIES.
PRESENT OPERATIONS
The Company's registered head office is located in Vancouver, British Columbia at the offices of the Company's Canadian legal counsel. The Company's principal executive offices are located in Vancouver, British Columbia in facilities occupied pursuant to a lease expiring on November 30, 1998. During 1997 the Company, through its subsidiaries, also leased a facility in San Diego, California of approximately 12,000 square feet, housing the Educorp operations. This facility was occupied pursuant to a short-term lease. Effective September 1, 1997 the Company reduced costs by reducing by approximately 1/2 the area of leased premises in the San Diego facility. Effective January 1, 1998 the San Diego facility lease was assumed by the purchaser of the Direct operations. The purchaser terminated the lease effective March 1, 1998 and moved the former Direct operations to Elmsford, New York.
ITEM 3.
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 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 in respect of the allegation that Mr. Irving Kott failed to provide them with correct information concerning the Company causing them to lose money on the purchase and sale of the Company's stock on the open market, on September 22, 1995 in the Superior Court of the Province of Quebec, District of Montreal (Case No. CSM: 500-05-010184-958). The defendants include the Company and Mr. Irving Kott. In this case, the 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 believes the claim is without merit and intends to vigorously defend this matter. However, the outcome of the lawsuit is not currently determinable.
The plaintiffs also filed an action in respect of the allegation that the Company deprived them of options to acquire stock to which they were legally entitled, on February 24, 1997 in the Supreme Court of the Province of British Columbia, Vancouver Registry (Case No. C971045). The defendants include the Company and Mr. Irving Kott. In this case, the plaintiffs seek damages of $560,000. 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 believes the claim is without merit and intends to vigorously defend this matter. However, the outcome of the lawsuit is not currently determinable.
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 and other defendants 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 separately proposed by letter to Hariston settlement of the lawsuit if Hariston were to pay $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 believes the claim is without merit and intends to vigorously defend this matter. However, the outcome of the lawsuit is not currently determinable.
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, the 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.
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's 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's operating subsidiaries to Consolidated Western and Pacific Resources Corp. (since renamed Synergy Renewable Resources 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The 1997 Annual Meeting of Shareholders was held on December 12, 1997. The matters voted on, and the votes cast, were as follows:
1. In respect of the election of Directors as follows:
2. In respect of the appointment of Arthur Andersen, Chartered Accountants, as the Auditors of the Corporation and authorizing the Directors to fix the remuneration to be paid to the Auditors, as follows:
FOR: 4,807,689 WITHHELD: 14,000
PART II
ITEM 5.
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".
As of April 6, 1998 there were 3,937 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:
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 may be applicable when a U.S. resident owns at least 10% of the voting stock of the Canadian corporation paying the dividends. The Company is not aware of any individual or corporation owning 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.
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.
ITEM 6. SELECTED FINANCIAL DATA.
Set forth below is selected financial data for the Company for the fiscal years ended December 31, 1993 to December 31, 1997.
SELECTED FINANCIAL DATA FOR HARISTON CORPORATION AND SUBSIDIARIES
(in thousands except per share data)(1)
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(1) All amounts in U.S. dollars.
(2) Excluded are revenues from discontinued multimedia software and book operations ($2,163 in 1997, $6,334 in 1996).
(3) As of December 31 of the year indicated.
SELECTED FINANCIAL DATA FOR HARISTON CORPORATION AND SUBSIDIARIES
(in thousands except per share data)(1)
(1) All amounts in U.S. dollars.
(2) Excluded are revenues from discontinued multimedia software and book operations ($2,805 in 1995), revenues from discontinued Polish retail operations ($5,179 in 1994), revenues from discontinued factoring operations ($576 in 1994) and revenues from discontinued oil and gas operations ($562 in 1995, $1,586 in 1994).
(3) As of December 31 of the year indicated.
SELECTED FINANCIAL DATA FOR HARISTON CORPORATION AND SUBSIDIARIES
(in thousands except per share data)(1)
(1) All amounts in U.S. dollars.
(2) Excluded are revenues from discontinued Polish retail operations ($5,689), revenues from discontinued factoring operations ($637) and revenues from discontinued oil and gas operations ($1,575).
(3) As of December 31 of the year indicated.
ITEM 7.
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements of the Company follow hereafter. See Financial Statement Index at Item 14(a).
HARISTON CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS AS AT DECEMBER 31, 1997 AND 1996 TOGETHER WITH AUDITORS' REPORT
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, 1997 and 1996 and the consolidated statements of operations and deficit and changes in financial position for the years ended December 31, 1997, 1996 and 1995. 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, 1997 and 1996 and the results of its operations and the changes in its financial position for the years ended December 31, 1997, 1996 and 1995 in accordance with generally accepted accounting principles.
Vancouver, British Columbia February 23, 1998.
ARTHUR ANDERSEN & CO.
HARISTON CORPORATION
CONSOLIDATED BALANCE SHEETS -- DECEMBER 31, 1997 AND 1996 (Amounts in thousands of U.S. dollars)
The accompanying notes are an integral part of these consolidated statements.
HARISTON CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (Amounts in thousands of U.S. dollars)
The accompanying notes are an integral part of these consolidated statements.
HARISTON CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (Amounts in thousands of U.S. dollars)
The accompanying notes are an integral part of these consolidated statements.
HARISTON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995 (Dollar amounts in thousands of U.S. dollars unless otherwise stated)
1. ORGANIZATION AND 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. During 1997, the Company substantially disposed of its multimedia software businesses and is currently seeking opportunities in other businesses.
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 wholly-owned subsidiaries Educorp Multimedia, Inc., HighText Interactive, Inc., Educorp Direct, Inc. and EuroEastern Investment Corporation, all of which have ceased operations. Material intercompany transactions have been eliminated upon consolidation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of liquid investments with a maturity of three months or less when purchased.
EQUIPMENT AND DEPRECIATION
Furniture and equipment are recorded at cost. Depreciation is provided on the straight-line basis over the estimated useful lives of the assets at the following rates:
INVESTMENTS
Investments are recorded at cost or at net realizable value if there has been a permanent impairment in value. Investments are classified as short-term if the intended holding period is less than one year.
HARISTON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995 (Dollar amounts in thousands of U.S. dollars unless otherwise stated)
FOREIGN CURRENCY TRANSLATION
Transactions denominated in currencies other than U.S. dollars are translated under the temporal method. Monetary assets and liabilities are translated at the exchange rate in effect on the balance sheet date; non-monetary assets and liabilities are translated at the exchange rate in effect on the transaction date. Revenue and expense items are translated at the average monthly exchange rate. Gains and losses resulting from changes in exchange rates are reflected in the statement of operations and deficit for the year.
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.
FAIR VALUE INFORMATION
The carrying amounts of cash and cash equivalents, 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, 1997. 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 herein.
INCOME (LOSS) PER SHARE
Income (loss) per share is calculated on the basis of the weighted average number of shares outstanding during the year. The effect of potential conversions of common share equivalents on the income (loss) per share is either anti-dilutive or not material. As a result, no adjusted or fully diluted income (loss) per share is presented.
RECLASSIFICATION
Certain figures for 1996 and 1995 have been reclassified to conform to the current year's presentation.
3. DISCONTINUED OPERATIONS
In January of 1997, the Company adopted a formal plan to dispose of its multimedia software operations.
EDUCORP DIRECT, INC.
On August 25, 1995, a wholly-owned subsidiary of the Company, Educorp Multimedia, Inc., through a wholly-owned subsidiary, 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.
HARISTON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995 (Dollar amounts in thousands of U.S. dollars unless otherwise stated)
On December 19, 1997, the Company sold substantially all the operating assets and liabilities of Educorp Direct, Inc. to Arch Publishers Group, Inc. ("APG"), a private company, in exchange for a 15% equity interest in APG. The investment in APG was recorded at nominal value.
HIGHTEXT INTERACTIVE, INC.
Effective January 1, 1996, the Company, through a wholly-owned subsidiary, 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 was accounted for by the purchase method.
During 1997, the Company entered into an agreement with the previous owners of HighText Publications, Inc. whereby the Company agreed to transfer to them substantially all of the assets and certain liabilities of the book publishing operations. The transfer represented payment in full of the contingent consideration related to the purchase and the loss on sale was recorded as at December 31, 1996.
On February 13, 1998, the Company entered into an agreement with a publicly listed company whereby the remaining assets and liabilities of the multimedia software operations would be disposed of in exchange for 150,000 shares in the purchaser valued at $1.33 each (see Note 14).
The remaining assets and liabilities of the multimedia software operations as at December 31, 1997 consisted of the following:
Revenue generated from the multimedia operations amounted to $2,163 in 1997 (1996-$6,334, 1995-$2,805). The results of operations from the multimedia software operations and the loss on disposal are included in income (loss) from discontinued operations on the consolidated statement of operations and deficit.
4. EQUIPMENT
HARISTON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995 (Dollar amounts in thousands of U.S. dollars unless otherwise stated)
5. TERM DEBT
6. CONTINGENCIES
ENVIRONMENTAL CONTINGENCIES
The Company disposed of its minerals recovery project in 1995. 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 shares of the Company's common stock. The Company believes the claim is without merit; however, the outcome of the lawsuit is not currently determinable.
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 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 did not and does not intend to respond to this proposal and intends to rigorously defend itself in the lawsuit. The outcome of the lawsuit is not currently determinable. 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.
HARISTON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995 (Dollar amounts in thousands of U.S. dollars unless otherwise stated)
7. SHARE CAPITAL
Changes in the Company's issued share capital for the years ended December 31, 1995, 1996 and 1997 were:
As at December 31, 1997, the Company had outstanding vested stock options and warrants as follows:
HARISTON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995 (Dollar amounts in thousands of U.S. dollars unless otherwise stated)
8. OPERATING AND CORPORATE EXPENSES
Consulting fees, salaries and employee benefits include $195 (1996-$108, 1995-$nil) paid to Scorpion Holdings, Inc. ("Scorpion"), a private financial advisory company. By agreement between Hariston and Scorpion, Scorpion was 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. The management fee was reduced to $10 per month from September 1997 and was discontinued upon the resignation of Brandolini and McCarthy in December 1997.
9. GAIN ON INVESTMENTS AND LOANS
10. INCOME TAXES
The Company has non-capital losses carried forward of approximately $5,128 (1996-$5,600) for Canadian income tax purposes, which expire at various dates from 1999 to 2004. They may be utilized to offset taxable income in Canada of future years. The Company also has net capital losses of approximately $5,778 (1996 -$8,200) for Canadian income tax purposes which may be carried forward indefinitely and may be applied against future capital gains taxable in Canada.
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, 1997. At December 31, 1997, the Company had approximately $4,700 (1996-$3,500) of federal net operating loss carry forwards for tax reporting purposes available to offset future taxable income from 2010 to 2012. 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
HARISTON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995 (Dollar amounts in thousands of U.S. dollars unless otherwise stated)
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, 1997, 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.
HARISTON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995 (Dollar amounts in thousands of U.S. dollars unless otherwise stated)
11. SEGMENTED INFORMATION
HARISTON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995 (Dollar amounts in thousands of U.S. dollars unless otherwise stated)
12. 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 consolidated financial statements have been prepared in accordance with Canadian GAAP, which is in agreement with U.S. GAAP, except as set forth below.
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
There are no differences in the consolidated balance sheets as at December 31, 1997 and 1996.
(a) 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
HARISTON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995 (Dollar amounts in thousands of U.S. dollars unless otherwise stated)
exercise price of the options is required to be charged to expense, with the corresponding amount being credited to capital stock.
(b) 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 operations and deficit.
ADDITIONAL DISCLOSURES UNDER U.S. GAAP
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 totaling approximately $1.9 million at December 31, 1997 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.
HARISTON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995 (Dollar amounts in thousands of U.S. dollars unless otherwise stated)
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 the Direct and HighText operations (see Note 3) had occurred on January 1, 1995:
- ---------- No pro forma results of operations for the years ended December 31, 1997 and 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, 1997 and 1996:
A total of 375,000 options granted in 1996 were cancelled in the same year. In addition, a total of 376,668 options granted in 1996 were vested in each of August 1996 and 1997, while the remainder in the same amount will vest in August 1998.
As permitted under U.S. GAAP, the Company has adopted the disclosure provisions of SFAS No. 123 effective January 1, 1996 while continuing to account for the options under SFAS No. 25. 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 (loss) and earnings per share would have been reduced to the pro forma amounts indicated below:
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.
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
13. YEAR 2000
As of December 31, 1997, the Company has assessed the impact of the Year 2000 issue on its computer systems and is in the process of remediating the affected hardware and software. Expenditures for the Year 2000 project are not expected to have a material impact on the financial position of the Company.
14. SUBSEQUENT EVENT
SALE OF MULTIMEDIA SOFTWARE BUSINESS
On February 13, 1998 the Company entered into an asset purchase and sale agreement to sell substantially all of the remaining assets and liabilities of its multimedia software business for $200. Consideration received in settlement was 150,000 shares in the purchaser corporation, valued at $1.33 each. The fair value of the consideration will be used to record the transaction as the shares have an established market (the NASDAQ SmallCap Market tier of the NASDAQ Stock Market). The loss from disposition has been reflected in the current year through a provision for the loss in the value of the respective assets (see Note 3).
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The directors and executive officers of the Company and their ages as of April 6, 1998 are as follows:
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(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.
JAMES P. ANGUS, Chairman of the Board, Chief Executive Officer and President, has held these offices since December 11, 1997. He was first appointed to the Company's Board of Directors in December 1994. Mr. Angus is also President of Angroup Holdings Limited, a private investment holding company he founded in 1988.
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.
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 509306 B.C. Limited, a private children's software developer, President of Interlearn Holdings Ltd., a public holding company, a Director of Mineral Solutions, Inc., a private marketer of coal combustion products, 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 year ended December 31, 1997, all Section 16(a) filing requirements applicable to the Company's officers, directors and greater than 10% beneficial owners were complied with.
ITEM 11.
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, 1996 and 1997 to Messrs. Brandolini and Angus (the "Named Executive Officers"), each of whom served as Chief Executive Officer of the Company during 1997. No other executive officer's total salary and bonus for 1997 exceeded $100,000.
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(1) Mr. Brandolini resigned as Chief Executive Officer of the Company in December 1997.
(2) Mr. Brandolini received no salary or bonus payments from the Company. Mr. Brandolini's services were rendered to the Company through an arrangement between the Company and Scorpion Holdings, Inc. During 1997, the Company paid $194,876 (1996-$107,741) to Scorpion Holdings, Inc. pursuant to this arrangement. Prior to his July 1996 appointment as Chief Executive Officer of the Company, Mr. Brandolini received directors fees from the Company of $4,777 in 1996.
(3) Mr. Angus was appointed Chief Executive Officer of the Company in December 1997. Prior to such appointment, Mr. Angus received directors fees from the Company of Cdn$15,851 (1996-Cdn$14,808; 1995-Cdn$16,327).
No options to purchase shares of the Company were issued during the fiscal year of the Company ended December 31, 1997.
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, 1997 and the number and value of securities underlying unexercised options held by the Named Executive Officers as of December 31, 1997.
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(1) Based on the closing price of the Common Stock of $0.24 on December 31, 1997.
DIRECTOR COMPENSATION
Directors, other than Messrs. Angus and Porter, receive a fee from the Company equal to Cdn$1,000 per month plus Cdn$500 per meeting attended.
STOCK OPTIONS
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, 1997, 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, 1997, 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.
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.
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 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 April 6, 1998 by the Company's directors, by the Named Executive Officers, 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).
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(1) Based on 12,663,113 shares of Common Stock, outstanding as of April 6, 1998.
(2) Includes 376,666 shares issuable upon exercise of options which are exercisable within 60 days.
(3) Consists solely of shares issuable upon exercise of options which are exercisable within 60 days.
(4) As reported on Schedule 13D 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.
(5) As reported on Schedule 13D dated March 5, 1998, which Schedule 13D has not been amended. According to such Schedule 13D, such shares are owned directly by Cross Creek Finance Group Ltd., a British Columbia corporation, all of the outstanding shares of which are owned by Pacific Mercantile Company Limited, an Alberta corporation. According to such Schedule 13D, Cross Creek Finance Group Ltd.'s business address is Suite 220, 375 Water Street, Vancouver B.C. V6B 5C6.
(6) Includes 1,016,666 shares issuable upon exercise of options which are exercisable within 60 days.
ITEM 13.
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 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 were made by Hariston in monthly installments thereafter and the note was fully repaid by December 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. Until their resignations in December 1997, the services of Messrs. Brandolini and McCarthy were rendered to the Company through an arrangement between Hariston and Scorpion Holdings, Inc. ("Scorpion"). Under the terms of this arrangement, Scorpion was paid a monthly fee of $20,000, which decreased to $10,000 effective September 1997. During 1997 the Company paid $194,876 (1996-$107,741) to Scorpion pursuant to this arrangement.
PART IV
ITEM 14.
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, 1997 and 1996;
(iii) Consolidated Statements of Operations and Deficit for the years ended December 31, 1997, 1996 and 1995;
(iv) Consolidated Statements of Changes in financial position for the years ended December 31, 1997, 1996 and 1995;
(v) Notes to Consolidated Financial Statements.
(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.
(d) SCHEDULES.
None
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, 1998
HARISTON CORPORATION
By: /s/ L. James Porter ------------------------------------- L. James Porter Chief Financial 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.
EXHIBIT INDEX
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* INCORPORATED BY REFERENCE.