AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 14, 2000.
REGISTRATION NO. ____________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
Enova Holdings, Inc.
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(Name Of Small Business Issuer In Its Charter)
Nevada 6770 33-0803552
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(State or Other Jurisdiction (Primary Standard (I.R.S. Employer
of Incorporation Industrial Classification Identification No.)
or Organization) Code Number)
1196 E. Willow Street, Long Beach, CA 90806
(562) 426-1321
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(Address and Telephone Number of Principal Executive Offices)
1196 E. Willow Street, Long Beach, CA 90806
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(Address of Principal Place of Business or Intended Principal Place of Business)
Mr. Fred Cohn
1196 E. Willow Street, Long Beach, CA 90806
(562) 426-1321
(Name, Address, and Telephone Number of Agent for Service)
Copy to:
Richard O. Weed
Weed & Co. L.P.
4695 MacArthur Court, Suite 1450
Newport Beach, CA 92660
Telephone (949) 475-9086
Facsimile (949) 475-9087
Approximate Date of Commencement of Proposed Sale to the Public: as soon as
possible after this registration statement becomes effective
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of earlier effective
registration statement for the same offering. [ ]
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If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
_______________________________________________________________
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
_______________________________________________________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.[ ]
CALCULATION OF REGISTRATION FEE
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Title Of Each Proposed Proposed
Class Of Maximum Maximum
Securities Amount Offering Aggregate Amount Of
To Be To Be Price Offering Registration
Registered Registered Per Unit Price Fee
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Common Stock 3,812,211 $ .001(1) $3,813.00 $1.06
Common Stock 2,000,000 $5.00 $10,000,000 $2,640.00
Total 5,812,211 N/A N/A $2,641.06
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This calculation is made solely for the purposes of determining the registration
fee pursuant to the provisions of Rule 457(c) under the Securities Act.
(1) Since Enova Holdings, Inc. is not yet trading and the book value of the
shares is a negative number, we have used the par value as the proposed
maximum offering price per share in this calculation.
The registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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PROSPECTUS
Enova Holdings, Inc.,
a Nevada corporation
5,812,211 Shares of Common Stock of Enova Holdings, Inc.
This prospectus relates to the public offering, which is not being underwritten,
of 5,812,211 shares of common stock of Enova Holdings, Inc., a Nevada
corporation ("Enova"). 3,812,211 of the shares offered are shares held by the
stockholders of Enova (the "selling stockholders"). The selling stockholders may
offer their shares of common stock through public or private transactions, at
prevailing market prices, or at privately negotiated prices. Enova will not
receive any of the proceeds from the selling shareholders' sale of the shares of
common stock. 2,000,000 of the shares offered may be offered to the public at a
price of $5.00 per share.
You should carefully consider the Risk Factors beginning on page 6 of this
prospectus before purchasing any of the common stock offered by this prospectus.
Enova's common stock is currently not trading on any national securities
exchange or on the Nasdaq stock market. This is a self-underwritten offering.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The Registrant may amend this registration statement. A registration statement
relating to these securities has been filed with the Securities and Exchange
Commission. Enova may not sell these securities until the registration statement
filed with the Securities and Exchange Commission is effective. This prospectus
is not an offer to sell these securities and it is not soliciting an offer to
buy these securities in any state where the offer or sale is not permitted.
The date of this prospectus is November 14, 2000.
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Table of Contents
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Prospectus Summary..........................................................5
Risk Factors..........................................................6
Use of Proceeds............................................................10
Determination of Offering Price............................................11
Dilution...................................................................11
Selling Security Holders...................................................12
Plan of Distribution.......................................................12
Legal Proceedings..........................................................14
Directors, Executive Officers, Promoters and Control Persons...............14
Security Ownership of Certain Beneficial Owners and Management.............16
Description of Securities..................................................16
Experts....................................................................18
Disclosure of Commission Position on Indemnification for
Securities Act Liabilities...........................................18
Organization Within Last Five Years........................................18
Description of Business....................................................19
Management's Discussion and Analysis or Plan of Operation..................26
Description of Property....................................................29
Certain Relationships and Related Transactions.............................30
Market for Common Equity and Related Stockholder Matters...................30
Executive Compensation.....................................................30
Financial Statements.......................................................33
Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.................................................34
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PROSPECTUS SUMMARY
Enova Holdings, Inc.
Enova Holdings, Inc. ("Enova") was incorporated in the State of Nevada on
May 1, 1998 under the name of Yes Lifestyles, Inc. Enova is a holding company
who operates primarily through its wholly-owned subsidiary, Pego Systems, Inc.
("Pego") and Pego's subsidiary, Pacific Pneumatic, Inc ("PPI").
Pego is a manufacturer's representative organization that offers a full
line of value added services including distribution, service, and manufacturing
of custom process equipment packages, which are blower, pump or compressor
packages designed to a customer's specification. Pego supplies air, gas and
material handling equipment, i.e. blowers and compressors, for the
environmental, petrochemical, food service and other industries with similar
requirements. Pego designs and fabricates packages and provides repair service
for the equipment it sells.
PPI sells positive displacement blower packages, blower systems and
components. These systems are primarily used by industry to convey powders from
one place to another, to inject bubbles into liquid holding containers and to
extract vapors by creating a vacuum. PPI also provides sales, engineering
services, consulting and after market support services. PPI is an original
equipment manufacturer for Pore Poly filters and owns the trade name Pore Poly.
Poly Pore Filters are an industrial filter that allows powder to move to another
destination without allowing a dust charge into the atmosphere.
There is no market for Enova's securities.
Enova's executive office is located at 1196 E. Willow Street, Long Beach,
CA 90806. The telephone number is (562) 426-1321.
Offering
Common Stock Outstanding.......................3,812,211 shares
Common Stock Offered by Selling
Stockholders...................................3,812,211 shares
Common Stock Offered by Enova 2,000,000 shares at $10,000,000
Price per Share....................$5.00
Common Stock
Currently Outstanding..........................3,812,211 shares
Risk Investment in the shares involves
Factors........................................a high degree of risk.
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Risk Factors
An investment in the shares offered hereby involves a high degree of risk.
Prospective investors should carefully consider the following factors concerning
the business of Enova and its subsidiaries and the offering, and should consult
independent advisors as to the technical, tax, business and legal considerations
regarding an investment in the shares.
Enova Is A Start-Up Stage Company With Limited Operating History And Is Subject
To All Of The Risks Inherent To A Business In The Start-Up Phase.
Enova was established in May 1998 and has limited operating history and
is subject to all of the risks inherent in a business in the start-up phase.
Enova only recently acquired its subsidiary, Pego and Pego's subsidiary, PPI.
Both Pego and PPI are involved in industries that Enova has little or no
experience in. As a result, Enova will incur additional expenses before becoming
profitable, if it ever becomes profitable. Additionally, Enova has a limited
business history that investors can analyze to aid them in making an informed
judgment as to the merits of an investment in Enova. Any investment in Enova
should be considered a high risk investment because the investor will be placing
funds at risk in a start-up company with unforeseen costs, expenses, competition
and other problems to which start-up ventures are often subject. Therefore,
there is no assurance that an investment in Enova will become profitable in the
future.
Since Inception, Enova Has Incurred Significant Losses, And For The Year Ended
December 31, 1999 Had An Accumulated Deficit of $1,295,819.
For the year ended December 31, 1999 and December 31, 1998, Enova's net
loss was $435,093 and $1,093,413, respectively. Enova intends to invest heavily
in the marketing, research and development of its subsidiaries' businesses. As
such, Enova may incur further operating losses for the foreseeable future, and
the rate at which such losses may be incurred may increase significantly from
current levels. There can be no assurance that Enova will be able to generate
sufficient revenues to achieve or sustain profitability in the future. As a
result, Enova's financial condition may be materially adversely affected.
Enova's Growth May Require Substantial Expenditures Which Enova May Not Be Able
To Fund.
At December 31, 1999, Enova had cash and cash equivalents of
approximately $60,000 and a negative working capital of $637,000. Enova's
success and ongoing financial viability is contingent upon the success of its
new business model and the generation of related cash flows. There is no
assurance that such contingencies will be met in the future which may adversely
affect the operations of Enova.
Any additional equity financing may be dilutive to Enova's existing
stockholders, and any debt financing, if available, may involve restrictive
covenants which may limit Enova's operations. Enova's failure to raise capital
if and when needed could delay or suspend Enova's strategy and result in a
material modification of Enova's business strategy. Enova's inability to fund
its capital requirements could have a material adverse effect on Enova's
business, financial condition and results of operations.
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Enova May Be Unable To Continue To Operate As A Going Concern.
Because Enova has had continuing losses and a working capital deficit
and accumulated losses from inception to December 31, 1999, Enova's auditors, in
their report of Enova's and its subsidiaries financial statements as of December
31, 1999, expressed substantial doubt about Enova's ability to continue as a
going concern, which contemplates, among other things, the realization of assets
and satisfaction of liabilities in the normal course of business. Enova believes
that its existing working capital deficit, legal fees associated with settlement
of litigation together with funds generated from operations, will not be
sufficient to provide for its planned operations for the foreseeable future. As
such, Enova's sustained operations are dependant on reducing overhead, finding
internal sources of cash and obtaining outside financing which may not be
available on favorable terms, if at all. As a result, Enova's ability to
continue to operate as a going concern may be unlikely.
As A Result Of Rapid Expansion, Enova May Not Have The Ability To Manage Growth
Which May Strain Enova's Resources And Therefore, Detrimentally Affect Enova's
Future Operations
Enova will expand its operations rapidly, which may create significant
demands on Enova's administrative, operational, developmental and financial
personnel and other resources. Additional expansion by Enova may further strain
Enova's management, financial personnel and other resources. If Enova's
management is unable to manage growth effectively, its business, financial
condition and results of operations could be materially adversely affected.
There can be no guarantee that Enova's systems, procedures, controls and
existing space will be adequate to support expansion of Enova's operations.
Enova's future operating results will depend, among other things, on its ability
to manage changing business conditions and to continue to improve its
operational, financial control and reporting systems.
Enova May Not Be Able to Meet its Capital Requirements And May Encounter Limited
Sources Of Liquidity, Which May Limit Its Ability To Fully Execute Its Business
Strategy.
Enova requires substantial capital to pursue its operating strategy
and implement its business plan. Enova's current level of operations is
consuming cash at a rate of approximately $20,000 per month and is expected to
continue at this rate through the end of the fiscal year. For the next six
months, Enova's primary financing activities will be from the sale of 100,000
restricted shares of common stock of The Hartcourt Companies, Inc. which it
believes will provide the necessary working capital for operations. Hartcourt
has included these shares in its Form SB-2 registration statement filed on
August 24, 2000. There is no guarantee that this registration statement will
become effective or that Enova will be able to sell the Hartcourt shares for a
premium, if at all. Enova may need additional debt or equity capital in order to
continue to fund its business operations and finance its growth. There can be no
assurance that Enova will be able to obtain funding from any external source on
suitable terms, if at all. A decrease in expected revenues resulting from
adverse economic conditions or otherwise, unforeseen costs, or an inability to
sell its investment in Hartcourt could shorten the period during which the
current working capital may be expected to satisfy Enova's capital requirements
which may be detrimental to Enova's continued operation.
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Enova Is Dependent On Certain Members of Its Key Personnel And Loss Of These
Personnel May Have An Adverse Effect On Its Business.
The success of Enova is dependent upon, among other things, the
services of Dr. Alan V. Phan, chairman, and Manu Ohri, president. The loss of
the services of Dr. Phan or Mr. Ohri, for any reason, could have a material
adverse effect on the prospects of Enova. Enova has entered into employment
agreements with Dr. Phan and Mr. Ohri but does not maintain any key-man life
insurance. Enova has enlisted experienced personnel in several key positions;
however, there can be no assurance that Enova will be able to continue to
attract and retain qualified employees to implement its business plan.
Enova's Success Depends Upon Its Ability To Protect Its Proprietary Technologies
Enova relies on certain non-disclosure agreements with employees,
and common law remedies with respect to certain of its subsidiary's proprietary
technology. Although its subsidiary, PPI, owns a trademark on the name "Poly
Pore" used to sell Poly Pore Filters, Enova does not own any other trade names
and has not filed or obtained patents on its subsidiaries key technology and
products. Further, there can be no assurance that the patents will be issued if
applied for in the future. There can be no assurance that others will not
misappropriate Enova's proprietary technologies or develop competitive
technologies or products that could adversely affect Enova. In addition,
although Enova is not aware of any infringement claims against it or any
circumstances that could lead to such claims, there can be no assurance that
such a claim could not be made which could adversely affect its business.
Enova's efforts to protect its intellectual property may cause it to
become involved in costly and lengthy litigation which could seriously harm its
business. In recent years, there has been significant litigation in the United
States involving patents and other intellectual property rights. Although it has
not become involved in intellectual property litigation, it may become involved
in litigation in the future to protect its intellectual property or defend
allegations of infringement asserted by others. Legal proceedings could subject
it to significant liability for damages and subject it to significant liability
for damages or invalidate Enova's proprietary rights. Any litigation, regardless
of its outcome, would likely be time consuming and expensive to resolve and
would divert management's time and attention. Any potential intellectual
property litigation also could force Enova to take specific actions, including:
o cease selling its products that use the challenged intellectual property;
o obtain from the owner of the infringed intellectual property a right a
license to sell or use the relevant technology, which license may not be
available on reasonable terms, or at all;
or
o redesign those products that use infringing intellectual property.
Enova Faces Substantial Competition From Competitors With Significantly Greater
Resources.
Enova's subsidiaries typically sell to oil refineries, cement
plants, food and drink manufacturers, construction companies and all other areas
of industry that require purification and/or cleaning of air and gases before
expelling them into the atmosphere or into their product. Enova's subsidiaries
face substantial competition from companies that serve many of the same
customers served by Enova. Several of these companies offer lower prices and
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have low overhead operations. Substantially all of Enova's competitors have
significantly greater resources, including financial, technical and marketing,
than Enova, and there can be no assurance that Enova will be able to compete
successfully in the future.
Failure to Expand Enova's Distribution Channels and Manage Enova's Distribution
Relationships May Adversely Effect Its Operations.
The future growth of Enova's business will depend in part on its
ability to expand its subsidiaries existing relationships with distributors and
resellers, develop additional channels for the distribution and sale of Enova's
products and manage these relationships. As part of Enova's growth strategy,
Enova intends to expand its subsidiaries relationships with distributors and
resellers. The inability to successfully execute this strategy could impede its
future growth.
Any Potential Acquisition Enova Makes Could Disrupt Its Business And Harm Its
Financial Condition.
While Enova has not identified any specific acquisitions, an element
of its growth strategy includes the acquisition of companies which it believes
have synergistic business models. Acquisitions entail a number of risks that
could materially and adversely affect its business and operating results,
including:
o Problems integrating the acquired operations, technologies or products;
o Diversion of Enova's management's time and attention from its core business;
o Difficulties in retaining business relations with suppliers and customers of
the acquired company;
o Risks associated with entering markets in which it lacks prior experience;
and
o Potential loss of key employees from the acquired company.
There Is No Public Market For The Shares, Therefore, It Is Unlikely That Enova
Shareholders Will Be Able To Sell Their Shares At the Public Market At A
Premium, If At All.
It is unlikely that any market will develop prior to the second
anniversary of Enova's operations following this offering, if then. Therefore,
it is unlikely that Enova shareholders will be able to sell their shares for a
premium, if at all.
Available Information
Enova files annual, quarterly and special reports, proxy statements and
other information with the Securities and Exchange Commission. You may read and
copy any document Enova files with the Commission at the Commission's Public
Reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call
the Commission at 1-800-SEC-0330 for further information on the public reference
room. Enova's Commission filings are also available to the public at the
Commission's web site at http://www.sec.gov.
You may also request a copy of these filings, at no cost, by writing or
telephoning as follows:
Enova Holdings, Inc. Attention: Investor Relations, 1196 E. Willow
Street, Long Beach, CA 90806 (562) 426-1321.
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This prospectus is part of a registration statement on Form SB-2 Enova
filed with the SEC under the Securities Act. You should rely only on the
information or representations provided in this prospectus. Enova has not
authorized anyone to provide you with different information other than the
information contained in this prospectus. Enova is not making an offer of these
securities in any state where the offer is not permitted. You should not assume
that the information in this prospectus is accurate as of any date other than
the date on the front of the document.
Forward-Looking Statements
Except for historical information contained herein, the matters
discussed in this prospectus are forward-looking statements that are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those set forth in such forward looking statements. Such risks
and uncertainties include, without limitation, Enova's dependence on the timely
development, introduction and customer acceptance of products, the impact of
competition and downward pricing pressures, the ability of Enova to generate
revenues and raise any needed capital, the effect of changing economic
conditions, and risks in technology development.
USE OF PROCEEDS
The selling stockholders are offering 3,812,211 of the shares of common
stock covered by this prospectus. Enova will not receive any proceeds from the
sale of these shares of common stock. Enova will receive the proceeds from the
sale of the 2,000,000 shares of common stock and will use these funds as set out
in the table below.
The following table sets forth the use of the proceeds from this offering:
Amount %
Total Proceeds $10,000,000 100%
Less: offering expenses
Legal & Accounting $ 50,000 .5%
Copying & Printing $ 8,000 .08%
Net Proceeds from Offering $ 9,942,000 99.42%
Use of Net Proceeds $ 9,942,000 99.42%
Equipment 1,550,000 15.5%
Services 500,000 .5%
Operating Expenses & $ 7,892,000 78.92%
Working Capital *
*Enova has not allocated funds to specific areas within this category and
instead, intends to make payments towards its various liabilities and will
allocate the remainder of these funds on an as needed basis to its various
operations.
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DETERMINATION OF OFFERING PRICE
The offering price of the shares has been determined by Enova and not
as the result of arm's-length negotiations. There is no established public
market for the shares. Enova set the price of the shares to value Enova after
full financing through this offering at $10,000,000.
DILUTION
Not applicable.
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SELLING SECURITY HOLDERS
The following table sets forth the number of shares owned by each of
the selling stockholders. All information contained in the table below is based
upon their beneficial ownership as of November 6, 2000. Enova is not able to
estimate the amount of shares that will be held by the selling stockholders
after the completion of this offering because those selling stockholders may
offer all or some of the shares and because there currently are no agreements,
arrangements or understandings with respect to the sale of any of their shares
other than those agreements and arrangements listed below. The following table
assumes that all of the shares being registered will be sold. The selling
stockholders are not making any representation that any shares covered by the
prospectus will be offered for sale. The selling stockholders reserve the right
to accept or reject, in whole or in part, any proposed sale of the shares.
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Name and address of Number of shares Percent of class of Number of
Selling Stockholder beneficially owned shares beneficially shares
prior to the offering owned prior to the offered
offering hereby
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Total Shares: 3,812,211 100% 3,812,211
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PLAN OF DISTRIBUTION
3,812,211 Shares Sold By Selling Stockholders
Enova is registering 3,812,211 shares of common stock on behalf of the
selling stockholders. As used in this prospectus, the term "selling
stockholders" includes pledgees, transferees or other successors-in-interest
selling shares received from the selling stockholder, as a pledgor, a borrower
or in connection with other non-sale-related transfers after the date of this
prospectus. This prospectus may also be used by transferees of the selling
stockholders, including broker-dealers or other transferees who borrow or
purchase the shares to settle or close out short sales of shares of common
stock. The selling stockholders will act independently of Enova in making
decisions with respect to the timing, manner, and size of each sale or non-sale
related transfer. Enova will not receive any of the proceeds of this offering.
The selling stockholders may sell their shares of common stock directly
to purchasers from time to time. Alternatively, they may from time to time offer
the common stock to or through underwriters, broker/dealers or agents, who may
receive compensation in the form of underwriting discounts, concessions or
commissions from the selling stockholders or the purchasers of such securities
for whom they may act as agents. The selling stockholders and any underwriters,
broker/dealers or agents that participate in the distribution of common stock
may be deemed to be "underwriters" within the meaning of the Securities Act and
any profit on the sale of such securities and any discounts, commissions,
concessions or other compensation received by any such underwriter,
broker/dealer or agent may be deemed to be underwriting discounts and
commissions under the Securities Act.
The common stock may be sold from time to time in one or more
transactions at fixed prices, at prevailing market prices at the time of sale,
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at varying prices determined at the time of sale or at negotiated prices. The
sale of the common stock may be effected by means of one or more of the
following transactions (which may involve block transactions): in the
over-the-counter market or in transactions otherwise than on such exchanges or
services, including transactions pursuant to Rule 144 or another exemption from
registration.
In connection with sales of the common stock or otherwise, the selling
stockholders may enter into hedging transactions with broker/dealers, who in
turn may engage in short sales of the common stock in the course of hedging the
positions they assume. The selling stockholders may also sell common stock short
and deliver common stock to close out such short positions, or loan or pledge
common stock to broker/dealers who in turn may sell such securities.
At the time a particular offering of the common stock is made, a
prospectus supplement, if required, will be distributed which will set forth the
aggregate amount common stock being offered and the terms of the offering,
including the name or names of any underwriters, broker/dealers or agents, any
discounts, commissions and other terms constituting compensation from the
selling stockholders and any discounts, and commissions or concessions allowed
or re-allowed or paid to broker/dealers.
To comply with the securities laws of certain jurisdictions, if
applicable, the common stock will be offered or sold in such jurisdictions only
through registered or licensed brokers or dealers.
The selling stockholders will be subject to applicable provisions of
the Exchange Act and the rules and regulations thereunder, which provisions may
limit the timing of sales of the common stock by the selling stockholders. The
foregoing may affect the marketability of such securities.
2,000,000 Shares To Be Sold By Enova
Enova is offering 2,000,000 shares at the purchase price of $5.00 per
share on a delayed or continuous offering basis pursuant to Rule 415 of the
Securities Act of 1933 Rules. This is a self underwritten offering.
Enova reserves the right to use selling agents with the appropriate
modification to the registration statement, as necessary. If Enova makes
arrangements to use selling agents after effectiveness of this registration
statement, then Enova will need to file a post-effective amendment to the
registration statement identifying the broker-dealer, providing the required
information on the plan of distribution and use of proceeds, revising the
disclosures in the registration statement, and filing the agreement as an
exhibit to the registration statement. Further, prior to any involvement of any
broker-dealer in the offering, such broker-dealer must seek and obtain clearance
of the underwriting compensation and arrangements from the NASD Corporate
Finance Department.
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LEGAL PROCEEDINGS
On January 14, 2000, Comerica Bank-California, instituted a legal
action against Pego Systems, Inc. as maker, Enova Holdings Inc. and Hartcourt
Companies, Inc. as guarantors, in the Los Angeles County Superior Court, Case
Number NC027075, alleging nonpayment of promissory notes, breach of security
agreement and breach of guaranty contracts, and alleging monies due. Enova
expects to settle with the bank for the recorded liability of $886,104 and no
other liabilities are expected to be incurred. A forbearance agreement has been
entered into by all the parties effective October 1, 1999, which requires the
bank to forbear all collection efforts until July 31, 2001. Enova has reached a
settlement with the bank and expects to finalize this agreement by late
November, 2000.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Identification of Directors and Executive Officers.
Enova, pursuant to its Bylaws is authorized to maintain a three (3)
member Board of Directors, and executive officers as needed. The directors and
officers for fiscal 2000 are as follows:
Name Position Held with the Issuer Age Dates of Service
-------------- ----------------------------- ----- -------------------
Dr. Alan Phan Director, Chairman of the Board 55 March 1999 to present
Manu Ohri Director, President & CEO 44 June 1999 to present
Fred Cohn Director, Vice President, 64 March 1999 to present
Secretary, Treasurer
All directors of Enova hold office until the next annual meeting of
shareholders and until their successors have been elected and qualified. The
officers of Enova are elected by the Board of Directors and serve at the
discretion of the Board of Directors or until their earlier resignation or
death.
Business Experience
Dr. Alan V. Phan, Chairman of the Board and Director. Dr. Phan has over 30
years of experience in business management. He obtained his academic training
and degrees at Pennsylvania State University and Sussex College of Technology.
As Executive Vice President of Em Kay Group and Eisenberg Company, he
established 11 industrial projects including real estate developments in Asia
and South America. Dr. Phan has been a founder and Chairman of the Board and
Chief Executive Officer of The Hartcourt Companies, Inc., a NASDAQ listed
company, since August 1990.
Mr. Manu Ohri, President, Chief Executive Officer and Director. Mr. Ohri has
over 19 years of diversified business management and operations experience in
public and private companies. Mr. Ohri joined Enova in June 1999 as the
President, CEO and Director of the company. From January 1997 to May 1999, Mr.
Ohri served as Chief Operating Officer of Dynamic Cooking Systems, Inc., a
privately held manufacturing company. From September 1989 to December 1996, Mr.
Ohri held the position of Chief Financial Officer at Startel Corporation, a
NASDAQ listed company in software development business. Mr. Ohri's multi-faceted
experience includes operations, finance as well as administrative functions in
the manufacturing, distribution and software development industries. Mr. Ohri is
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a member of the Board of Directors of Hartcourt since December 1999. Mr. Ohri is
a Certified Public Accountant with over six years experience with Deloitte &
Touche and PriceWaterhouseCoopers. Mr. Ohri earned his Masters degree in
Business Administration from University of Detroit and Bachelors degree in
Accounting from University of Delhi in India.
Mr. Fred Cohn, Vice President, Secretary, Treasurer and Director. Mr. Cohn has
over 30 years of diversified experience in business management. During the last
five years, Mr. Cohn was a successful entrepreneur owning and operating medium
size companies in the fields of transportation, entertainment, manufacturing and
distribution. Mr. Cohn is a former member of the Board of Directors of The
Hartcourt Companies, Inc., a NASDAQ listed company. Mr. Cohn obtained his law
degree from New York School of Law and Bachelors degree in Accounting from
Wilkes University.
Board Committees
The Board of Directors has established an Audit Committee and
Compensation Committee. The Audit Committee, consisting of Dr. Phan and Mr.
Ohri, reviews the adequacy of internal controls and results and scope of the
audit and other services provided by Enova's independent auditors. The Audit
Committee will meet periodically with management and the independent auditors.
The Compensation Committee, consisting of Dr. Phan and Mr. Ohri,
establishes salaries, incentives and other forms of compensation for officers
and other employees of Enova and administers the incentive compensation and
benefit plans of Enova. As such, Dr. Phan and Mr. Ohri jointly made the
compensation decisions for their own executive positions.
Director Compensation
In January 2000, the Board of Directors adopted a director compensation
plan pursuant to which Enova directors will be compensated as follows: (i)
$10,000 annual retainer payable in quarterly installments for participation at
up to four meetings of the Board of Directors; (ii) an immediately exercisable,
nonqualified stock option to purchase 20,000 shares of common stock to be
granted upon appointment to the Board of Directors, and (iii) an immediately
exercisable, nonqualified stock option to purchase 5,000 shares of common stock
to be granted on the day of each annual shareholders meeting during the
non-employee director's service on the Board of Directors. Such options are to
be granted as freestanding options and not under any stock option plan. The
exercise price shall be the fair market value of a share of common stock on the
date of grant. No options have been granted under this plan. Directors are also
reimbursed for reasonable expenses incurred in attending meetings of the Board
of Directors and committees thereof.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires Enova's
directors and officers and persons who own more than 10 percent of Enova's
equity securities, to file reports of ownership and changes in ownership with
the SEC. Directors, officers and greater than ten percent shareholders are
required by SEC regulation to furnish Enova with copies of all Section 16(a)
reports filed.
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Based solely on its review of the copies of the reports it received
from persons required to file, Enova believes that all filing requirements
applicable to its officers, directors and greater than ten percent shareholders
were complied with.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of November 6, 2000 with
respect to the beneficial ownership of common stock of Enova, by each person
known by Enova to own beneficially more than five percent of Enova's common
stock, by each executive officer and director, and by all officers and directors
as a group. Unless otherwise indicated, all persons have sole voting and
investment powers over such shares, subject to community property laws. As of
November 6, 2000, there were 3,812,211 shares of common stock outstanding.
--------------------------------------------------------------------------------
Name and Address of Amount and Nature of Percent of Class
Beneficial Owners Beneficial Interest of
$.01 par value Common Stock
--------------------------------------------------------------------------------
Frederic Cohn 25,000 .7%
Director, Secretary, Treasurer
1198 E. Willow Street
Long Beach, CA 90806
--------------------------------------------------------------------------------
Larco 224,829 5.9%
Emmet A. Larkin & Co.
100 Brush St. #1000
San Francisco, CA 94104
--------------------------------------------------------------------------------
Dr. Alan V. Phan (1) 1,237,313 32.5%
Chairman of the Board
1198 E. Willow Street
Long Beach, CA 90806
--------------------------------------------------------------------------------
All officers and directors 1,262,313 33%
as a group
--------------------------------------------------------------------------------
(1) Includes an aggregate of 250,000 shares issueable upon conversion of 250
shares of preferred stock. The sole holder of the 250 outstanding shares of
preferred stock, Dr. Phan is entitled to elect 3/5 of the number of members of
Enova's Board of Directors.
DESCRIPTION OF SECURITIES
The following summary is a description of certain provisions of Enova's
Articles of Incorporation and Bylaws. Such summary does not purport to be
complete and is subject to, and is qualified in its entirety by, all of the
provision of the Articles of Incorporation and Bylaws, including the definitions
therein of certain terms.
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Common Stock
Pursuant to the Enova's Certificate of Incorporation, the Board of
Directors has authority to issue up to 75,000,000 shares of common stock, par
value $0.001 per share. As of November 6, 2000, there were 3,812,211 shares
issued, one vote for each share held on all matters. Cumulative voting in
elections of directors and all other matters brought before stockholders
meetings, whether they are annual or special, is not provided for under Enova's
Articles of Incorporation or Bylaws. However, under certain circumstances,
cumulative voting rights in the election of Enova's directors may exist under
Nevada law. Presently, section 78.360 of the Nevada Revised Statutes provides
that cumulative voting is authorized to the extent the Articles of Incorporation
provide. The holders of common stock will be entitled to receive such dividends,
if any, as may be declared by the board from time to time out of legally
available funds, subject to any preferential dividend rights of any outstanding
shares of preferred stock.
Upon the liquidation, dissolution, or winding up of the company, the
holders of the common stock will be entitled to share ratably in all assets of
the company that are legally available for distribution, after payment of all
debt and other liabilities and distribution in full of preferential amounts, if
any, to be distributed to holders of preferred stock. The holders of common
stock are not entitled to preemptive, subscription, redemption, or conversion
rights. The rights, preferences, and privileges of holders of common stock are
subject to, and may be adversely affect by, the rights of any series of
preferred stock, which the company may designate, and issue in the future.
Preferred Stock
Pursuant to the Enova's Certificate of Incorporation, the Board of
Directors has the authority, without further action by the stockholders, to
issue up to 25,000,000 shares of preferred stock in one or more series and to
fix the designations, powers, preferences, privileges, and relative
participating, optional or specials rights and the qualifications, limitations
of restrictions thereof, including dividend rights, conversion rights, voting
rights, terms of redemption and liquidation preferences, any or all of which may
be greater than the rights of the common stock. The Board of Directors, without
stockholder approval, can issue preferred stock with voting, conversion or other
rights that could adversely affect the voting power and other rights of the
holders of common stock. Preferred stock could thus be issued quickly with terms
calculated to delay or prevent a change in control of Enova or make removal of
management more difficult. Additionally, the issuance of preferred stock may
have the effect of decreasing the market price of the common stock, and may
adversely affect the voting and other rights of the holders of common stock.
As of November 6, 2000 there were 250 issued and outstanding shares of
preferred stock. Pursuant to Enova's Certificate of Determination of the Rights
and Preferences of Preferred Stock of Enova Holdings, Inc, set forth March 1999,
the 250 shares are designated as shares of "Series A Preferred Stock." The
Series A is senior to the common stock or any other series of preferred stock.
The Series A is not entitled to vote on any matters not concerning the Series A,
except, until December 31, 2010, the holders of the Series A are entitled to
elect 3/5 of Enova's Board of Directors. The holders of the Series A are
entitled to convert each share of Series A into four shares of common stock. The
holders of the Series A are entitled to receive annual dividends at the rate of
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$.32 per share, payable in additional shares of Series A and upon liquidation,
are entitled to a liquidation preference of $.16 per share. The Series A may be
redeemable at $4.00 per share during the first two years of issuance and
thereafter, the redemption price will increase by 5% per annum.
Transfer Agent
Signature Stock Transfer, Inc. serves as the transfer agent for Enova.
EXPERTS
Weinberg & Company, P.A., independent auditors, have audited Enova's
financial statements included in Enova's Annual Report on Form 10-SB for the
year ended December 31, 1999, which is incorporated by reference in this
prospectus and elsewhere in the registration statement. Enova's financial
statements are incorporated by reference in reliance on Weinberg & Company,
P.A.'s report, given on their authority as experts in accounting and auditing.
Richard O. Weed, legal counsel to Enova, has expressed an opinion
concerning the validity of the securities being registered. Mr. Weed does not
own any shares of Enova common stock.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
ORGANIZATION WITHIN LAST FIVE YEARS
On July 7, 1999, Enova authorized and issued restricted shares under
Rule 144 to Heinz Mueller, Richard Korber, Martin Kamm, Karl Stobl and Claudia
Pekari, former holders of convertible debentures of Hartcourt. Hartcourt
promised the shares to these holders of convertible debentures prior to the
spin-off and these holders agreed to accept Enova's common shares in lieu of
cash repayment. As such, Enova issued 13,156 shares of its common stock to
settle $65,780 of obligations of Hartcourt.
On December 19, 1999, Enova received 100,000 shares of restricted
common stock of Hartcourt in the name of Pego in satisfaction of all debts
payable to Enova and for all ECS common stock held by Enova. During 1998 and
1999, Hartcourt borrowed cash in the amount of $1,058,642 from Enova. Hartcourt
securities are traded over the OTC Bulletin Board and were valued at $1,525,000
on the date of exchange.
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DESCRIPTION OF BUSINESS
Business Development
Enova Holdings, Inc. ("Enova") is a corporation duly incorporated,
validly existing and is in good standing under the laws of Nevada. Enova was
originally incorporated on May 1, 1998 as Yes Lifestyles, Inc. ("YSI") in the
state of Nevada by a director of The Hartcourt Companies, Inc ("Hartcourt") and
Yes Clothing Company, Inc., a California corporation, to license and sell Yes
Clothing Company merchandise. YSI never commenced any operations and amended its
articles to change its name to Enova Holdings, Inc. on December 7, 1998.
On February 1, 1999, Enova and Hartcourt entered into a Share Purchase
Agreement in which Hartcourt acquired one (1) share of Enova which represented
all of the issued and outstanding shares of the company, making Enova a wholly
owned subsidiary of Hartcourt.
On March 1, 1999, Enova and Hartcourt executed an Exchange Agreement
whereby Hartcourt exchanged all of its ownership interest in two wholly owned
subsidiaries, Pego Systems, Inc. ("Pego") and Electronics Component Systems,
Inc. ("ECS"), collectively the "subsidiaries," for 4,709,788 additional shares
of Enova. The acquisition of Pego included the acquisition of its subsidiary,
Pacific Pneumatics, Inc. ("PPI"), a competitor Pego acquired in August 1998. As
a result, Enova obtained 100% ownership in Pego, which included 100% of PPI, and
35% ownership in ECS.
On March 1, 1999, Enova and Hartcourt entered into a Distribution
Agreement pursuant to which Hartcourt agreed to distribute to all Hartcourt
shareholders of record on March 31, 1999 all of the 4,709,789 shares of common
stock of the Enova and to file, within a reasonable period of time following
such distribution, a Registration Statement on Form 10-SB to cause the
distributed shares of Enova to be registered under the Securities Act of 1934.
As a result of the Share Purchase Agreement, the Exchange Agreement and
the Distribution Agreement, each shareholder of record of Hartcourt on March 31,
1999 received one (1) share of Enova for every four (4) shares owned of
Hartcourt. Following the distribution of Enova shares, both Enova and Hartcourt
continue to operate as separate companies. All of Enova's operations and related
assets and liabilities are held by Enova's subsidiaries.
On December 19, 1999, Hartcourt, who owed Enova $1,058,642, issued
100,000 shares of its restricted common stock to Enova, to satisfy the debt and
in exchange for all of Enova's interest in ECS. As a result, Enova no longer
holds any interest in ECS and holds 100% interest in Pego, which includes 100%
interest in PPI.
Business of Issuer
Enova Holdings, Inc.
Enova is a holding company as a result of spin-off of Pego and ECS by
Hartcourt. Enova is currently doing business through its wholly owned
subsidiary, Pego and Pego's wholly-owned subsidiary, PPI.
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Pego Systems, Inc.
Pego is a manufacturer's representative organization that offers a full
line of value added service including distribution, service, and manufacturing
of custom process equipment packages, which are blower, pump or compressor
packages designed to a customer's specification. The "package" itself is a
self-contained skid on which a blower, pump or compressor are assembled complete
with motor and operating controls.
Pego supplies air, gas and material handling equipment, i.e. blowers
and compressors, for the environmental, petrochemical, food service and other
industries with similar requirements. Pego is a stocking distributor for
positive displacement blowers, air knives, filters, silencers and compressor
parts. Pego designs and fabricates packages and provides repair service for the
equipment it sells.
Products
Pego sells positive displacement blowers, centrifugal blowers, and
components. These blowers are primarily used by industry to convey liquids and
powders from one place to another, to inject air into liquid and to extract
vapors by creating a vacuum. For example, blowers have been used to move cement
from raw material, through a process and into a holding bin; to create a vacuum
in a landfill and to draw off methane gas; and to inject air bubbles into a
sewage treatment plant to speed up effluent breakdown.
Pego sells sliding vane compressors, which supply air to blowers for
use in pneumatic conveying systems, which are air and mechanical conveying
systems that move product from one area to another, generally used for in-plan
processing of cement, resins, flour, coffee, pet food and powder chemicals. Pego
also sells air knives, which are dry containers for various items such as fruits
and vegetables, and steam turbines, which change steam to mechanical or
electrical energy. Steam turbines have been used to create electricity for
generators used by hospitals, universities and under-developed countries.
Pego sells liquid ring vacuum pumps that remove liquid from processed
food, milk and milk products and plastic molding processes. Pego sells
compressors, which provide air to blowers and pumps, and gas compressors, which
boost pressure in pipes which move gas for hospitals, refineries and other
customers who use natural gas.
Pego sells filters for air or gas, which clean the air in a system to
as much as 97% efficiency at the inlet or outlet depending on the process.
Filters clean the air in the system so the blower or pump can work efficiently.
Lastly, Pego sells moisture separators, which remove the moisture from pipes or
lines to leave clean, dry air and silencers, which muffle the noise of
compressed air, many times to meet OSHA standards.
Pego does not have any new products or services at the present time.
Services
Founded as a manufacturer's representative in 1952, Pego has expanded
its representation and sales force and continually sought new opportunities. A
manufacturer's representative has resell agreements with other manufacturers to
market and resell the manufacturer's products. In addition to sales, Pego
provides in-house repair, engineering design, fabrication and consulting
services. Pego sells directly to the end user, who are retail or industrial
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users of the equipment or part supplied, and utilizes independent sales agents
for distribution of its products and sales.
Pego's evolution continued with the opening in 1992 of a satellite
service and sales facility in Novato, California, a sales office in Sacramento,
California in 1994, and a sales office in Seattle, Washington in 1998; and plans
to open a sales office in Portland, Oregon. In 1998, Pego acquired Pacific
Pneumatics, Inc., a competitor in Rancho Cucamonga, California, that has the
ability to offer complementary products not available through Pego. Based on the
success of its satellite office program, Pego intends to continue expanding this
regional representation program by opening new offices in markets throughout the
country that will enable Pego to maintain its growth.
Currently, although it has yet to enter this market, Pego has
determined that its engineering and fabrication capabilities are well suited for
pollution control systems necessary for most of today's industrial operations.
In addition, opportunities exist for providing equipment and services for
wastewater treatment plants and landfills in the United States and worldwide
especially in evolving and emerging nations. Pego believes that there is a
virtually untapped potential of new business with industrial plants in the
United States discharging billions of gallons daily of water requiring
treatment. Pego is already fabricating and shipping systems to China and other
Asian countries providing management with experience in these markets.
Raw Materials
Pego purchases raw steel from Shoey Steel Co. and steel pipe from Long
Beach Metals. These materials are used in the fabrication of blower packages.
All sources or raw materials can easily be replaced as these materials are not
particular to any product or specific use.
Market Analysis
Pego is involved in four inter-related markets. This includes the
distribution, manufacturer's representative, fabrication, and repair and service
markets. Within the distribution market, Pego acts a distributor of positive
displacement blowers, sliding vane compressors, air knives, filters, silencers
and separators to the manufacturing sector. Distribution sales are growing at a
strong rate. The sales for these products amounted to $3,363,000 in 1999 and
$1,600,000 in 1998 representing a steady growth over the previous year. Pego
also acts as a manufacturer's representative selling liquid ring vacuum
pumps/compressors, steam turbines, conveying systems and gas compressors to the
manufacturing sector and petro-chemical sector. The manufacturer's
representative sales have shown some growth but are generally flat. Some of this
explained by the fact that Pego packages more equipment, and the petrochemical
market has been slow for the past two years. This is due to the plunge in oil
prices and also the devaluation of the monetary value in the Pacific Rim
countries where many large projects are on hold. Pego's manufacturers whom it
represents cater to those markets. Lastly, within the fabrication market, Pego
fabricates self-contained equipment packages, which it sells to the
manufacturing sector and engineering contractors. Pego has also found a market
for repairing and servicing the products it sells.
The upside potential for Pego's products in each of the currently
addressed markets over the next two years is further sales inroads into the food
industry, which is one of the fastest growing industries in the non-computer
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technology fields. Also, the environmental field includes wastewater treatment
plants, landfill gas gathering, vapor extraction and soil remediation. There are
several thousand industrial plants in the United States that discharge billion
gallons of water per day that need to be treated. This is above the
municipalities that are growing and need more wastewater treatment. The number
of plants combined in the USA and in the foreign countries, to which Pego has
access, exceeds 20,000 plants. Based on the conditions introduced above, it is
apparent that Pego will broaden its market coverage of the food, petrochemical
and environmental industries. An altogether new application for some of its
product would be tapping the metal finishing markets. Further opportunity for
its product exists in pharmaceutical and general food processing industries.
All the above-listed markets are areas with growth, stability and
opportunities for Pego products and are markets that Pego has sold to for years.
Products sold to these markets include air knives, positive displacement
blowers, blower packages and centrifugal blowers.
Market Segment
Key points in defining the market segment are the western states where
Pego operates, and in the general processing industry. Currently, over 150
companies in the western states that are of Pego's size or larger share the
market. Users of air and gas handling machinery and complete systems are looking
for quality and productivity improvements. Although thus far, the market for air
and gas handling machinery is stable and mature, future developments in air and
gas handling machinery and complete systems may cause Pego to increase its
packaging and service capabilities.
The stability of this market segment is good. This is based on the
product category performance over the past 10 years. The machinery Pego sells is
essential to many markets and will be unaffected by changes in the development
of high tech equipment, since it cannot do the work of these standard products.
The major market segments are: petrochemicals, wastewater treatment,
environmental, pneumatic conveying and food processing. In the next two years,
it is estimated that there will be more than ten products distributed by Pego.
The market potential for these products in Pego's market is very strong even
with only 5% of the overall market. Pego has an active customer base of over 600
companies and a turnover of new customers that is in the range of 4500 companies
in the last 5 years.
Strengths
In terms of product strength, Pego has several distinct advantages over
the competition. First, Pego is a distributor for Gardner Denver Blowers, Fuller
Compressors and is a manufacturer's representative for Nash Vacuum
Pumps/Compressors and Tuthill Turbines, who sell world-known equipment. These
manufacturers all have global presence and are leaders in the manufacturing of
their products. In marketing, Pego's most powerful asset is its sales engineers.
Pego has eight sales engineers, all of who are extremely well trained in the
sales of its equipment and complete systems. Its sales engineers have been with
Pego for as long as 18 years. The longevity with Pego gives its sales engineers
great advantage during competitive situations because of their product
knowledge, product training at the home factories of the companies that Pego
represents and their rapport with their customers.
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Weaknesses
While there are some weaknesses inherent in Pego's product lines, the
only notable marketplace disadvantage is delivery times. The sales increases
have exceeded Pego's manufacturing capacity. By mid year 2001, Pego expects to
be in good position as production may catch up with sales and thereby reduce
this weakness considerably. Corporate weaknesses at this time consist of a lack
of a fully integrated accounting system. Pego has brought on board an
information technology coordinator to review Pego's immediate needs and offer
solutions and implement a fully integrated accounting system.
Customer Profile
The most typical customer for Pego's product is someone who is in the
processing field and who currently uses its product for food or chemical
processing. It is likely that potential customers are going to be familiar with
similar products, and that they will readily accept Pego's product, provided
that Pego markets them effectively.
Complementary products to Pego's primary products, i.e. blowers, vacuum
pumps and compressors, are filters, silencers and separators which are already
in use by its customers and are seen as a tremendous help in compelling
customers to acquire and use its product. People are motivated to buy Pego's
product because of cost savings in operation.
Customer List
Typical customers include all the major oil companies, chemical plants,
power plants, A & E engineering firms, the food processing plants,
municipalities with respect to landfills, wastewater treatment plants and any
other industry that requires purification and/or cleaning of air and gases
before expelling them into the atmosphere or into their product. All
environmental clean up companies are deemed as Pego's potential customers.
Pego's customers include: Coca-Cola, Beatrice Foods, Shell Oil, Exxon,
British Petroleum, Bechtel Corporation, Fluor-Daniel Corporation, and Waste
Management Inc.
Competition
Companies that compete in this market are Roots, Paxton Blowers, MD
Pneumatics and other blower manufacturers. All companies mentioned above charge
competitive prices within 10% of Pego's prices, both higher and lower. The major
strengths of Pego's competitors are name recognition and the major weaknesses of
its competitors are lesser-trained sales representatives. Pego competes with
national companies, several of whom are low cost market suppliers, and are based
primarily in Pennsylvania and Ohio. Further, other competitors, such as United
Blowers Co. and Universal Blower Co. have very low overhead operations. In
contrast, Pego's building in Long Beach has recently been expanded and
rearranged to accommodate future support staff.
The major competitors' objectives and strategies are to win on price.
The major competitors' most likely response to trends affecting Pego's industry
will be to reduce production and sales costs. Pego's products are positioned
relative to its major competitors by price, quality and location. Pego is
Gardner Denver's and Tuthill's largest distributor in the twelve western states.
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Pego is one of Sonic Air Systems top three distributors. This is because Pego
specializes in selling low pressure air and gas equipment targeted at the
process applications. Pego receives 90% of the business in the cement plant
industry, where its top competitor is Fuller Co. In the waste treatment plant
industry, Pego is 70% successful against competitor California Centrifugal in
the sale of pumps and 50% successful against competitor Roots-Dresser in the
sale of aeration products. In the mining and chemical industry, Pego is 50%
successful in sales against competitor GL Sales. In the food processing
industry, Pego is 70% successful against competitors, Roots-Dresser and Paxton.
These statistics are based upon the number of known bid proposals that Pego has
successfully won against the above-mentioned competition.
Key factors that have resulted in the present competitive position in
this industry are improved efficiency and reduced operating noise level. Sales
and profit ranking of major competitors in the industry have changed over recent
years due to consolidation taking place in Pego's industry. The rankings have
changed because of the big companies buying out some of the smaller ones in the
industry.
Competitive threats today come from foreign manufacturers who are
desperate to enter the domestic market and offer prices and services that are
below cost. Pego's products perform in virtually all situations. The ability to
offer a full range of product and services for air and gas handling equipment is
unique in its industry.
In all comparisons, Pego's products provide the same or more features
and have superior performance than do many competitive products.
Cost Structure
Pego opened a new facility in 1998 that increased its potential
capacity by a factor of 15%. The facility is 22,000 square feet. The office
space of the facility comprises approximately 3,000 square feet while 19,000
square feet is divided evenly into the repair and fabrication departments with
the remaining area committed to inventory storage. In conjunction with this
expansion, Pego increased its marketing expense and other administrative
overheads. If the market acceptance in its expanded sales area is similar to its
existing territory, Pego's profitability should increase, as the additional
sales should far outweigh the increase in overhead expenses.
Pego plans to add equipment and personnel to further increase sales and
production capacity over a period of time. However, market opportunities for
Pego products have encouraged it to accelerate its expansion plans.
Pego will use additional financing to allow it to meet the expected
growth in demand for its products. Because of certain credit problems as
discussed further in this document, Pego is dependent on Enova for additional
financing.
Industry Growth
The sale and consumption of Pego's product has increased significantly
over the past 23 years. Pego and its manufacturers, for whom it distributes, are
increasing their capacity in order to meet this growth. There can be no
assurance, however, that the growth will continue at the present rate.
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Economic Risks
The economic risks affecting Pego are reduced oil prices and loss of
monetary value of foreign currencies against the dollar. This is because Pego
sells to businesses such as Tuthill Turbines and Nash Vacuum, who sell pumps and
compressors, which are sold globally to the petrochemical industry and power
plants. Global factors such as the price of oil and currency values directly
affect these market sectors. These sales are typically high dollar, therefore, a
slowdown in the construction, expansion or renovation of refineries and power
plants may effect Pego's business negatively. The best strategy for Pego is to
increase domestic sales and increase the service part of its business. In
addition, Pego is increasing the product lines it represents and the territory
into which it sells.
Legal and Government
State and local ordinances or zoning laws will not likely change or
have impact on the products that Pego distributes. Pego's products are in
compliance with environmental laws. No government approval is required for any
of its products that it represents for its principals. Environment law
compliance is related strictly to Pego's paint booth that is licensed by the
city, county and state EPA regulatory agencies. Pego will stay abreast of legal
issues facing its industry through the major contractors and available
government publications.
Pacific Pneumatics, Inc.
Pacific Pneumatics, Inc. ("PPI") was incorporated in California in
1959. On August 6, 1998, Pego purchased all outstanding shares of Pacific
Pneumatics, Inc. Terms of the transaction included payment of $235,000 in cash
and the transfer of equipment valued at $15,000. As such, PPI was transferred to
Enova via Pego when Enova acquired Pego and ECS in the Exchange Agreement with
Hartcourt on March 1, 1999.
PPI functions as a wholly-owned subsidiary of Pego. PPI sells positive
displacement blower packages, blower systems and components. These systems are
primarily used by industry to convey powders from one place to another, to
inject bubbles into liquid holding containers and to extract vapors by creating
a vacuum. For example, systems have been used to move flour for baking from
trucks into a holding bin, to create agitation in a plating process by blowing
bubbles into a tank and to extract polluted vapors from the ground by creating a
vacuum that pulls the vapor through the system and returns cleansed air to
atmosphere. PPI also sells pneumatic conveying systems, which are air and
mechanical conveying systems used to move product from one area to another,
generally used for in-plan processing of cement, resins, flour, coffee, pet food
and powder chemicals.
PPI also provides sales, engineering services, consulting, conveying
systems support and after market support services. PPI is a original equipment
manufacturer ("OEM") for Pore Poly filters and owns the trade name Pore Poly.
Poly Pore Filters are an industrial filter that allows powder to move to another
destination without allowing a dust charge into the atmosphere.
PPI typically sells to oil refineries, cement plants, food and drink
manufacturers, construction companies and all other industries that require
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purification and/or cleaning of air and gases before expelling them into the
atmosphere or into their product. Within these industries, PPI markets its
products to end users, OEM's and resellers. End users are retail or industrial
users of the equipment or part supplied and resellers are dealers or "middlemen"
to whom a particular piece of equipment is sold and who subsequently sells it to
an end user. PPI does not have a contractual representative or distribution
agreements with any of the manufacturers whose products it sells. All products
are purchased on an OEM or resale price basis. PPI's sales efforts are not bound
by geographical constraints since it has not entered into contractual agreements
with manufacturers whose products it sells. All sales are directed towards the
industrial sector.
Customers of PPI include Baker Furnace, Dow Chemical, Dolly Madison, Heinz
Products and Coto de Caza. Many companies compete with PPI in the sale of blower
packages. However, PPI has a strong repeat customer base, and faces minimal
competition in the areas of pond aeration, which is the oxygenation of small
bodies of water for the purposes of purification, and Poly Pore filter markets.
PPI usually faces competition from 2-3 other companies on a specific project and
is successful 50% of the time.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Results of Operations
Since Enova had no operations in fiscal 1998, the accompanying
financial statements for the year ended December 31, 1998 included only the cost
of organization of Enova.
Comparison of Year Ended December 31, 1999 to Year Ended December 31, 1998:
The accompanying financial statements of Enova for the year ended
December 31, 1999 included operations of Enova and Pego. The accompanying
financial statements for the year ended December 31, 1998 included operations of
Pego for the twelve months ended December 31, 1998 and five months of operations
of PPI from August 6, 1998 (date of acquisition by Pego) to December 31, 1998.
Enova's investment in ECS was deemed as zero due to consistent losses in 1999
and 1998, respectively.
The exchange of Pego and ECS was accounted for at historical cost since
it qualified as a combination of entities under common control. Accordingly, the
transaction was accounted for as a recapitalization of Pego, a combination of
businesses under common control and an asset acquisition of securities of ECS.
The financial statements subsequent to the acquisition are as follows: (1) the
balance sheet includes the net assets of Enova and Pego at historical cost; (2)
the statement of operations includes the operations of Enova and Pego for the
periods presented.
Sales. Sales increased by approximately $338,500 or 5% for the year
ended December 31, 1999 compared with 1998. This increase was primarily
attributable due to acquisition of Pacific Pneumatics, Inc. in August 1998 and
higher volume in repairs and service sales.
Cost of sales. Cost of sales decreased by approximately $194,000 or
(4%) for the year ended December 31, 1999 when compared with 1998. This decrease
resulted primarily due to increase in higher margin products sales and increased
26
<PAGE>
margin in repairs and service sales. Gross margins increased by 5% in 1999 over
1998 due to the sales of higher margin products and higher margins in repairs
and service sales in 1999.
General & administrative expenses. General and administrative expenses
increased by approximately $587,000 or (60%) and as a percentage of sales
increased to approximately 22% in 1999 compared to 15% in 1998. Such increase
was primarily due to increased administrative expenses, legal and accounting
costs, and payroll expenses due to acquisition of Pego and ECS in March 1999.
Sales and marketing expenses. Sales and marketing expenses increased by
approximately $157,000 or (19%) and percentage of sales increased to
approximately 14% in 1999 compared to 13% in 1998. The increase was primarily
due to Enova's expanding direct sales and marketing activities.
Net loss. Enova incurred a net loss of approximately $435,000 or (6.2%)
for the year ended December 31, 1999 when compared to net loss of approximately
$1,093,000 or (16.5%) during the same period of 1998. The reduction in loss
resulted primarily due to the impairment of goodwill amounting to $991,081
recorded in 1998 compared to $ 0 in 1999, offset by increased general and
administrative expenses and sales and marketing expenses incurred in 1999 when
compared with 1998, and loss of $40,134 on disposition of computer hardware and
software purchased in 1998 that was not Y2K compliant.
Impairments. Impairments for the year ended December 31, 1999 amounted
to zero compared to $991,081 for the year ended December 31, 1998. Enova
evaluated the recoverability of goodwill during 1998 and based on continuing
losses from Pego, management wrote off $991,081 of goodwill originally recorded
under push down method of accounting when Hartcourt acquired Pego. Hartcourt
based the write-off on the reevaluation of the value of Pego and the lack of
profitability of Pego after the acquisition.
Interest expense. Interest expense increased by $34,374 or (26%) for
the year ended December 31, 1999 as compared to 1998 primarily due to interest
charged by Comerica Bank on the loan obtained by Pego in August 1998.
Comparison of the Three Months and Six Months Ended June 30, 2000 to Three
Months and Six Months Ended June 30, 1999:
The accompanying financial statements of Enova for the three months and
six months ended June 30, 2000 include operations of Enova, Pego and PPI. The
accompanying financial statements for the three months and six months ended June
30, 1999 include operations of Pego and PPI.
Sales. Sales decreased by approximately $481,800 and $664,400 during
the three months and six months ended June 30, 2000 when compared to the same
periods in 1999. The decrease in sales resulted primarily due to Enova not able
to complete shipments of major engineering packages due to back-ordered parts.
Cost of sales. Cost of sales decreased by approximately $409,600 and
$382,750 during the three months and six months ended June 30, 2000 when
compared to the same periods in 1999. Cost of Sales as a percentage of sales
decreased to approximately 61% and increased to 63% of sales during the three
months and six months ended June 30, 2000 as compared to approximately 67% and
27
<PAGE>
62% of sales for the same periods in 1999. The decrease in cost of sales was
primarily due to sale of product mix with higher gross margin during the three
months ended June 30, 2000 compared to the sale of product mix during the same
periods in 1999.
Sales and marketing. Sales and marketing expenses decreased by
approximately $91,900 and increased by $40,050 during the three months and six
months ended June 30, 2000 when compared to the same periods in 1999. Sales and
marketing expenses as a percentage of sales decreased to approximately 3% of
sales and increased to 12% of sales during the three months and six months ended
June 30, 2000 as compared to approximately 7% and 9% of sales for the same
periods in 1999. Such decrease was primarily due to Enova reducing advertising
and marketing activities during the three months ended June 30, 2000 as compared
to the same period in 1999. However, sales and marketing expense increased due
to Enova expanding direct sales and increased advertising and marketing expense
in the six months ended June 30, 2000 as compared to the same period in 1999.
General and administrative expenses. General and administrative
expenses decreased by approximately $24,900 and $161,400 during the three months
and six months ended June 30, 2000 when compared to the same periods in 1999.
General and administrative expenses as a percentage of sales increased to
approximately 28% and 22% of sales during the six months ended June 30, 2000
when compared to approximately 23% and 22% of sales for the same periods in
1999. Such decrease was primarily due to the increased administrative, legal and
accounting costs, and payroll expenses incurred in connection with the
organization of Enova during the three months and six months ended June 30, 1999
compared to the same periods in 2000.
Interest expense. Interest expense increased by approximately $73,000
and $128,000 during the three months and six months ended June 30, 2000 when
compared to the same periods in 1999. The increase in interest expense was
primarily due to higher rate of interest charged to Enova on loans outstanding
to the bank and third party during the three and six months ended June 30, 2000
as compared to the same periods in 1999.
Liquidity and Capital Resources
At December 31, 1999, Enova had cash and cash equivalents of
approximately $60,000 and working capital deficiency of approximately $637,000.
Material commitments. Enova has a promissory note on its and Pego's
corporate headquarters in Long Beach, California bearing 8.5% interest per year,
with monthly payment of $9,543 including principal and interest. The final
payment on the promissory note is due on November 1, 2024. Enova has two other
facilities located in Novato, California and Chino, California. The monthly
payments on the Novato lease, which expires May 31, 2003, are $1,975. PPI's
office, located in Chino, is leased at $1,409 per month for a two-year term
expiring on August 31, 2001.
Enova also leases certain computer equipment under a capital lease of
$71,530 with minimum payments of approximately 23,088 due annually until 2004.
Enova is also obligated under employment contracts with its Chairman of the
Board and Chief Executive Officer to provide salary and fringe benefits through
June 30, 2002. Minimum salary payments under the contracts currently amount to
$260,000 per year and aggregate $739,600 through June 20, 2002.
28
<PAGE>
Enova is currently going through litigation with Comerica bank as a
guarantor of Pego's debt under a line of credit arrangement and a note payable.
The bank has called the line of credit of $200,000 and the note payable of
$686,104 due as of December 31, 1999. Enova expects to incur less than $20,000
in legal fees as a result of the litigation. A forbearance agreement has been
entered into by all parties effective October 1, 1999, which requires the bank
to forbear all collection efforts until July 1, 2001. Enova has reached a
settlement with the bank and expects to finalize the settlement agreement by
late November, 2000.
At June 30, 2000, Enova had cash and cash equivalents of approximately
$52,840 and working capital deficiency of approximately $696,560.
Because Enova has had continuing losses and a working capital deficit
and accumulated losses from inception to December 31, 1999, Enova's auditors, in
their report of Enova's and its subsidiaries financial statements as of December
31, 1999, expressed substantial doubt about Enova's ability to continue as a
going concern, which contemplates, among other things, the realization of assets
and satisfaction of liabilities in the normal course of business. Enova believes
that its existing working capital deficit, legal fees associated with settlement
of litigation together with funds generated from operations, will not be
sufficient to provide for its planned operations for the foreseeable future.
Pursuant to the December 1999 Agreement between Enova and Hartcourt,
Enova received 100,000 shares of Hartcourt restricted common stock in the name
of Pego in exchange for Enova's ownership interest in ECS. Pego plans to sell
its investment in Hartcourt common shares upon effectiveness of a registration
statement filed by Hartcourt on August 24, 2000 to register such shares. Enova
believes that it will be able to satisfy its cash requirements with the proceeds
of that sale for at least six months. Enova believes that an additional million
dollars will be required to remove the going concern opinion. Management
believes that actions are currently being taken to reduce expenses, generate
cash by optimizing operations and thus pay-off the bank loans, which will
provide the opportunity for Enova to continue as a going concern.
Enova regularly examines opportunities for strategic acquisitions of
other companies or lines of business and anticipates that it may from time to
time issue additional debt and/or equity securities either as direct
consideration for such acquisitions or raise additional funds to be used, in
whole or in part, in payment for acquired securities or assets. The issuance of
such securities could be expected to have a dilutive impact on Enova's
shareholders, and there can be no assurance as to whether or when any acquired
business would contribute positive operating results commensurate with the
associated investment.
DESCRIPTION OF PROPERTY
The corporate headquarters of Enova and Pego is located in Long Beach,
California. These facilities are owned by Enova and contain approximately 22,000
square feet of office, warehouse and production facilities. Enova has a
promissory note on the facility bearing 8.5% interest per year, with monthly
payment of $9,543 including principal and interest. The final payment on the
promissory note is due on November 1, 2024. The production area is complete with
cranes, forklifts, fabrication equipment, overhaul and service equipment,
testing and certification equipment and a paint booth. The production facility
is in compliance with all government certifications.
29
<PAGE>
Enova has two other facilities located in Novato, California and Chino,
California. The Novato facility is leased from the former owner of Pego and
approximates 2,100 square feet. The monthly payments on this lease, which
expires May 31, 2003, are $1,975. The facility includes a sales office, a small
warehouse for certain high sales volume components and a shop for limited
repairs. PPI's office, located in Chino is leased at $1,409 per month for a
two-year term expiring on August 31, 2001. The lease has an option to renew for
one additional year. The facility is approximately 2,200 square feet and
supports Pore Poly production and filtration business.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Please see "Organization Within Last Five Years."
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no public market for Enova common stock. As of November 6,
2000, there were 25,000,000 shares of preferred stock authorized, $.001 par
value, 250 shares issued and outstanding and 75,000,000 shares of common stock
authorized, $.001 par value, 3,812,211 shares issued and outstanding. As of
November 6, 2000, there were 1076 holders of record of Enova common stock and 1
holder of record of Enova preferred stock.
Enova's Board of Directors approved a Stock Option Plan, effective
January 3, 2000 to December 31, 2010, whereas Enova will grant options for up to
2,000,000 shares of common stock to certain employees and consultants for
services rendered. Enova has prepared a Form S-8 to register the shares
underlying these options and expects to file the Form S-8 with the Securities
and Exchange Commission shortly. On January 3, 2000, Enova granted under the
plan to Dr. Alan Phan an option to purchase 500,000 shares of common stock; to
Mr. Manu Ohri an option to purchase 200,000 shares of common stock; and to Mr.
Fred Cohn an option to purchase 100,000 shares of common stock, at an exercise
price of $2.00 per share. No options have been exercised under the plan as of
the date of this filing.
No other shares of Enova are subject to outstanding options or warrants
to purchase or securities convertible into, common equity of Enova. Further, no
holder has met the requirements to sell Enova securities under Rule 144 of the
Securities Act Rules and Enova has not agreed to register its securities under
the Securities Act for sale by securities holders.
Enova has not declared any dividends in the last two years.
EXECUTIVE COMPENSATION
The following table sets forth the total compensation for the Chairman
and the Chief Executive Officer and each of Enova's most highly compensated
executive officers whose total salary and bonus for the fiscal 1999 exceeded
$100,000 or would have exceeded $100,000 on an annualized basis.
Name Annual Salary Other Compensation Year
--------------- ----------------- --------------------------- -------------
Dr. Alan Phan $0 ($60,000 worth of Stock) 1999
--------------- ----------------- --------------------------- -------------
Manu Ohri $0 ($25,000 worth of Stock) 1999
--------------- ----------------- --------------------------- -------------
30
<PAGE>
(1) Stock represents restricted Enova stock. The amounts represent compensation
payable in the form of restricted Enova stock. Fair market value of Enova stock
is indeterminable at the present time and will be determined when compensation
is paid.
Stock Option Plan
On January 3, 2000, Enova adopted a formal stock option plan titled the
2000 Stock Option Plan ("Plan") to encourage ownership of the common stock of
Enova by key eligible employees and its Directors and Officers thereby
encouraging them to exert maximum effort for the success of the business of
Enova and its subsidiaries. The Plan was funded with 2,000,000 shares of Enova
common stock. On January 3, 2000 Enova granted, under the Plan, to Dr. Alan Phan
an option to purchase 500,000 shares of common stock; to Mr. Manu Ohri an option
to purchase 200,000 shares of common stock; and to Mr. Fred Cohn an option to
purchase 100,000 shares of common stock, at an exercise price of $2.00 per
share. No options have been exercised under the Plan as of the date of this
filing.
Employment Agreements
Dr. Alan Phan's Employment Agreement. Enova entered into an employment
agreement with Dr. Alan Phan in July 1999 pursuant to which Dr. Phan agreed to
serve as Chairman of the Board of Directors of Enova. The employment agreement
provides that Dr. Phan will receive an annual compensation of $120,000 and an
annual cash bonus as determined by the Board of Directors. In Dr. Phan's sole
discretion, he may elect to take stock in lieu of a cash salary. If Dr. Phan
does not take compensation in cash, Enova will issue restricted common shares
for such compensation earned, shares calculated at the closing price on the
first trading of the year discounted by 50%, for the year for which compensation
is earned. Accrued compensation paid in stock will be recorded at the fair
market value of the stock issued with any excess fair market value over the
accrued amount being charged to compensation expense on the grant date. Enova
will provide Dr. Phan with (i) a life insurance policy in the amount of
$1,000,000; (ii) medical, dental and disability (long-term and short-term)
coverages; (iii) a car allowance of $650 per month; and (iv) membership dues for
business and professional associations.
Dr. Phan may terminate the employment agreement at any time for any
reason or no reason upon delivering thirty days notice to the company. If the
employment agreement is terminated by Enova without cause, or if Dr. Phan
terminates his employment for good reason, including as a result of a change in
control, Dr. Phan is entitled to a lump sum payment dependent upon the amount of
time the employment agreement has been in effect.
If the employment agreement is terminated in the first year, the severance
amount would be equal to his base salary for 12 months; if employment agreement
is terminated in the second year, the severance amount will be equal to his base
salary for 18 months; and if employment agreement has been in effect for longer
than two years, the severance amount will equal 24 months of base pay at the
time of termination. In addition, Dr. Phan shall receive (i) his base salary
accrued through the date of termination; (ii) all accrued vacation pay and
accrued bonuses, if any, to date of termination; (iii) any bonus which would
have been paid but for the termination, prorated through the date of
termination, based upon Enova's performance and in accordance with the terms,
provisions and conditions of any company incentive bonus plan in which Dr. Phan
31
<PAGE>
may be designated a participant; (iv) providing, for a period of 12 months after
the date of termination, at the company's expense, coverage to Dr. Phan under
the company's life insurance and disability insurance policies and to Dr. Phan
and his dependents under the company's health plan; if any of the company's
health, life insurance, or disability insurance plans are not continued or if
Dr. Phan is not eligible for coverage thereunder because of the termination of
his employment, the company shall pay the amount required for Dr. Phan to obtain
equivalent coverage; (v) providing to Dr. Phan reasonable outplacement services;
and (vi) providing an office, secretarial support, and access to equipment and
supplies for a period of 6 months after termination. Also upon termination of
Dr. Phan's employment by Enova without cause, all equity options, restricted
equity grants and similar rights held by Dr. Phan with respect to securities of
the company shall automatically become vested and shall become immediately
exercisable.
Mr. Manu Ohri's Employment Agreement. Enova entered into an employment
agreement with Mr. Manu Ohri in July 1999, pursuant to which Mr. Ohri agreed to
serve as the Chief Executive Officer and President of Enova. The employment
agreement provides that Mr. Ohri will receive an annual base salary of $140,000
in the first year, $168,000 in the second year, and $201,600 in the third year,
and an annual cash bonus as determined by the Board of Directors. Enova will
provide Mr. Ohri with (i) a life insurance policy in the amount of $1,000,000;
(ii) medical, dental and disability (long-term and short-term) coverage; (iii) a
car allowance of $650 per month; and (iv) membership dues for business and
professional associations not to exceed $2,500 annually without the
authorization of the Board.
Mr. Ohri may terminate the employment agreement at any time for any
reason or no reason upon delivering thirty days notice to the company. If the
employment agreement is terminated by the company without cause, or if Mr. Ohri
terminates his employment for good reason, including as a result of a change in
control, Mr. Ohri is entitled to a lump sum payment dependent upon the amount of
time employment agreement has been in effect.
If the employment agreement is terminated in the first year, the
severance amount would be equal to Mr. Ohri's base salary for 12 months; if
employment agreement is terminated in the second year, the severance amount will
be equal to Mr. Ohri's base salary for 18 months; and if employment agreement
has been in effect for longer than two years, the severance amount will equal 24
months of base pay at the time of termination.
In addition, Mr. Ohri shall receive (i) his base salary accrued through
the date of termination; (ii) all accrued vacation pay and accrued bonuses, if
any, to date of termination; (iii) any bonus which would have been paid but for
the termination, prorated through the date of termination, based upon company's
performance and in accordance with the terms, provisions and conditions of any
company incentive bonus plan in which Mr. Ohri may be designated a participant
(iv) providing, for a period of 12 months after the date of termination, at the
company's expense, coverage to Mr. Ohri under the company's life insurance and
disability insurance policies and to Mr. Ohri and his dependents under the
company's health plan; if any of the company's health, life insurance, or
disability insurance plans are not continued or if Mr. Ohri is not eligible for
coverage thereunder because of the termination of his employment, the company
shall pay the amount required for Mr. Ohri to obtain equivalent coverage; (v)
32
<PAGE>
providing to Mr. Ohri reasonable outplacement services; and (vi) providing an
office, secretarial support, and access to equipment and supplies for a period
of 6 months after termination. Also upon termination of Mr. Ohri's employment by
the company without cause, all equity options, restricted equity grants and
similar rights held by Mr. Ohri with respect to securities of the company shall
automatically become vested and shall become immediately exercisable.
FINANCIAL STATEMENTS
ENOVA HOLDINGS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998
33
<PAGE>
ENOVA HOLDINGS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONTENTS
PAGE 1 INDEPENDENT AUDITORS' REPORT
PAGE 2 BALANCE SHEET AT DECEMBER 31, 1998
PAGE 3 STATEMENT OF OPERATIONS FOR THE PERIOD FROM
MAY 1, 1998 (INCEPTION) TO DECEMBER 31, 1998
PAGE 4 STATEMENT OF CASH FLOWS FOR THE PERIOD FROM
MAY 1, 1998 (INCEPTION) TO DECEMBER 31, 1998
PAGE 5 STATEMENT OF STOCKHOLDER'S EQUITY FOR THE PERIOD
FROM MAY 1, 1998 (INCEPTION) TO DECEMBER 31, 1998
PAGES 6 - 9 NOTES TO FINANCIAL STATEMENTS
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of:
Enova Holdings, Inc.
(A Development Stage Enterprise)
We have audited the accompanying balance sheet of Enova Holdings, Inc. (a
development stage enterprise) as of December 31, 1998 and the related statements
of operations, changes in stockholder's equity and cash flows for the period
from May 1, 1998 (inception) to December 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we 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.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly in all
material respects, the financial position of Enova Holdings, Inc. (a development
stage enterprise) as of December 31, 1998, and the results of its operations and
its cash flows for the period from May 1, 1998 (inception) to December 31, 1998
in conformity with generally accepted accounting principles.
WEINBERG & COMPANY, P.A.
Boca Raton, Florida
December 27, 1999
1
<PAGE>
ENOVA HOLDINGS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEET
DECEMBER 31, 1998
------------------------------------------------------------------------------
ASSETS
Current assets
$ -
------------
TOTAL ASSETS $ -
============
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES $ -
------------
STOCKHOLDER'S EQUITY
Preferred stock, $.001 par value, 25,000,000 shares authorized,
none issued and outstanding -
Common stock, $.001 par value, 75,000,000 shares authorized,
one share issued and outstanding -
Additional paid-in capital 500
Deficit accumulated during development stage (500)
------------
TOTAL STOCKHOLDER'S EQUITY -
------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ -
============
See accompanying notes to financial statements
2
<PAGE>
ENOVA HOLDINGS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF OPERATIONS
FROM MAY 1, 1998 (INCEPTION)
TO DECEMBER 31, 1998
-----------------------------------------------------------------------------
REVENUES $ -
-----------
EXPENSES
Organization expense 500
-----------
TOTAL EXPENSES 500
-----------
NET LOSS $ (500)
===========
Net loss per share - basic and diluted $ (500)
===========
Weighted average number of shares
outstanding during the period -
basic and diluted 1
===========
See accompanying notes to financial statements
3
<PAGE>
ENOVA HOLDINGS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF CASH FLOWS
FROM MAY 1, 1998 (INCEPTION) TO
DECEMBER 31, 1998
---------------------------------------------------------------------------
Cash flows from operating activities
Net loss $ (500)
-------------
Net cash used in operating activities (500)
-------------
Cash flows from investing activities
Net cash provided by investing activities
Cash flows from financing activities
Proceeds from issuance of common stock 500
-------------
Net cash provided by financing activities 500
-------------
Net increase (decrease) in cash -
Cash and cash equivalents at beginning of year -
-------------
Cash and cash equivalents at end of year $ -
=============
See accompanying notes to financial statements
4
<PAGE>
ENOVA HOLDINGS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
FROM MAY 1, 1998 (INCEPTION) TO
DECEMBER 31, 1998
<TABLE>
<S> <C> <C> <C> <C> <C>
DEFICIT
ACCUMULATED
ADDITIONAL DURING
COMMON STOCK PAID-IN DEVELOPMENT
SHARES AMOUNT CAPITAL STAGE TOTAL
----------------------------------------------------------------------------------------------------------
Common Stock Issuance 1 $ - $ 500 $ - $ 500
Net loss from May 1,1998
(Inception) to December 31,1998 - - - (500) (500)
----------------------------------------------------------------------
======================================================================
Balance, December 31, 1998 1 $ - $ 500 $ (500) $ -
======================================================================
</TABLE>
See accompanying notes to financial statements
5
<PAGE>
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION
(A) Organization
Enova Holdings, Inc. (a development stage enterprise)
(the "Company"), formerly known as Yes Lifestyles, Inc.,
was incorporated in Nevada on May 1, 1998 to serve as a
vehicle to effect a merger, exchange of capital stock,
asset acquisition or other business combination with a
domestic or foreign private business. At December 31,
1998, the Company had not yet commenced any formal
business operations, and all activity related to the
Company's formation. The Company's fiscal year end is
December 31.
In February 1999, the Company was acquired by a publicly
held company and subsequently spun off (see Note 3).
(B) Use of Estimates
In preparing financial statements in conformity with generally
accepted accounting principles, management is required to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at
the date of the financial statements and revenues and expenses during the
reported period. Actual results could differ from those estimates.
(C)Cash and Cash Equivalents
For purposes of the cash flow statements, the Company considers all
highly liquid investments with original maturities of three months or
less at the time of purchase to be cash equivalents.
(D)Income Taxes
The Company accounts for income taxes under the Financial Accounting
Standards Board Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes" ('Statement 109"). Under Statement 109,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Under
Statement 109, the effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes
the enactment date. There was no current income tax expense in the period
ended December 31, 1998 due to the net loss. Any deferred tax asset
resulting from the net loss has been fully offset by a valuation
allowance.
(E)Earnings Per Share
Net loss per common share for the period from May 1, 1998 (inception)
to December 31, 1998 is computed based upon the weighted average common
6
<PAGE>
shares outstanding as defined by Financial Accounting Standards No. 128,
"Earnings Per Share" There were no common stock equivalents outstanding
at December 31, 1998.
NOTE 2 STOCKHOLDER'S EQUITY
(A)Preferred Stock
The Company is authorized to issue 25,000,000 shares of preferred
stock at $.001 par value, with such designations, preferences and
relative, participating, optional or other special rights, or
qualification, limitations or restrictions thereof as may be designated
by the Board of Directors. As of December 31, 1998, none of the preferred
stock was issued or outstanding (See Note 3).
(B)Common Stock
The Company is authorized to issue 75,000,000 shares of common stock
at $.001 par value. As of December 31, 1998, one share of common stock
was issued and outstanding (See Note 3).
NOTE 3 SUBSEQUENT EVENTS
(A)Share Purchase Agreement
On February 1, 1999, the sole shareholder of the Company
(the "Shareholder") entered into a share purchase
agreement (the "Agreement") with The Hartcourt
Companies, Inc., a publicly held corporation
("Hartcourt"). Under the terms of the Agreement,
Hartcourt acquired one share of common stock of the
Company, representing 100% of the total issued and
outstanding capital stock of the Company in exchange for
$500 cash paid to the Shareholder. As a result, the
Company became a wholly-owned subsidiary of Hartcourt.
(B)Exchange Agreement
On March 1, 1999, in contemplation of the distribution
agreement and spin-off discussed in Note 3(C) below, the
Company entered into an exchange agreement, as amended,
(the "Agreement") with Hartcourt. Under the terms of the
Agreement, the Company agreed to issue 4,709,788 shares
of its common stock to Hartcourt in exchange for all of
Hartcourt's ownership in Pego Systems, Inc. ("Pego") and
Electronic and Component Systems, Inc. ("ECS"). The
exchange was accounted for at historical cost since it
qualified as a combination of entities under common
control pursuant to AICPA Interpretation 39 of APB
Opinion 16 and Emerging Issues Task Force 90-5 ("EIFT
90-5") "Exchanges of Ownership Interest Between Entities
Under Common Control" and a recapitalization of Pego
pursuant to APB 16.. As a result, the Company obtained a
7
<PAGE>
100% ownership interest in Pego and a 35% ownership
interest in ECS.
Under generally accepted accounting principles the
Company whose stockholders receive over fifty percent
voting control of the surviving entity in a business
combination is considered the acquirer for accounting
purposes. Accordingly, the transaction is accounted for
as a recapitalization of Pego, a combination of
businesses under common control and an asset acquisition
of securities of ECS. The financial statements
subsequent to the acquisition are as follows: (1) the
balance sheet includes the net assets of of the Pego and
Enova at historical cost; (2) the statement of
operations includes the operations of Pego and Enova for
the period presented.
(C)Distribution Agreement
On March 1, 1999, the Company entered into a
distribution agreement (the "Distribution Agreement")
with Hartcourt. Under the terms of the Distribution
Agreement, Hartcourt agreed to distribute to all its
shareholders of record on March 31, 1999 all of the
4,709,789 shares of common stock of the Company owned by
Hartcourt at a 1 for 4 ratio and to file a Registration
Statement on Form 10-SB to cause the distributed shares
to the Company to be registered under the Securities
Exchange Act of 1934, as amended. Due to the rounding of
fractional shares, an additional 146 shares were issued
to the stockholders. This distribution transaction was
accounted for as a spin-off by Hartcourt. In addition,
250 new shares of preferred stock were issued to a
preferred stockholder of Hartcourt, who is the Chairman
of the Company, at the same 1 for 4 ratio pursuant to
the Board of Directors' authorization, and their
interpretation of the Distribution Agreement. The 250
preferred shares entitle the Chairman to appoint
three-fifths of the membership of the Board of Directors
of the Company. Subsequent to March 1, 1999, Hartcourt
issued its common stock to the Company's Chairman for
services he rendered to Hartcourt during 1998. In
September 1999, the Company's Board of Directors issued
a resolution to retroactively include these shares as
part of the March 1, 1999 Distribution Agreement. As a
result, an additional 426,621 new shares of the
Company's common stock were issued. Thus an aggregate of
5,136,556 and 250 common and preferred shares,
respectively, were issued pursuant to the Distribution
Agreement.
8
<PAGE>
(D)Common Stock Issuance
On July 7, 1999, as authorized by the Board of
Directors, the Company issued 13,156 shares of its
common stock to satisfy former holders of convertible
debentures of Hartcourt. The shares were recorded by the
Company at the $65,780 Hartcourt carrying value of the
debentures, with a corresponding amount due from
Hartcourt.
9
<PAGE>
ENOVA HOLDINGS, INC. AND SUBSIDIARIES
FINANCIAL STATEMENTS
DECEMBER 31, 1999 (CONSOLIDATED)
DECEMBER 31, 1998 (COMBINED)
<PAGE>
ENOVA HOLDINGS, INC. AND SUBSIDIARIES
CONTENTS
PAGE 2 INDEPENDENT AUDITORS' REPORT
PAGE 3 CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1999
PAGE 4 STATEMENTS OF OPERATIONS AND COMPRENSIVE INCOME FOR THE
YEARS ENDED DECEMBER 31, 1999 (CONSOLIDATED) AND DECEMBER
31, 1998 (COMBINED)
PAGE 5 STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE
YEARS ENDED DECEMBER 31, 1999 (CONSOLIDATED) AND DECEMBER
31, 1998 (COMBINED)
PAGES 6 - 7 STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31,
1999 (CONSOLIDATED) AND DECEMBER 31, 1998 (COMBINED)
PAGES 8 - 19 NOTES TO FINANCIAL STATEMENTS AS OF DECEMBER 31, 1999 AND
1998
PAGE 20 BALANCE SHEET AS OF JUNE 30, 2000 (UNAUDITED
PAGE 21 STATEMENT OF OPERATIONS- THREE MONTHS AND SIX MONTHS
ENDED JUNE 30, 2000 AND 1999 (UNAUDITED)
PAGE 22 STATEMENT OF CASH FLOWS -SIX MONTHS ENDED JUNE 30, 2000
AND 1999 (UNAUDITED)
PAGE 23 - 24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of:
Enova Holdings, Inc.
We have audited the accompanying consolidated balance sheet of Enova Holdings,
Inc. and Subsidiaries as of December 31, 1999 and the related statements of
operations, changes in shareholders' equity and cash flows for the years ended
December 31, 1999 (consolidated) and December 31, 1998 (combined). These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. We did not audit the December 31, 1998 financial statements of the
Company's subsidiary, Pego Systems, Inc., a wholly owned subsidiary, which
statements reflect total assets of $5,042,110 as of December 31, 1998 and total
revenues of $6,631,798 for the year then ended. Those statements were audited by
other auditors whose report dated March 17, 1999 expressed an unqualified
opinion on has been furnished to us, and our opinion, insofar as it relates to
the amounts included for Pego Systems, Inc. as of December 31, 1998, and for the
year then ended, is based solely on the report of the other auditors.
those financial statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we 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.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly in all
material respects, the consolidated financial position of Enova Holdings, Inc.
and Subsidiaries as of December 31, 1999, and the results of its operations and
its cash flows for the years ended December 31, 1999 (consolidated) and the
December 31, 1998 (combined) in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note LM to the
financial statements, the Company is in violation of certain debt covenants on a
note and line of credit payable to a bank, and the bank has demanded payment in
full. In addition, the Company has continuing losses and a working capital
deficiency and accumulated deficit at December 31, 1999. These conditions raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to this matter are also described in Note L.M. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
WEINBERG & COMPANY, P.A.
Boca Raton, Florida
March 8, 2000
2
<PAGE>
ENOVA HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1999
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 60,373
Accounts receivable, net 1,177,544
Inventory 830,783
Other current assets 16,494
-----------
Total Current Assets 2,085,194
-----------
PROPERTY AND EQUIPMENT, net 1,343,883
OTHER ASSETS
Investments 1,506,250
Intangible, net 734,930
Receivable from affiliate 65,780
-----------
Total Other Assets 2,306,960
-----------
TOTAL ASSETS $ 5,736,037
------------ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Accounts payable $ 1,061,720
Lines of credit 250,000
Accrued expenses 520,248
Notes payable, current portion 877,156
Capital lease obligations, current portion 13,112
------------
Total Current Liabilities 2,722,236
NOTES PAYABLE 1,468,828
CAPITAL LEASE OBLIGATIONS 71,530
------------
TOTAL LIABILITIES 4,262,594
----------------- ------------
SHAREHOLDERS' EQUITY
Preferred stock, $.001 par value, 25,000,000 shares authorized,
250 shares issued and outstanding -
Common stock, $.001 par value, 75,000,000 shares authorized,
5,149,712 shares issued and outstanding 5,150
Additional paid-in capital 2,332,862
Accumulated other comprehensive income 431,250
Accumulated deficit (1,295,819)
------------
Total Shareholders' Equity 1,473,443
------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 5,736,037
------------------------------------------ ===========
See accompanying notes to financial statements.
3
<PAGE>
ENOVA HOLDINGS, INC. AND SUBSIDIARIES
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE YEARS ENDED DECEMBER 31, 1999 (CONSOLIDATED)
AND DECEMBER 1998 (COMBINED)
----------------------------
1999 1998
-------------- ---------------
NET SALES $ 6,970,262 $ 6,631,798
COST OF SALES 4,600,448 4,794,128
-------------- ---------------
Gross profit 2,369,814 1,837,670
-------------- ---------------
OPERATING EXPENSES
Sales and marketing 1,002,110 844,693
General and administrative 1,563,497 976,435
Impairments - 991,081
-------------- ---------------
Total Operating Expenses 2,565,607 2,812,209
-------------- ---------------
LOSS FROM OPERATIONS (195,793) (974,539)
OTHER (INCOME) EXPENSES
Interest income (708) (46,758)
Interest expense 164,206 129,832
Loss on disposal of assets 40,134 -
Gain on settlement of receivable (16,358) -
-------------- ---------------
Total Other (Income) Expenses 187,274 83,074
-------------- ---------------
LOSS BEFORE INCOME TAXES (383,067) (1,057,613)
Income taxes 52,026 35,800
-------------- ---------------
NET LOSS (435,093) (1,093,413)
Other comprehensive income
Unrealized gain on investments 431,250 -
-------------- ---------------
COMPREHENSIVE LOSS $ (3,843) $ (1,093,413)
------------------ ============== ===============
Net loss per common share -
basic and diluted $ (0.08) $ (0.21)
============== ===============
Weighted average shares outstanding -
basic and diluted 5,142,936 5,136,556
============== ===============
See accompanying notes to financial statements.
4
<PAGE>
ENOVA HOLDINGS, INC. AND SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999 (CONSOLIDATED)
AND 1998 (COMBINED)
-------------------
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ACCUMULATED RETAINED
ADDITIONAL OTHER EARNINGS
PREFERRED STOCK COMMON STOCK PAID-IN COMPRENSIVE (ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL INCOME DEFICIT) TOTAL
------ ------ ------ ------ ------- ------ -------- -----
Balance, December 31, - $ - 5,136,555 $ 5,137 $ 2,251,595 $ - $ 232,687 $ 2,489,419
1997
Contribution of - - - - 15,000 - - 15,000
equipment
Additional paid-in - - - - 500 - - 500
capital
Net loss 1998 - - - - - - (1,093,413) (1,093,413)
---------- ---------- ----------- -------- ----------- ---------- ----------- --------------
Balance, December 31, - - 5,136,555 5,137 2,267,095 - (860,726) 1,411,506
1998
Recapitalization - - 1 - - - - -
Stock issued pursuant
to 250 - - - - - - -
Distribution agreement
Stock issued as loan to
prior - - 13,156 13 65,767 - - 65,780
Principal stockholder
Unrealized gain on - - - - - 431,250 - 431,250
investments
Net loss 1999 - - - - - - (435,093) (435,093)
---------- --------- ----------- ---------- ----------- ----------- ----------- --------------
BALANCE, DECEMBER 31,
1999 250 $ - 5,149,712 $ 5,150 $ 2,332,862 $ 431,250 $(1,295,819) $ 1,473,443
-----
========== ========== ============ ========= =========== =========== =========== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
ENOVA HOLDINGS, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 (CONSOLIDATED)
AND DECEMBER 31, 1998 (COMBINED)
1999 1998
---------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (435,093) $ (1,093,413)
Adjustments to reconcile net profit to
net cash provided by (used in)
operating activities:
Impairments - 991,081
Depreciation 68,904 60,501
Amortization 53,103 81,252
Loss on disposal assets 40,134 -
Gain on settlement of receivable (16,358) -
Provisions for doubtful accounts - 10,000
Changes in assets and liabilities:
(Increase) Decrease in accounts receivable (193,453) 548,350
(Increase) Decrease in inventory (239,904) 164,705
(Increase) Decrease in other assets (9,368) 8,988
Decrease in prepaid income taxes - 35,000
Increase in accounts payable 176,210 162,914
Increase (Decrease) in accrued expenses 473,123 (193,675)
---------------- ---------------
NET CASH PROVIDED BY (USED IN)OPERATING ACTIVITIES (82,702) 775,703
---------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (30,779) (77,676)
Advances to affiliate (67,561) -
Purchases of subsidiary - (235,000)
Loan to parent company - (991,081)
---------------- ---------------
NET CASH USED IN INVESTING ACTIVITIES (98,340) (1,303,757)
---------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from lines of credit 200,000 -
Net payments on lines of credit - (200,000)
Proceeds from notes payable 250,000 1,235,000
Payments on notes payable (549,692) (159,431)
Payments on capital lease (4,007) (7,760)
Proceeds from issuance of common stock - 500
---------------- ---------------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES (103,699) 868,309
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (284,741) 340,255
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 345,114 4,859
---------------- ---------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 60,373 $ 345,114
================ ===============
See accompanying notes to financial statements.
6
<PAGE>
Supplemental Disclosures of Cash Flow Information:
Non-cash investing and financing activities:
Common stock issued to third party to
settle debt of former parent $ 65,780
Equipment acquired under capital lease $ 86,356
Accounts receivable settled for
marketable securities $ 1,058,642
Cash paid during the year ended
December 31, 1999 for:
Interest $ 164,206
Income taxes $ 52,026
See accompanying notes to financial statements.
7
<PAGE>
ENOVA HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS AS OF DECEMBER 31, 1999 AND 1998
A. Organization and Summary of Significant Accounting Policies:
Organization and Nature of Operations
Enova Holdings, Inc.'s. ("Enova" or the "Company") operations include
distribution, service, and manufacturing of custom process equipment
packages for the air and gas handling equipment industry. The Company
operates through two operating subsidiaries; Pego Systems, Inc. ("Pego")
and Pacific Pneumatics, Inc. ("PPI"). (See Note B)
Basis of presentation
The accompanying financial statements have been prepared on a consolidated basis
for 1999 and combined basis for 1998. The combined 1998 financial statements
include the accounts of Enova, Pego and PPI under common control of Hartcourt
Companies, Inc.
("Hartcourt"). (See Note B)
Principles of Consolidation and Combination
The accompanying consolidated and combined financial statements include
the accounts of Enova Holdings, Inc., Pego, and PPI. For purposes of
these consolidated and combined financial statements all material
intercompany transactions and balances have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities 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.
Cash and Cash Equivalents
For purpose of the statements of cash flows, the Company considers all
highly liquid investments purchased with a initial maturity of three
months or less to be cash equivalents.
Investments in Marketable Securities
The Company accounts for investments in marketable securities in
accordance with Statement of Financial Accounting Standards No. 115
"Accounting for Certain Investments in Debt and Equity Securities."
("SFAS 115")
Management determines the appropriate classification of its investments
at the time of acquisition and reevaluates such determination at each
balance sheet date. Available-for-sale securities are carried at fair
value, with unrealized gains and losses, net of tax, reported as a
8
<PAGE>
separate component of stockholders' equity. In determining realized gains
and losses, the cost of the securities sold is based on the specific
identification method.
Investments in Non-Marketable Equity Securities
The Company accounts for investments in non-marketable equity securities
in accordance with Accounting Principles Board Opinion No. 18 ("APB 18")
and related interpretations. Under APB 18, investments in corporate joint
ventures and other common stock of less than 20% are generally accounted
for using the cost method while investments between 20% and 50% are
generally accounted for using the equity method.
Under the cost method, investments are recorded and reported at original
cost until they are partially or entirely disposed of or the original
cost value has been impaired. Under the equity method, the investment is
recorded at original cost and periodically increased (decreased) by the
investor's proportionate share of earnings (losses) of the investee and
decreased by all dividends received from the investor by the investee.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments", requires disclosures of information
about the fair value of certain financial instruments for which it is
practicable to estimate the value. For purposes of this disclosure, the
fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing
parties other than in a forced sale or liquidation.
The carrying amounts of the Company's accounts receivable, accounts
payable, accrued liabilities, and current loans payable approximates fair
value due to the relatively short period to maturity for these
instruments.
Accounts Receivable
The Company extends credit in the normal course of business to its
customers who are located throughout the United States. The Company
performs ongoing credit evaluations of its customers, and generally does
not require collateral. At December 31, 1999, the allowance for doubtful
accounts was $10,000.
Inventory
Inventory is stated at the lower of cost (first-in, first-out) or net
realizable value, and consists of purchased parts, materials, labor, and
overhead.
Property and Equipment
Property and equipment are recorded at cost. Depreciation and
amortization of property and equipment is provided using the
straight-line method over estimated useful lives ranging from five to
seven years. The building is depreciated over an estimated useful live of
20 years. The Company's policy is to evaluate the remaining lives and
recoverability in light of current conditions.
9
<PAGE>
Intangibles
Goodwill and other intangible assets are amortized on the straight-line
basis. Goodwill, the excess of the Company's purchase price over the fair
value of the net assets acquired, is amortized over 25 years. The
covenant not to compete is amortized over five years.
Impairment of Long-Lived Assets
The Company has adopted Statement of Financial Accounting Standards No.
121 (SFAS 121) "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of." Under the provisions of this
statement, the Company has evaluated its long-lived assets for financial
impairment, and will continue to evaluate them as events or changes in
circumstances indicate that the carrying amount of such assets may not be
fully recoverable.
The Company evaluates the recoverability of long-lived assets not held
for sale by measuring the carrying amount of the assets against the
estimated undiscounted future cash flows associated with them. At the
time such flows of certain long-lived assets are not sufficient to
recover the carrying value of such assets, the assets are adjusted to
their fair values. Accordingly, based on these evaluations, management
has adjusted the carrying value of goodwill in 1998 (See Note E).
Advertising
Advertising costs are expensed as incurred. Advertising expense included
in general and administrative expenses was $36,858 and $ 33,115 for the
year ended December 31, 1999 and 1998, respectively.
Stock Options
In accordance with Statement of Financial Accounting Standards No. 123
("SFAS 123") the Company has elected to account for Stock Options issued
to employees under Accounting Principles Board Opinion No. 25 ("APB
Opinion No. 25") and related interpretations.
Income Taxes
Income taxes are provided in accordance with Statement of Financial
Accounting Standards No. 109 (SFAS No. 109), "Accounting for Income
Taxes." A deferred tax asset or liability is recorded for all temporary
differences between financial and tax reporting. Deferred tax expense
(benefit) results from the net change during the year of deferred tax
assets and liabilities. The components of the deferred tax asset and
liability are individually classified as current and non-current based on
their characteristics.
Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or
all of the deferred tax assets will not be realized. Deferred tax assets
and liabilities are adjusted for the effects of changes in tax laws and
rates on the date of enactment.
10
<PAGE>
Loss Per Share
Basic and diluted net loss per common share for the years ended December
31, 1999 and 1998 is computed based upon the weighted average common
shares outstanding as defined by Financial Accounting Standards No. 128,
"Earnings Per Share". There were no common stock equivalents outstanding
at December 31, 1999 or 1998.
Business Segments
The Company applies Statement of Financial Accounting Standards No. 131
"Disclosures about Segments of an Enterprise and Related Information".
The Company operates in one segment and therefore segment information is
not presented.
Recent Accounting Pronouncements
The Financial Accounting Standards Board has recently issued several new
accounting pronouncements. Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities", as amended by Statement No. 137,
establishes accounting and reporting standards for derivative instruments
and related contracts and hedging activities. This statement is effective
for all fiscal quarters and fiscal years beginning after June 15, 2000.
The Company believes that its adoption of pronouncement No. 133, as
amended by No. 137, will not have a material effect on the Company's
financial position or results of operations.
B. Business Acquisitions and Stock Issuances:
Enova Holdings, Inc., Pego and PPI were subsidiaries of Hartcourt until
they were spun-off effective March 31, 1999 (see below).
The acquisition of Pego by Hartcourt in October 1997 was accounted for
under the purchase method of accounting in accordance with Accounting
Principles Board Opinion No. 16 ("APB 16") "Business Combinations" and
using push-down accounting. The acquisition was recorded based upon a
purchase price of $2,211,501 and based on the fair value of the assets
acquired and liabilities assumed resulting in goodwill of $1,326,083. The
goodwill is being amortized over a period of 25 years. (See Note E)
On August 6, 1998, Pego purchased all outstanding shares of PPI. Terms of
the transaction include payment of $235,000 in cash and the transfer of
equipment valued at $15,000. Included in the acquisition price is a
covenant not-to compete (See Note E). The excess purchase price over the
fair value of the net assets totaling $442,543, was recorded as goodwill.
(See Note E)
On March 1, 1999 in contemplation of the spin-off of the Company from its
parent, Hartcourt, discussed below, the Company entered into an exchange
agreement, as amended, (the "Agreement") with Hartcourt. Under the terms
of the Agreement, the Company agreed to issue 4,709,788 shares of its
common stock to Hartcourt shareholders in exchange for all of Hartcourt's
ownership in Pego and ECS. The exchange was accounted for at historical
cost since it qualified as a combination of entities under common control
pursuant to AICPA Interpretation 39 of APB Opinion 16 and Emerging Issues
11
<PAGE>
Task Force 90-5 ("EITF 90-5") "Exchange of Ownership Interest Between
Entities Under Common Control" and a recapitalization of Pego pursuant to
APB 16. As a result, the Company obtained a 100% ownership interest in
Pego and a 35% ownership interest in Electronic Component Systems, Inc.
("ECS"). The investment in ECS was recorded at its carry-over historical
basis of zero. (See Note F) F) The investment in ECS has a carryover
basis of zero due to significant equity method losses applied to the
investment by Hartcourt prior to March 1, 1999 and the accounting effect
of a non-pro-rata split-off at fair market value on March 1, 1999 by
Hartcourt.
Under generally accepted accounting principles, the Company whose
stockholders receive over 50% voting control of the surviving entity in
business combination is considered the acquirer for accounting purposes.
Accordingly, the transaction is accounted for as a recapitalization of
Pego, a combination of business under common control and an asset
acquisition of securities in ECS. The financial statements subsequent to
the acquisition are as follows: (1) the balance sheet includes the net
assets of Pego, PPI, and Enova Holdings, Inc. at historical cost; (2) the
statement of operations includes the operations of Pego PPI, and Enova
Holdings, Inc. for the periods presented.
All capital stock and earnings per share data in the accompanying
financial statements have been retroactively restated to reflect the
recapitalization.
On March 1, 1999, in conjunction with the above Agreement, the Company
entered into a distribution agreement (the "Distribution Agreement") with
Hartcourt. Under the terms of the Distribution Agreement, Hartcourt
agreed to distribute, to all its shareholders of record on March 31,
1999, the 4,709,788 shares of the common stock of the Company owned by
Hartcourt at a 1 for 4 ratio and to file a registration Statement on Form
10-SB to cause the distributed shares to the Company to be registered
under the Securities Exchange Act of 1934, as amended. Due to the
rounding of fractional shares, an additional 146 shares were issued. This
distribution transaction was accounted for as a spin-off by Hartcourt. In
addition, 250 new preferred shares were issued to a preferred shareholder
of Hartcourt, who is the Chairman of the Company, at the same 1 for 4
ratio pursuant to the Board of Directors' authorization, and their
interpretation of the Distribution Agreement. The 250 preferred shares
entitle the Chairman to appoint three-fifths of the membership of the
Board of Directors of the Company. Subsequent to March 31, 1999,
Hartcourt issued common shares to the Company's Chairman for services
rendered during 1998. In September 1998,1999, the Company's Board of
Directors issued a resolution to retroactively include these common
shares as part of the Distribution Agreement. As a result, an additional
426,621 shares of the Company's common stock were issued. Thus, an
aggregate of 5,136,555 of common shares and 250 preferred shares,
respectively, were issued pursuant to the Distribution Agreement.
On July 7, 1999, the Company issued 13,156 shares of its common stock to
satisfy former holders of convertible debentures of Hartcourt. The shares
were recorded by the Company at the $65,780 Hartcourt carrying value of
the debentures, with a corresponding amount due from Hartcourt.
C. Inventory:
12
<PAGE>
Inventory at December 31, 1999 consists of the following:
Raw materials and purchased parts $ 491,788
Work-in-process 338,995
--------
$ 830,783
D. Property and Equipment:
Property and equipment at December 31, 1999 consists of the following:
Building and improvements $ 661,215
Land 586,155
Computer equipment 52,476
Furniture and equipment 56,125
Vehicles 28,904
Equipment under capital lease 86,356
------------
1,471,231
Less accumulated depreciation (127,348)
--------------
Property and equipment, net $1,343,883
==========
During 1999, the Company scrapped and wrote-off computer hardware and software
that was not Year 2000 compliant. There were no proceeds on disposal and the
Company recorded loss on disposal of $40,134.
E. Intangibles:
Intangibles at December 31, 1999 consists of the following:
Goodwill $ 777,545
Covenant not to compete 110,000
-----------
887,545
Less accumulated amortization (152,615)
-------------
Intangibles, net $ 734,930
===========
Goodwill consists of amounts paid in excess of the fair value of the net
assets in the acquisition of Pego by Hartcourt and the acquisition of PPI
by Pego. Management has evaluated the recoverability of goodwill and had
recorded an impairment of $991,081 during 1998.
The covenant not-to compete agreements are with the former stockholders
of the Company which are in effect for a five year period.
F. Investments:
Investment in Hartcourt
13
<PAGE>
During 1998 and 1999, Hartcourt borrowed cash from the Company with no
interest, no repayment terms, and which was unsecured. On December 19,
1999, Hartcourt, who owed the Company $1,058,642, ($991,081 at December
31, 1998) issued 100,000 shares of its restricted common stock, valued at
$10.75 per share based upon the quoted market price, to satisfy its debt
to the Company and in exchange for the ECS common stock held by the
Company. The Company recognized a gain on settlement of $16,358. At
December 31, 1999, the investment in Hartcourt stock was classified as
available-for-sale and the Company recorded an unrealized gain of
$431,250, which is included in the financial statements as other
comprehensive income.
Investment in ECS
During the period from March 1, 1999 to September 15, 1999 the investment
in ECS was accounted for under the equity method and remained at zero due
to losses in ECS. From September 15, 1999 the investment in ECS was
recorded under the cost method since at September 15, 1999 the Company's
percentage holdings in ECS of 35,000 shares was diluted to under 20%. As
discussed above the ECS common stock was exchanged as part of the
settlement of receivables from Hartcourt. There was no accounting effect
since the recorded value of ECS at the exchange date of December 19, 1999
was zero.
G. Lines of Credit:
The Company has a line of credit agreement with a bank that provides that
it may borrow up to $300,000 at the prime rate of 9%. The line of credit
is collateralized by inventory, equipment and accounts receivable and is
due on demand. At December 31, 1999, the Company had borrowed $ 200,000
under this agreement. This line is also guaranteed by Hartcourt. The
Company was in violation of certain covenants at December 31, 1999, and
accordingly, the bank has demanded payment in full from the Company and
its guarantors. As of the date of this report, neither the Company nor
its guarantors have made payment.
PPI, the Company's subsidiary, has an unsecured line of credit with a
bank which provides that it may borrow up to $50,000 at the prime rate
plus 5.5% (13.25%) at December 31, 1999. At December 31, 1999, the entire
line was drawn.
H. Notes Payable:
Notes payable at December 31, 1999 consists of the following:
Note payable, individual, monthly principal and interest
payments of $9,544 with interest at 8.5%; matures November
2024; collateralized by land and building. $ 1,184,085
Note payable, bank, monthly installments of $34,306 plus
interest at prime plus 2%, however, the Company was
charged at the bank's default rate of 13.25% at December
31, 1999; collateralized by substantially all assets of
the Company; all unpaid principal and interest due in full
on June 5, 2001. The agreement requires maintenance of
certain financial covenants on a quarterly basis and other
14
<PAGE>
restrictions of certain assets of the parent company. The
note is also guaranteed by Hartcourt. The Company was in
violation of the covenants and restriction provisions of
the agreement at December 31, 1999. Accordingly, the bank
has demand payment in full and the balance has been
included in the current portion. 686,104
Note payable, former owner of PPI, monthly principal and
interest payments of $3,146 including interest at 6.5% due
May 2010, unsecured. 282,070
Note payable, former owner of PPI, monthly principal and
interest payments of $780 including interest at 6% per;
due June 2005; unsecured. 43,725
Note payable to Hartcourt, non-interest bearing,
due on demand, unsecured. 50,000
Note payable, for $150,000, total principal and interest
of $30,000 due March 30, 2000, secured by 10,000 shares of
Hartcourt stock. In January 2000, the remaining $50,000
under the note was received by the Company. 100,000
-------------
2,345,984
Less current portion (877,156)
-----------
Notes payable, less current portion $ 1,468,828
===========
The following is a summary of principal maturities of notes payable:
Year Ending
December 31,
2000 $ 877,156
2001 44,085
2002 47,348
2003 50,858
2004 54,632
Thereafter 1,271,905
-----------
Total $2,345,984
==========
I. Commitments:
Operating Leases
The Company leases facilities under long-term, non-cancelable lease
agreements expiring at various dates through November 2001. The
non-cancelable operating lease agreements provide that the Company pays
property taxes, insurance and certain operating expenses applicable to
15
<PAGE>
the leased premises. Rent expense for 1999 and 1998 was $66,126 and
$47,378, respectively.
Future minimum lease payments required under the operating lease
agreements are as follows:
2000 $ 16,116
2001 11,096
----------
Total minimum lease payments $ 27,212
=========
Capital Leases
The company leases certain computer equipment under a capital lease.
Future minimum lease payments required under the capital lease are as
follows:
2000 $ 23,088
2001 23,088
2002 23,088
2003 23,088
2004 22,030
Less interest (29,740)
------------
84,642
Current portion (13,112)
------------
$ 71,530
============
Consulting Agreement
On December 21, 1999, the Company entered into a consulting agreement
effective January 1, 2000 and terminating on June 30, 2000 with an option
to renew for an additional six months. The consultant will provide
services, as defined in the Agreement, generally relating to operations,
sales and acquisitions. A payment of $2,000 per month starting January
31, 2000 will be due and a leased automobile will be provided. The
consultant will be paid a finder's fee under a stipulated schedule based
on the purchase price for any acquisitions closed. The $2,000 per month
paid is to be deducted from any finder's fee due.
Employment Agreements
The Company is obligated under employment contracts with its Chairman of
the Board and Chief Executive Officer ("Executives"), to provide salary
and fringe benefits through June 30, 2002. Minimum salary payments under
the contracts currently amount to $260,000 per year and aggregate
$739,600 through June 30, 2002. At December 31, 1999, $85,000 in
compensation expense was included in accrued expenses relating to the
employment agreements. The Company may terminate Executives employment at
any time for any reason or no reason upon giving a written notice to the
Executives. In such event, the Company shall pay to Executives an amount
equal to six months base compensation.
16
<PAGE>
In the event the Company terminates the Executive's employment without
good cause, the Company shall make severance payments equal to and in the
same manner as the Executive's Basic Compensation in effect at the time
of such termination for the remaining terms of this Employment Agreement.
To the extent Executive receives compensation from any form of employment
after such termination for any part of the period during which
termination payments are being made to the Executive by the Company,
Executive shall immediately so inform the Company, and the termination
payment pursuant to this subparagraph will be reduced at the rate of
$0.75 for each dollar of compensation so received by the Executive.
In the event the Company terminates the Executive's employment with good
cause in the first year, the severance amount would be equal to
Executive's base salary for 12 months, if the Executive's employment is
terminated in the second year, the severance amount will be equal to his
base salary for 18 months, and if Executive's employment has been in
effect for longer than two years, the severance amount will equal 24
months of the base pay at the time of termination.
Upon termination of employment by the Company without good cause, all
equity options, restricted equity grants and similar rights held by the
Executive with respect to securities of the Company shall automatically
become vested and shall become immediately exercisable.
J. Stockholder's Equity:
Preferred Stock
The Company is authorized to issue 25,000,000 shares of preferred stock
at $0.001 par value, with such designations, preferences and relative
participation, optional or other special rights, or qualifications,
limitations or restrictions thereof as may be designated by the Board of
Directors. At December 31, 1999, 250 shares were outstanding with rights
as discussed in Note B.
K. Employee Benefit Plan:
The Company has a 401(k) employee savings and profit sharing plan for the
benefit of its employees. Under the plan, eligible employees may
contribute 1% to 15% of their compensation. At the discretion of the
Board of Directors, the Company may contribute additional amounts to the
plan on behalf of those who actively participate. Company contributions
vest over a six-year period. Contributions totaled $10,124 for the year
ended December 31, 1999.
L. Income Taxes:
Income tax expense for the years ended December 31, 1999 and 1998 are as
follows:
Current:
1999 1998
Federal $14,002 $ 25,800
State 38,024 10,000
------ ---------
$52,026 $ 35,800
======= ========
17
<PAGE>
The tax affects of temporary differences that give rise to significant
portion of deferred tax assets and liabilities at December 31, are as
follows:
1999 1998
---- ----
Deferred tax assets:
Net operating loss carryforward $ 187,950 $ 35,600
Impairment of goodwill 346,900 346,900
----------- ----------
534,850 382,500
Valuation allowance (534,850) (382,500)
----------- ----------
Net deferred taxes $ - $ -
============== =============
Income tax expense for the year ended December 31, 1999 arises from an
under accrual of prior periods Federal and State income tax liabilities.
Such under accrual is related to the Company's PEGO subsidiary being
required to file short period tax returns in order for it to change its
fiscal year end to a calendar year end so that it can file consolidated
tax returns with the parent company.
Impairment of goodwill is not deductible in 1999 and 1998 for income tax
purposes. Goodwill is amortized over fifteen years for income tax
purposes or until the Company has disposed of its ownership in the entity
to which the goodwill relates.
At December 31, 1999, the Company had net operating loss carryforwards,
of approximately $537,000, available to offset future taxable income
expiring through 2019.
The valuation allowance at January 1, 1999 was $382,500. The net change
in the valuation allowance was an increase of $152,350.
M. Going Concern:
As reflected in the accompanying financial statements, the Company is in
violation of certain debt covenants on a $686,104 note payable and a
$200,000 credit line payable to a bank and the bank has demanded payment
in full from the Company and its guarantor, who at the date of this audit
report, have not paid such debts. In addition the Company has continuing
losses from operations and a working capital deficit and accumulated
deficit of $637,042 and $1,295,819 respectively at December 31, 1999. The
ability of the Company to continue as a going concern is dependent on the
Company's ability to raise additional capital or obtain debt financing
and generate income from operations. The financial statements do not
include any adjustments that might be necessary if the Company is unable
to continue as a going concern.
Management plans to sell its investment in Hartcourt common stock upon
effectiveness of a registration statement filed by Hartcourt in February
2000 to register such shares. Management believes that actions presently
being taken to generate cash and thus pay the bank loans provide the
opportunity for the Company to continue as a going concern.
18
<PAGE>
N. Subsequent Events
On January 14, 2000, the bank who had demanded payment in full (Notes G,
H and L), filed a complaint against the Company on an alleged non-payment
of a line of credit and promissory note and breach of security agreement,
alleging payment in the amount of $924,636.26.agreement. The balance due
to the bank at December 31, 1999 was $886,104. This amount is recorded as
a liability on the Company's financial statements at December 31, 1999.
Management and its counsel are currently reviewing the complaint noting
that there are meritorious defenses and basis for counter claims which
may be vigorously prosecuted. The Company does not believe that there is
a legal basis for the prosecution of this action.
In January 2000, the Company adopted a director compensation plan whereby
Company directors will each be compensated as follows:
(i) $10,000 retainer payable in quarterly payments commencing January 1, 2000
for participation in a minimum of four meetings of the Board
of Directors
(ii) an immediately exercisable, non-qualified stock option
to purchase 20,000 shares of common stock at an exercise price
of $.38 per share and
(iii) an immediately exercisable non-qualified stock
option to purchase 5,000 shares of common stock to be granted
on the day of each annual shareholders meeting with an
exercise price equal to the fair market value of the common
stock on each grant date. Directors will also be reimbursed
for reasonable expenses.
In January 2000, the Company adopted a stock option plan and authorized
1,000,000 shares of common stock under the plan. In conjunction with this
plan the Company granted 800,000 options to three employees exercisable
for five years at $2.00 per share.
19
<PAGE>
ENOVA HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
(Unaudited)
------------------- -------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 52,841 $ 60,373
Accounts receivable, net 1,200,900 1,177,544
Inventory 707,672 830,783
Other current assets 3,509 16,494
------------------- -------------------
Total Current Assets 1,964,922 2,085,194
------------------- -------------------
PROPERTY AND EQUIPMENT, NET 1,308,390 1,343,883
OTHER ASSETS
Investments 818,750 1,506,250
Intangibles, net 715,713 734,930
Receivable from affiliate 70,256 65,780
------------------- -------------------
Total Other Assets 1,604,719 2,306,960
------------------- -------------------
TOTAL ASSETS $ 4,878,031 $ 5,736,037
=================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 935,438 $ 1,061,720
Lines of credit 262,000 250,000
Accrued expenses 424,692 520,248
Notes payable, current portion 1,025,534 877,156
Capital lease obligations, current portions 13,819 13,112
------------------- -------------------
Total Current Liabilities 2,661,483 2,722,236
NOTES PAYABLE, NET OF CURRENT PORTION 1,440,732 1,468,828
CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION 65,559 71,530
------------------- -------------------
TOTAL LIABILITIES 4,167,774 4,262,594
------------------- -------------------
SHAREHOLDERS' EQUITY
Preferred stock, $.001 par value, 25,000,000 shares
authorized, 250 shares issued and outstanding - -
Common stock, $.001 par value, 75,000,000 shares
authorized, 5,149,712 shares issued and outstanding 5,150 5,150
Additional paid-in capital 2,332,862 2,332,862
Accumulated other comprehensive income (256,250) 431,250
Accumulated deficit (1,371,505) (1,295,819)
------------------- -------------------
Total Shareholders' Equity 710,257 1,473,443
------------------- -------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 4,878,031 5,736,037
=================== ===================
</TABLE>
See accompanying notes to financial statements
20
<PAGE>
ENOVA HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statement of Operations and Comprehensive Income (Loss)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
----------------- --------------- ----------------- ---------------
<S> <C> <C> <C> <C>
NET SALES $ 1,536,552 $2,018,309 $ 3,242,668 $3,907,073
COST OF SALES 933,943 1,343,546 2,038,737 2,421,491
----------------- --------------- ----------------- ---------------
GROSS PROFIT 602,609 674,763 1,203,931 1,485,582
----------------- --------------- ----------------- ---------------
OPERATING EXPENSES
Sales and marketing 51,426 143,327 384,020 343,970
General and administrative 429,829 454,720 717,863 879,222
----------------- --------------- ----------------- ---------------
Total Operating Expenses 481,255 598,047 1,101,883 1,223,192
----------------- --------------- ----------------- ---------------
INCOME (LOSS) FROM OPERATIONS 121,354 76,716 102,048 262,390
OTHER (INCOME) EXPENSES
Other income
(7,335) (39) (7,336) (546)
Interest expense 99,998 27,305 182,670 54,671
----------------- --------------- ----------------- ---------------
Total Other (Income) Expenses 92,663 27,266 175,334 54,125
----------------- --------------- ----------------- ---------------
NET INCOME (LOSS) BEFORE
INCOME TAXES 28,691 49,450 (73,286) 208,265
Income taxes (800) 51,237 2,400 51,237
----------------- --------------- ----------------- ---------------
NET INCOME (LOSS) 29,491 (1,787) (75,686) 157,028
OTHER COMPREHENSIVE INCOME
Unrealized loss on investments (381,250) (687,500)
----------------- --------------- ----------------- ---------------
COMPREHENSIVE INCOME (LOSS) $ (351,759) $ (1,787) $ (763,186) $ 157,028
================= =============== ================= ===============
Net income (loss) per common share -
basic and diluted $ 0.01 $ (0.00) $ (0.01) $ 0.03
================= =============== ================= ===============
Weighted average shares outstanding -
basic and diluted 5,149,712 5,142,936 5,149,712 5,142,936
================= =============== ================= ===============
See accompanying notes to financial statements
</TABLE>
21
<PAGE>
ENOVA HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
2000 1999
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income (loss) $ (75,686) $ 157,028
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation & amortization 54,709 58,764
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (23,356) (230,800)
(Increase) decrease in inventory 123,111 118,436
(Increase) decrease in other assets 12,987 (9,508)
Increase in accounts payable (126,285) (308,636)
Increase (decrease) in accrued expenses (16,177) 27,366
--------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (50,697) (187,350)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment - (11,130)
Advances to affiliate (4,476) (8,166)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (4,476) (19,296)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from lines of credit 12,000 200,000
Proceeds from notes payable 46,207 --
Payments on notes payable (5,302) (248,123)
Payments on capital lease (5,264) (2,293)
--------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 47,641 (50,416)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (7,532) (257,062)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 60,373 345,114
--------- ---------
CASH AND CASH EQUIVALENTS, JUNE 30 $ 52,841 $ 88,052
========= =========
See accompanying notes to financial statements
</TABLE>
22
<PAGE>
ENOVA HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
Note 1. Organization
Enova Holdings, Inc. ("Enova" or the "Company") is engaged in the
-------------------------------------------------------------------------
distribution, service, and manufacturing of custom process equipment
-------------------------------------------------------------------------
packages for the air and gas handling equipment industry. The Company
-------------------------------------------------------------------------
operates through two operating subsidiaries: Pego Systems, Inc. ("Pego")
-------------------------------------------------------------------------
and Pacific Pneumatics, Inc. ("PPI").
-------------------------------------
Note 2. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
and the rules and regulations of the Securities and Exchange Commission
for interim financial information. Accordingly, they do not include all
the information and footnotes necessary for a comprehensive
presentation of financial position and results of operations.
It is management's opinion, however, that all material adjustments
(consisting of normal recurring adjustments) have been made which are
necessary for a fair financial statement presentation. The results for
the interim period are not necessarily indicative of the results to be
expected for the year.
For further information, refer to the consolidated financial statements
and footnotes of Enova Holdings, Inc. and Subsidiaries included in the
Company's Form 10 - SB/A for the year ended December 31, 1999.
Note 3. Legal Matters
On January 14, 2000, the bank with whom the Company had its line
of credit and a term loan, demanded payment in full of these
obligations in the amount of $924,636, and filed a complaint
against the Company for alleged no-payment of the promissory note
and breach of the security agreement. This amount is recorded as a
liability on the Company's financial statements at June 30, 2000.
Management and counsel have reviewed the complaint and have
interposed numerous defenses. The Company continues to believe
that there is no legal basis for the prosecution of this action.
Note 4. Going Concern
The Company continues to be in violation of certain debt covenants
23
<PAGE>
in connection with certain notes payable to a bank. In addition,
the Company has continuing losses from operations. The ability of
the Company to continue as a going concern is dependent on the
Company's ability to raise additional capital or obtain debt
financing and generate income from operations. The financial
statements do not include any adjustments that might be necessary
if the Company is unable to continue as a going concern.
Management plans to sell its investment in Hartcourt common stock
upon effectiveness of a registration statement filed by Hartcourt,
however, it is not currently known when this might occur.
Management continues to believe, however, that actions presently
being taken to generate cash and thus pay the bank loans provide
the opportunity for the Company to continue as a going concern.
24
<PAGE>
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Harlan & Boettger, LLP ("Harlan") were the independent accountants for
Pego and its subsidiary for the year ended December 31, 1998. The opinion of
Harlan on the Balance Sheet of Pego and its subsidiary at December 31, 1998 and
the statement of operations, shareholders' equity, and cash flows for Pego and
its subsidiary for the year ended December 31, 1998, did not contain any adverse
opinion or disclaimer, or modifications as to uncertainty, audit scope or
accounting principles. There were no disagreements between Pego and Harlan on
any matters of accounting principles or practices, financial statement
disclosures, or auditing scope or procedures.
Harlan declined to stand for reelection.
Weinberg & Company, P.A. ("Weinberg") were appointed Enova's
independent accountants for the years ended December 31, 1999 and 1998,
respectively. The Board of Directors of Enova approved the appointment of
Weinberg and acknowledged Harlan's decision not to stand for reelection. The
opinion of Weinberg on the Balance Sheet of Enova and its subsidiaries at
December 31, 1999 and 1998, and the statement of operations, shareholder's
equity, and cash flows for Enova and its subsidiaries for the years ended
December 31, 1999 and 1998, respectively, did not contain any adverse opinion or
disclaimer, or modifications as to uncertainty, audit scope or accounting
principles. Enova has no disagreements with its accountants concerning
accounting and financial disclosures.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Enova's Articles of Incorporation and Bylaws provide for expanded
indemnification of directors and officers of the company and limits the
liability of directors of the company. The Bylaws provide that Enova shall
indemnify each person who is or was an officer or director of Enova, or is or
was serving as an officer, director, employee or agent of any other corporation,
partnership, joint venture, trust or other enterprise at the request of the
company, against expenses (including attorney's fees), judgments, fines and
amounts paid in settlement (if such settlement is approved in advance by the
company, which approval shall not be unreasonably withheld) actually and
reasonably incurred by him or her in connection with such action, suit or
proceeding if he or she acted in good faith and in a manner he or she believed
to be in or not opposed to the best interest of the company, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe his or
her conduct was unlawful. Such right to indemnification includes the right to
advancement of expenses incurred by such person prior to final disposition of
the proceeding, provided that such director or officer shall provide the company
with an undertaking to repay all amounts so advanced if it shall ultimately be
determined by final judicial decision that such person is not entitled to be
indemnified for such expenses.
The Bylaws also provide that Enova shall indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the company to procure judgment
34
<PAGE>
in its favor by reason of the fact that he or she is or was a director, officer,
employee or agent of the company, or is or was serving at the request of the
company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against expenses,
including attorneys' fees, actually and reasonably incurred by him or her
connection with the defense or settlement of such action or suit, if he or she
acted in good faith and in a manner he or she reasonably believed to be in or
not opposed to the best interest of the company, except that no indemnification
shall be made in respect of any claim, issue or matter as to which such person
shall have been adjudged to be liable to the company unless and only to the
extent that the Nevada Court of Chancery or the court in which such action or
suit was brought shall determine upon application that, despite the adjudication
of liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which the Nevada
Court of Chancery or such other court shall deem proper. No person shall be
indemnified by the company for any expenses or amounts paid in settlement with
respect to any action to recover short-swing profits under Section 16(b) of the
Securities Exchange Act of 1934, as amended. The Articles of Incorporation
provides that if the Nevada General Corporation law is amended to further
eliminate or limit the personal liability of directors, then the liability of a
director of the company shall be eliminated or limited to the fullest extent
permitted by the Nevada General Corporation Law, as so amended.
Enova has also entered into indemnification agreements with its
directors and officers which similarly provide for the indemnification and
advancement of expenses. In addition, Enova has agreed to indemnify the
directors and officers to the fullest extent of the law pursuant to the terms of
their employment agreement with Enova.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following sets forth the expenses in connection with the issuance
and distribution of the Securities being registered, other than underwriting
discounts and commissions. Enova shall bear all such expenses. All amounts set
forth below are estimates, other than the SEC registration fee.
SEC Registration Fee $2,641.06
Legal Fees and Expenses $25,000.00
Accounting Fees and Expenses $15,000.00
Miscellaneous $5,000.00
---------
TOTAL $47,641.06
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Pursuant to its incorporation in May 1998, Enova (then YSI) issued one
share of its common stock to its initial director, Fred G. Luke in consideration
for services rendered. Exemption from registration under the Securities Act of
1933, as amended, is claimed for the sale of the security set forth above in
reliance upon the exemption afforded by Section 4(2) of the Act.
On February 1, 1999, Enova and Hartcourt entered into a Share Purchase
Agreement in which Hartcourt acquired one (1) share of Enova which represented
all of the issued and outstanding shares of Enova, making Enova a wholly owned
subsidiary of Hartcourt. Exemption from registration under the Securities Act of
1933, as amended, is claimed for the sale of the security set forth above in
reliance upon the exemption afforded by Section 4(2) of the Act.
35
<PAGE>
On March 1,1999, Enova and Hartcourt executed an Exchange Agreement
whereby Hartcourt exchanged all of its ownership interest in two wholly owned
subsidiaries, Pego Systems, Inc. ("Pego") and Electronics Component Systems,
Inc. ("ECS"), collectively the "subsidiaries," for 4,709,788 additional shares
of Enova. Exemption from registration under the Act, is claimed for the sale of
all the securities set forth above in reliance upon the exemption afforded by
Section 4(2) of the Act.
ITEM 27. EXHIBITS
The following is a list of exhibits required by Item 601 of Regulation S-B that
are filed or incorporated by reference. The exhibits that are incorporated by
reference from Enova's prior SEC filings are noted on the exhibit index. The
other exhibits are attached hereto and being filed with the SEC as part of this
registration statement.
Exhibit
Number Description of Exhibits
--------------------------------------------------------------------------------
3(i) Articles of Incorporation of Yes Lifestyles, Inc.*
3(ii) Bylaws of Yes Lifestyles, Inc.*
3(iii) Certificate of Amendment to the Articles of Incorporation of Yes
Lifestyles, Inc.*
4.1 Form of Common Stock Certificate of Enova Holdings Inc.*
4.2 Certificate of Determination of the Rights and Preferences of Preferred
Stock of Enova Holdings, Inc.*
5.1 Opinion of Richard O. Weed re: Legality
10.1 Share Purchase Agreement between The Hartcourt Companies, Inc. and
Enova Holdings, Inc.*
10.2 Exchange Agreement between The Hartcourt Companies, Inc. and Enova
Holdings, Inc.*
10.3 Distribution Agreement between The Hartcourt Companies, Inc. and Enova
Holdings, Inc.*
10.4 Employment Agreements with Dr. Alan V. Phan*
10.5 Employment Agreement with Mr. Manu Ohri*
21 Subsidiaries of Enova*
23.1 Consent of Independent Auditors, Weinberg & Co. L.P
23.2 Consent of Richard O. Weed
27 Financial Data Schedule*
* Previously filed with Enova's filing of a Form 10-SB and subsequent amendments
thereto.
36
<PAGE>
ITEM 28. UNDERTAKINGS.
Enova hereby undertakes to:
(a)(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the Securities Act
of 1933;
(ii) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the registration
statement; and
(iii) Include any additional or changed material information on the plan of
distribution not previously disclosed in the registration statement or any
material change to such information provided.
(2) That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(b) For the purposes of determining any liability under the Securities Act,
each filing of the registrant's annual report pursuant to Section 13(a) or
Section 15(d) of the Exchange Act that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
37
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the city of Long
Beach, State of California, on November 14, 2000.
Enova Holdings, Inc.
By: /s/ Dr. Alan V. Phan
Name: Dr. Alan V. Phan
Title: Chairman
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated.
/s/ Dr. Alan V. Phan
Dr. Alan V. Phan Director, Chairman November 14, 2000
/s/ Manu Ohri Director, President, Chief Executive Officer
Manu Ohri November 14, 2000
/s/ Frederic Cohn
Frederic Cohn Director, Secretary, Treasurer November 14, 2000
38
<PAGE>
Index To Exhibits Filed Herein
5.1 Opinion of Richard O. Weed re: Legality
23.1 Consent of Independent Auditors, Weinberg & Co. L.P
23.2 Consent of Richard O. Weed
39
