SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [Fee Required]
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [No Fee Required]
For fiscal year ended December 31, 1996
Commission file number 001-12671
HARTCOURT COMPANIES, INC.
(Exact name of registrant as specified in its charter)
UTAH 87-0400541
(State of incorporation) (I.R.S. Employer Identification No.)
19104 S. Norwalk Blvd.
Artesia, California 90701
310-403-1126
(Address, including zip code, and telephone number, including
area code, of registrant's executive offices)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on
which registered
None None
Securities registered pursuant to Section 12(g)of the Act:
Common Stock $.001 par value
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes[X] No[ ]
Check if disclosure of delinquent filers in response to item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
Issuer's revenues for most recent fiscal year: $510,692
State the aggregate market value of voting stock held by nonaffiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days: As of February 24, 1997, $25,570,999.
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: As of February 24, 1997,
there were 10,687,380 shares of common stock outstanding.
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HARTCOURT COMPANIES, INC.
1996 Form 10-KSB/A Annual Report
Table of Contents
Page
PART I
Item 1. Description of Business 3
Item 2. Description of Property 9
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
PART II
Item 5. Market for Common Equity and Related Stockholder
Matters 12
Item 6. Management's Discussion and Analysis or Plan of
Operation 15
Item 7. Consolidated Financial Statements 22
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 44
PART III
Item 9. Directors, Executive Officers, Promoters and
Control Persons; Compliance with Section 16(a)
of the Exchange Act 44
Item 10. Executive Compensation 46
Item 11. Security Ownership of Certain Beneficial Owners
and Management 46
Item 12. Certain Relationships and Related Transactions 48
PART IV
Item 13. Exhibits and Reports on Form 8-K 50
Signatures 53
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Explanatory Note:
Unless otherwise indicated or the context otherwise requires, all
references herein to the "Company" are to The Hartcourt Companies, Inc., a Utah
corporation, and its wholly owned subsidiaries, Harcourt Investments (USA) Inc.
("Harcourt Investments") and the Hartcourt Pen Factory, Inc. ("Hartcourt Pen").
All share and per share information contained herein has been adjusted to
reflect a five-for-seven reverse split of the Company's Common Stock effected on
October 6, 1995, and a one-for-five reverse split of the Company's Common Stock
effected on August 1, 1996.
PART 1
Item 1: Description of Business.
General
Stardust, Inc.-Production-recording-Promotion ("Stardust"), a
corporation organized under the laws of the State of Utah in September 1983,
acquired all of the outstanding shares of Harcourt Investments, a Nevada
corporation, for 6,110,337 shares of Stardust common stock (after taking into
account a reverse stock split and stock dividend) pursuant to an Agreement and
Plan of Reorganization dated November 5, 1994. At the time of this acquisition,
Stardust was a "shell" corporation with no assets, business or operations.
Subsequent to the acquisition of Harcourt Investments, Stardust changed its name
to "The Hartcourt Companies, Inc."
Harcourt Investments was organized under the laws of the State of
Nevada in April 1993, to engage in the design, manufacture and sale of writing
instruments. Harcourt Investments entered into a Stock Exchange Agreement dated
August 8, 1994 with Eastern Rocester Limited's 60% interest in Xinhui Harchy
Modern Pens, Ltd. (The "Xinhui JV"), a joint venture located in the Guangdong
province of the People's Republic of China ("China"), in exchange for 250,000
shares of Harcourt Investments common stock, representing 80% of the common
stock of Harcourt Investments outstanding immediately subsequent to the joint
venture agreement governing the Xinhui JV entered into in October 1995, the
Company's interest was reduced to a 52% interest in the Xinhui JV, with the
remaining 48% held by the Xinhui Orient Light Industrial Corp.
Hartcourt Pen was organized under the laws of the State of Nevada in
October 1993 to engage in the sale of writing instruments. Hartcourt Pen entered
into an Agreement and Plan of Reorganization dated December 1, 1994 with
Harcourt Investments, pursuant to which Harcourt Investments acquired all of the
outstanding shares of Hartcourt Pen in exchange for 38,625 shares of Harcourt
Investments common stock. In connection with this transaction, 1,000 shares of
Harcourt Investments Original Preferred Stock were issued to Dr. Alan Phan in
consideration of certain intangible assets and services rendered by Dr. Phan in
connection with the establishment of Hartcourt Pen. Hartcourt Pen currently is
in the business of importing pens, markers and components from China, Germany,
Taiwan and Italy for assembly (often by others) in the United States. It
conducts certain limited research and development activities in the United
States, but engages in no domestic manufacturing activities.
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The Hartcourt Companies, Inc. commenced limited business activities
involving the design, manufacture and sale of writing instruments in December
1994. The Company's present operations involve the assembly and distribution of
writing instruments. The Company's current primary objective is to acquire
operating companies with related products to maximize the marketing process and
expand the distribution of writing instruments. A secondary objective is to
acquire real property assets and to utilize profits from the development of the
Company's present real property assets in order to diversify and create a
multi-dimensional company. The principal executive offices of the Company are
located at 19104 South Norwalk Boulevard, Artesia, California 90701. The
Company's telephone number is (310) 403-1126.
In April 1993, the Xinhui JV commenced construction of a 170,000 square
foot manufacturing plant approximately ten miles north of Xinhui City. The plant
commenced limited operations in December 1994 and was fully operational by July
1995. By July 1996, the plant was operating at approximately 20% of its capacity
and employed approximately 80 people. It is estimated by management that
additional working capital in the amount of approximately $3,000,000 will be
required to permit the plant to operate at full capacity (300,000,000 pens
annually). There is no contractual obligation on the part of the joint venture
partners to provide this additional financing.
In April 1994, the Company entered into a Lease Agreement with
Tokai-Anza-Scripto Pen Company ("Anja"), for the use of five special ball pen
assembly machines by the Xinhui JV. The lease provides for semi-annual payments
of $25,000 over a ten-year term, subject to adjustment based on future purchases
of merchandise by the Company from the lessor. Consequently, annual lease
payments could range from zero, if annual purchases are in excess of $1,000,000,
to $100,000, if annual purchases are less than $100,000. The machinery was
delivered by Anja in June 1995. However, the machinery initially did not
function properly and therefore, the lease term did not commence until February
1996. In December 1996, the machinery was shipped by vessel back from the Xinhui
JV to the Company and arrived in January 1997. The Company and Anja have agreed
to terminate the lease upon delivery of the machinery to Anja with no further
obligation to the Company. To date, there have been no payments under this
lease.
Except for certain limited operations involving the manufacture and
distribution of writing instruments in China through the Xinhui JV and the
assembly and distribution of writing instruments in the United States through
Hartcourt Pen, the Company's activities to date primarily have consisted of
raising capital, obtaining financing, locating and acquiring equipment,
identifying prospective customers and suppliers, installing and testing
equipment and administrative activities relating to the foregoing, as well as
identifying real property for potential acquisition. The Company's future
business, including expansion of its current limited operations, requires
substantial additional equity and/or debt financing, which may not be available
in a timely manner, on commercially reasonable terms, or at all.
In September 1996 Hartcourt Pen was spun-off from Harcourt Investments
to Hartcourt Companies, Inc. by Harcourt Investments transferring 100% of stock
ownership in Hartcourt Pen to Hartcourt Companies, Inc. Pursuant to the spin-off
in September 1996 CKES Acquisitions, Inc. ("CKES"), a corporation organized
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under the laws of the State of Nevada in September 1996, a non-affiliate,
acquired all of the outstanding shares of the Company's wholly-owned subsidiary
Harcourt Investments, pursuant to a Purchase and Sale Agreement dated September
27, 1996, thus replacing the Company as a joint venture partner in the Xinhui
JV. Title to the shares was transferred to CKES in return for a Secured
Promissory Note in the principal sum of $3,000,000, payable monthly, with
accrued compound interest at six percent (6%) per annum. The Company has no
present contractual obligation to the Xinhui JV.
In January 1996, the Company entered into a Memorandum of Understanding
to acquire Yafa Pen Company ("Yafa"), a California corporation, with offices in
Los Angeles, California. The purchase price consisted of an initial cash payment
of $285,000 and 80,000 shares (valued at $1.00 per share) of the Company's
Preferred Stock. Pursuant to the Memorandum of Understanding, the Company
advanced to Yafa a total of $200,000, secured by two promissory notes ($100,000
on January 3, 1996 at 1% over prime due July 3, 1996 and $100,000 on February 9,
1996 at 1% over prime due August 9, 1996), the amount of this advance to be
offset against the purchase price for Yafa. Various disputes arose between the
Company and Yafa, and in September 1996 the parties entered into a confidential
settlement agreement and agreed to terminate the Memorandum of Understanding.
Terms include down payments totaling $20,924.89, invoice payments of $4,075.11
and 24 monthly payments of $2,000 with the remaining balance due in full on
August 15, 1999.
Pursuant to a Purchase Contract dated March 21, 1996, between the
Company and Exceptional Specialty Products, Inc., a California corporation,
located in Laguna Hills, California, the Company acquired a complete line of
cosmetics valued at $161,250, including creams, cleansers, scrubs, liquid
makeup, eye shadow, accent pencils, mascara, makeup brushes, translucent powder,
makeup bags, and mirrors, for 12,000 shares of the Company's Common Stock.
Included in this purchase is the United States trademarked brand name Camille
St. Moritz, under which the inventory will be marketed, as well as containers,
labels, packaging, stationery and promotional materials. The Company had not
sold any of the cosmetic products since the purchase and market and is currently
seeking overseas importers, primarily in China, to purchase the entire inventory
and market the products. The Company does not intend to distribute the cosmetics
other than to importers who will be responsible for their own marketing networks
and money collection.
In August 1996, The Company entered into a Purchase and Sale Agreement
with NuOasis International, Inc. ("NuOasis"), a corporation incorporated under
the laws of the Commonwealth of Bahamas, for the purchase of a commercial real
estate project, consisting of three 5-7 story apartment buildings, commonly
known as the Peony Gardens Property, ("Peony Gardens") located in the eastern
part of Tongxian in Beijing city, mainland China. The purchase price consists of
a Convertible Secured Promissory Note, granted NuOasis a security interest in
the property, in the principal amount of $12,000,000 and the greater of
10,000,000 shares of the Company's Common Stock, or that number of shares of the
Company's Common Stock having a market value equal to $10,000,000 immediately
preceding the closing date. On August 8, 1996, an Addendum to the Purchase and
Sale Contract was agreed to by the Company and NuOasis, by which the Company's
obligation to issue stock to NuOasis was reduced to 4,000,000 shares (valued at
$10,000,000) of its Common Stock. As of December 31, 1996, the apartment
buildings were approximately 35% complete, and it is anticipated by the Company
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that the project will be completed by August 1997. The Company has no obligation
for construction costs or any other costs relating to the project's completion
and may at its option rescind the Purchase and Sale Agreement, if construction
is not completed by August 1997. At completion, the Company will commence
operation of the project. It is anticipated that the Company may sell some of
the buildings, or units within the buildings, to provide initial operating
funds. There can be no assurance, however, as to when, if ever, the Company will
be successful in selling some of the buildings, or units within the buildings to
obtain operating funds, or whether, or to what extent, the project will be
profitable. See Part 1, Item 2, "Description of Property - Real Estate and
Operating Data."
In September 1996, the Company entered into a Sales Agreement with
Mandarin Overseas Investment Co., Ltd. ("Mandarin"), an unaffiliated Turks and
Caicos chartered company located in Central Hong Kong, for its undivided 50%
interest in thirty-four State of Alaska mineral lease gold lode claims, known as
Lodestar claims numbered 35-68, consisting of 160 acres each, all located in the
Melozitna mining district near Tanana, Alaska, approximately 300 air-kilometers
west of the City of Fairbanks, Alaska. The Company will pay $3,000,000 in shares
of its Common Stock to Mandarin for its undivided 50% interest in the mineral
lease gold lode claims, all shares to be issued pursuant to Regulation "S". The
number of shares are determined by the average price per share over a 10 day
period for the 10 days prior to the execution of this agreement. Certain
maintenance and administrative costs will be incurred to maintain the claims in
a good standing status with all regulatory agencies. The Company has agreed to
pay Mandarin fifty percent (50%) of all such administrative costs necessary to
maintain the claims in good standing, such costs not expected to exceed $2,500
annually. At the end of two years from the date of the Agreement, the Company
will pay an additional amount representing fifty percent (50%) of no less than
twenty-five thousand dollars ($25,000) in connection with the requirements of
regulatory agencies. There is no maximum of this additional amount.
In September 1996, the Company entered into a Sales Agreement with
Promed International Ltd. ("Promed"), an unaffiliated Turks and Caicos chartered
company with offices in the British crown colony of Gibraltar, for the purchase
of their undivided 50% interest in thirty-four State of Alaska mineral lease
gold lode claims, known as Lodestar claims numbered 1-34, consisting of 160
acres each, all located in the Melozitna mining district near Tanana, Alaska,
approximately 300 air-kilometers west of the City of Fairbanks, Alaska. The
Company will pay $3,000,000 in shares of its Common Stock to Promed for its
undivided 50% interest in the mineral lease gold lode claims, all shares to be
issued pursuant to Regulation "S." The number of shares are determined by the
average price per share over a 10 day period for the 10 days prior to the
execution of this agreement. Certain maintenance and administrative costs will
be incurred to maintain the claims in good standing with all regulatory
agencies. The Company has agreed to pay Promed fifty percent (50%) of all such
costs, not to exceed $2,500 annually. At the end of two years from the date of
the Agreement, the Company will pay an additional amount representing fifty
percent (50%) of no less than twenty-five thousand dollars ($25,000) in
connection with requirements of regulatory agencies. There is no maximum of this
additional amount.
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Management intends to obtain the services of an independent geo-survey
company to prepare detailed geo-maps of the gold lode claims acquired from
Mandarin and Promed, and to evaluate existing studies, at an estimated cost of
approximately $160,000. The possibility of not raising $160,000 will prevent an
accurate value of the Alaskan Mines; however, if these studies confirm the
valuation that has been represented, the Company intends to complete the
Purchase and Sale Agreement and raise sufficient capital to fulfill the
requirements of the mining project. Management does not expect this to affect
other activities in which the Company is involved. There can be no assurance,
however, as to when, if ever, the Company will obtain the necessary capital to
fulfill the requirements of the mining project, or whether, or to what extent,
the project will be profitable, should operations commence. See Item 2.
"Description of Property - Mineral Lease Gold Lode Claims."
During 1996 the Company entered into a Consulting Agreement with
American Equities, LLC, a California Limited Liability Company. The Company
intends to acquire, manage and develop a real estate portfolio through the year
2001. See Part II, F/S, "Consolidated Financial Statements, Years Ended December
31, 1996 and 1995 -- Notes to Financial Statements," Note H. "Commitments and
Contingencies."
In January 1997 the Company began ongoing negotiations with Network
Computer, Inc., a wholly-owned subsidiary of Oracle Company, to develop 500,000
network computer in Southeast Asia.
See Part III, Item 12, "Certain Relationships and Related Transactions"
for information about the interests of certain directors, executive officers and
promoters of the Company in the formation and reorganization transactions
described above involving Stardust, Harcourt Investments and Hartcourt Pen.
See Part I, Item 2, "Description of Property," for information about
the Company's facilities.
Principal Products, Distribution and Competitive Conditions
The Company's present business activities consist of the assembly and
distribution of a broad range of writing instruments, ranging from the most
commonly used and inexpensive plastic ballpoint pens to high-priced luxury and
collectible fountain pens. The Company also distributes special order stationery
items, such as daily diaries and planners, organizers and desk sets and other
desk items, manufactured by others.
Commonly used and inexpensive writing instruments ("Popular Items")
assembled and sold by the Company include a broad range of ballpoint pens,
roller pens, cosmetic pens, white board markers, water color markers, permanent
markers, highlighters, erasable ballpoint pens and magic ink pens. The Company's
Popular Items are available in various compositions and colors of plastic
barrels and in a variety of ink colors.
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Higher priced and luxury writing instruments ("Luxury Items") sold by
the Company include ballpoint, roller and fountain pens as well as mechanical
pencils. The barrels of Luxury Items generally are composed of brass or
stainless steel with lacquer or engraved designs and have nibs (the point of the
pen that regulates ink flow) of German-made iridium, as well as gold-plated
accessories. Once the pens are produced, they are inspected for quality control
before being available for retail.
The Company's products are distributed through consignment contracts
and retail activities. The Company also advertises on airline magazines such as
Frequent Flyer, Hughes and CFO. The mail order and U.S. domestic operations are
carried out by the help of customer service representatives under supervision of
office managers. All orders whether received by phone, fax, letter or through
the Company's web site are documented and checked for reliability. Once the
payment is processed or invoiced, the shipment proceeds through the mail order
and Internet service. The Company has established a large distribution network
available to customers worldwide.
Management believes that the materials and equipment used in the
assembly of the Company's products generally are available from multiple sources
on competitive terms. Therefore, the Company does not anticipate any significant
delays in the acquisition, of, or shortages of, either materials or equipment.
The Company believes that the markets for its broad range of writing
instruments are relatively fragmented and highly competitive. There are many
local, national and multinational importers of writing instruments in the United
States and elsewhere, and the Company's ability to compete successfully will be
dependent upon numerous factors, including its ability to obtain necessary
financing in a timely manner and on commercially acceptable terms, as well as
upon the design, quality and price of its products and its customer service.
Many of the Company's competitors have greater experience and far greater
financial and other resources than the Company. There can be no assurance that
the Company will be able to compete successfully in its markets.
Doing Business in China
GENERAL. Because the Company's Peony Gardens project is in China and
China is among the possible markets targeted by the Company for future
acquisitions, as well as a market for the purchase of its cosmetic products
inventory, China is important to the Company's success. The operation of
facilities in China involves certain risks and special considerations not
typically associated with operations in the United States.
These risks generally related to: (i) social, economic and political
uncertainty; (ii) substantial governmental involvement in and control over the
Chinese economy; (iii) the possibility that the Chinese government could elect
to discontinue its support of the economic reform programs implemented in 1978
and return to a completely centrally planned economy; and (iv) possible
nationalization or expropriation of assets. Accordingly, government actions in
the future could have a significant effect on economic conditions in China. Such
actions, and result changes in the Chinese economy, could significantly aversely
affect, limit or eliminate opportunities for foreign investment, the prospects
of private sector enterprises operating in China and the value of the Company's
investments in China.
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RESTRICTIONS ON FOREIGN CURRENCY EXCHANGE. In order to meet foreign
currency obligations and remit dividends to foreign owners, a joint venture
operating in China must convert a portion of its funds from the Chinese
currency, the Chinese Renminbi (the "RMB"), to other currencies. Because China
controls its foreign currency reserves, RMB earnings within China can not freely
be converted into foreign currencies, except with government permission and at
rates which are determined in part by supply and demand at authorized financial
institutions, such as the People's Bank of China or at government-regulated
foreign exchange swap centers established by the State Administration of
Exchange Control. In the event of shortages of foreign currencies, the Company
may be unable to convert sufficient RMB's into foreign currencies to enable it
to comply with foreign currency payment obligations or to make distributions to
equity holders located outside of China.
VOLATILITY OF EXCHANGE RATES. There has not been significant volatility
in the exchange rates of RMBs to U.S. Dollars in the recent past but future
exchange rates may experience significant volatility.
ENVIRONMENTAL REGULATION. The Company's Chinese operations are subject
to central, provincial and local environmental protection laws and regulations.
The costs and effects of compliance with environmental laws and regulations in
the United States (federal, state and local) and China (central, provincial and
local) have not been material in the past and are not anticipated to be material
in the future.
Employees
The Company currently employs four full-time and three part-time
employees at its principal executive offices in the United States. Hartcourt Pen
is located at this headquarters location, which also is the site for certain
research and development activities. The Company does not expect any significant
changes in the number of employees during the next twelve months.
Research and Development
The Company currently conducts limited research and development
activities involving the creation of ink formulas, as well as the engineering
design of pens and material used for the components of writing instruments.
During the fiscal years ended December 31, 1993, 1994 and 1995, $100,650,
$180,440 and $38,205 respectively, was expended in connection with such
activities. During the 12 month period ended December 31, 1996 no expense was
incurred in connection with research and development activities. Management
anticipates that research and development costs as a percentage of sales will
not increase materially from current levels.
Item 2. Description of Property
Principal Plants and Other Property
The Company's principal executive offices are located at 19104 South
Norwalk Boulevard, Artesia, California 90701. Hartcourt Pen is located at this
headquarters site, which also is the site of certain limited research and
development activities. The premises, which are leased from an unaffiliated
party, consist of 5,200 square feet, approximately 2,000 square feet of which is
used for warehousing, approximately 2,000 square feet for assembly of writing
instruments, and approximately 1,200 square feet for executive and clerical
offices. Monthly rent is $1,230 until May 31, 1997, $1,640 from June 1, 1997
through May 31, 1998 and $2,050 for the remainder of the lease term, through May
31, 2001; provided, however, that no rent will be due for the months of June
1999 and June 2000.
See Part I, Item 1, "Description of Business--General" for information
about the manufacturing facilities of Xinhui JV.
The Company believes that its property and equipment are adequate for
its present activities. See Part I, Item 1, "Description of Business--General,"
and Part II, Item 6, "Management's Discussion and Analysis or Plan of
Operation--Liquidity and Capital Resources."
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Investment Policies
The Company has placed no limitation on the percentage of assets which
may be invested in any one investment. This policy may be changed by the
Company's Board of Directors and without a vote of the Company's security
holders. It is the Company's policy to acquire assets primarily to add to its
equity base and for income.
Real Estate Investments
The Company's investments in real estate are not restricted to
developed or undeveloped properties, or properties of any specific type or
location. It is the present intent of Management to acquire commercial
properties that can be operated by outside management and do not require the
Company's hands-on operation. With the exception of the Peony Gardens Project
(See Item 1, "Description of Business, General"), it is the present intent of
Management that real estate will be purchased, free and clear of any mortgage,
with shares of the Company's Common Stock. Any necessary management services in
connection with the Peony Gardens Project, and any future acquisitions, will be
compensated, if possible, through the issuance of the Company's Common Stock.
Real Estate and Operating Data
On September 8, 1996, the Company completed the purchase of a
commercial real estate project, commonly known as the Peony Gardens Project
("Peony Gardens"), located in mainland China. See Part I, Item 1, "Description
of Business." The land use right of the property has been granted to Beijing
Grand Canal Real Estate Development Co. Ltd., the project's developer, for a
term of seventy (70) years, commencing from May 3, 1994. NuOasis, the seller,
holds the Company's Convertible Secured Promissory Note in the principal amount
of $12,000,000, granting NuOasis a security interest in the property, which is
otherwise free of any mortgages, liens or encumbrances.
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Peony Gardens, upon its anticipated completion, will be comprised of
three 5-7 story apartment buildings located at the eastern part of Tongxian of
Beijing city. The property is connected to a network of highways and roads, and
is located in one of the city's strategic areas for outward expansion, with a
relatively good transport system consisting of public buses and taxicabs between
the city center and the development.
As of December 1996, the development is approximately 35% complete, and
it is anticipated that it will be fully developed by August 1997. The Company
has no obligation for construction costs, or any other costs relating to the
project's completion, and will not assume operating costs until full completion
of the project. It is the opinion of the Company's management that present
insurance coverage is adequate. Upon completion of the project, it is the intent
of the Company to acquire, if possible, the services of an independent real
estate management company for the properties through the issuance of the
Company's Common Stock. At present, real estate management company fees in China
are 4% of total rents collected. It is estimated that the total annual rental
income, after completion of the project's three residential apartment buildings,
will be $5,764,000 at 70% occupancy. Management estimates expenses to be
approximately $1,441,000 annually. Depreciation is based on twenty years, which
is standard depreciation for apartment buildings. Real estate and governmental
taxes in connection with the Peony Gardens purchase are the obligation of the
developer and were included in the purchase price. All rental taxes will be paid
by the tenants included in their monthly rent. Management estimates that leases
will be for a minimum period of two years, which is the standard lease term for
the area. The property is not, at present, subject to the usual competitive
conditions associated with rental or leased residential apartment property,
since the apartment buildings have been mandated by the Chinese government as a
special project for the use of foreigners. However, should the government
rescind that mandate, or should conditions occur which would cause the Chinese
government to expel foreigners, the apartments would be subject to extremely
competitive lease and sale pricing. See Part I, Item 1, "Description of
Business--Doing Business in China."
Mineral Lease Gold Lode Claims
In September 1996, the Company, through separate transactions with
Mandarin Overseas Investment Co., Ltd. ("Mandarin") and Promed International,
Ltd. ("Promed"), acquired an undivided 50% interest in a total of 68 (34 from
each transaction) mineral lease gold lode claims, consisting of 160 acres each,
all located in the Melozitna mining district near Tanana, Alaska, some 300
air-kilometers west of the City of Fairbanks, Alaska. A gravel landing strip
near Golden Creek, about 12 kilometers north of the Yukon River, can be used to
access and service the area during snow-free months. Aircraft up to the size of
DC-3 can land on this strip to supply fuel and other supplies to mining camps in
the area. Scheduled passenger flights from Fairbanks west to points along the
Yukon River can be used to provide passenger service to and from the Golden
Creek landing strip. Larger equipment and fuel supplies can be barged down from
the Yukon River to several points where tractor roads lead into the mineral
lease area.
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Certain maintenance and administrative costs will be incurred by the
Company to maintain the claims in a good standing status with all regulatory
agencies. Pursuant to the Sales Agreements, with Mandarin and Promed, the
Company has agreed to pay fifty percent (50%) of all such administrative costs
necessary to maintain the claims in good standing, such costs not expected to
exceed a total of $5,000 annually, which are payable to Mandarin and Promed in
the amount of $2,500 each, respectively. At the end of two years from the date
of the Agreements, the Company will pay an additional amount representing fifty
percent (50%) of no less than twenty-five thousand dollars ($25,000) to
Mandarin, and an additional amount representing fifty percent (50%) of no less
than twenty-five thousand dollars ($25,000) to Promed, in connection with the
requirements of regulatory agencies. See Part I, Item 1., "Description of
Business--General."
Recent exploration activity in Alaska has been stimulated by the
discovery of low-grade bulk tonnage gold mineralization at the Fort Knox
deposit, near Fairbanks. The gold is associated with high concentrations of
tungsten and bismuth. Other unaffiliated companies, with gold lode claims in
areas adjacent to the Company's gold lode claims, commenced field work on a
portion of the adjacent area in July and August 1996. However, the Company does
not expect to enter into any mining operations on its gold lode claims until
such time as detailed geo-maps and evaluation of existing studies of the gold
lode claims are obtained from an independent geo-survey company, at an estimated
cost of $160,000. If these studies confirm the valuation that has been
represented, the Company intends to raise sufficient capital to fulfill the
requirements of the mining project. There can be no assurance, however, as to
when, if ever, the company will obtain the necessary capital to fulfill the
requirements of the mining project, or whether, or to what extent, the project
will be profitable, should operations commence.
Item 3. Legal Proceedings
Neither the Company nor any of its subsidiaries currently is a party
to, or owns property subject to, any pending or threatened legal proceedings
which, in the opinion of management, are likely to have a material adverse
impact on the financial condition of the Company.
Item 4. Submission of Matters of Security Holders
None
Item 5. Market for Common Equity and Related Stockholder Matters
The Common Stock is quoted on the bulletin board maintained by the
National Association of Securities Dealers, Inc. The following table sets forth
the range of high and low bid and asked quotations for the Common stock during
the two most recent calendar years ended December 31, 1996 and 1995:
12
<PAGE>
High Bid Low Bid High Asked Low Asked
-------------- -------------- -------------- -------------
March 31, 1995 5.00 3.00 8.00 3.62
June 30, 1995 3.62 3.50 4.25 3.87
September 30, 1995 3.75 3.62 4.37 4.00
December 31, 1995 5.75 3.50 7.12 4.25
March 31, 1996 5.75 4.25 6.37 5.00
June 30, 1996 5.75 4.62 6.50 5.12
September 30, 1996 7.50 3.00 12.25 5.00
December 31,1996 5.00 1.50 6.00 2.75
The above prices were obtained from the National Quotation Bureau, Inc.
The prices shown in the above table represent inter-dealer quotations without
retail mark-up, mark-down or commission, and may not necessarily represent
actual transactions. On December 31, 1996, there were broker-dealers publishing
quotes for the Common Stock.
All of the Company's issued stock has been issued pursuant to Rule 144
of the Securities Act and could come into any market which exists under Rule
144. Approximately 800,000 outstanding 144 shares exist at December 31, 1996
held by principal and directors.
As of December 31, 1996 there were 428 holders of the Company's Common
Stock. The Company believes there are numerous additional beneficial owners of
the Common Stock whose shares are held in "street name".
In September 1995 the Company declared a 3% stock dividend on its
Common Stock. Certain holders of shares of the Common Stock of the Company
waived their rights to receive this dividend. As a result, on October 31, 1995,
the Company issued a dividend of an aggregate of 21,753 shares of Common Stock
to holders of 713,010 shares of the Company's Common Stock.
In May 1996, the Company declared 3% stock dividend on its Common
Stock. As a result, on May 3, 1996, the Company issued a dividend of an
aggregate of 83,574 shares of Common Stock to holders of 2,785,813 shares of the
Company's Common Stock.
In June 1996, the Company declared a 3% stock dividend on its Common
Stock. As a result, on July 31, 1996, the Company issued a dividend of an
aggregate of 86,277 shares of Common Stock to holders of 2,875,906 shares of the
Company's Common Stock. The Company does not anticipate payment of any other
stock or cash dividends in the foreseeable future.
13
<PAGE>
The following information sets forth certain information for all
securities the Company sold during the past three years without registration
under the Securities Act of 1933 (the "Securities Act"). All transactions were
effected in reliance on the exemption from registration afforded by Section 4
(2) of the Securities Act for transactions not involving a public offering.
There were no underwriters in any of these transactions.
All the transaction hereunder were between the Company and accredited
investors as defined in Section 4(2) of the Securities Act of 1933 or
sophisticated investors that possessed sufficient knowledge and experience in
financial and business matters to be able to evaluate the merits and risks of
the investment and were allowed access to the books and records of the Company.
Pursuant to a Stock Exchange Agreement, dated August 8, 1994, Harcourt
Investments issued 250,000 shares of its common stock (representing 80% of its
common stock outstanding immediately subsequent to the transaction) to Eastern
Rocester Limited, a Hong Kong corporation, in exchange for a 60% interest in the
Xinhui JV. After the transaction, Harcourt Investments was 80% held by Eastern
Rocester Limited, 2% by Dr. Alan Phan, a director, executive officer and
promoter of the Company, and 18% by Pacific Rim Capital. All of the outstanding
common stock of Eastern Rocester Limited subsequently was sold to Tiana
Corporation, of which Dr. Phan beneficially owns 20% of its common stock.
Dr. Phan acquired ten Harcourt Investments shares in April 1993 for
nominal consideration.
The Company acquired all of the outstanding Harcourt Investments shares
for 6,110,337 shares of the Company's Common Stock pursuant to an Agreement and
Plan of Reorganization dated November 5, 1994. Dr. Phan received 291,500 of such
shares in exchange for his Harcourt Investments shares.
Pursuant to an Agreement and Plan of Reorganization dated December 1,
1994, the Company acquired all of the outstanding shares of Harcourt Pen from
Dr. Phan for 38,625 shares of the Company's Common Stock and 1,000 shares of its
Original Preferred Stock.
On February 28, 1996, the Company issued 27,000 shares of its Common
Stock to former attorney Kevin Quinn for $466,560.
On March 27, 1996, the Company acquired a complete line of cosmetics,
including inventory, valued at $161,250 and marketed under a brand name, for
12,000 shares of the Company's Common Stock.
On June 3, 1996, the Company issued 5,000 shares of the Company's
Common Stock to Cavaform, Inc. for outstanding liabilities, in the amount of
$106,775, on behalf of Xinhui JV. These payments were to increase our investment
in Xin Hui and to expedite completion of molds.
14
<PAGE>
On June 3, 1996, the Company issued a total of 1,267 shares of its
Common Stock for the purchase of inventory valued at $30,164 to Kenneth
Johnson/Marvin Lieberman and Edmund Murray in the amount of 667 shares and 600
shares, respectively. Inventory consists primarily of beauty
products and pen accessories.
On June 11, 1996, the Company issued 112 shares of the Company's Common
Stock to Idea International, Inc. in settlement of $2,814 in accounts payable.
Pursuant to a Sales Agreement dated September 17,1996, the Company
acquired a fifty percent (50%) interest in thirty four gold lode claims, valued
at approximately $3,000,000 from Promed International, Ltd. for 649,350 shares
of the Company's Common Stock.
Pursuant to a Sales Agreement dated September 17, 1996, the Company
acquired a fifty percent (50%) interest in thirty four gold lode claims, valued
at approximately $3,000,000 from Mandarin Overseas Investment Co., Ltd. for
649,350 shares of the Company's Common Stock.
Pursuant to a Purchase and Sales Agreement, dated September 27, 1996,
CKES Acquisitions, Inc., a Nevada corporation, acquired all of the outstanding
25,000 shares of the Company's wholly-owned subsidiary Harcourt Investments for
a Secured Promissory Note in the principal sum of $3,000,000, with accrued
compound interest at six percent (6%) per annum.
On September 30, 1996, pursuant to a purchase and Sales Agreement,
dated July 8, 1996, and its Addendum, dated August 8, 1996, the Company acquired
a commercial real estate project, commonly known as the Peony Gardens Property,
located in mainland China, for 4,000,000 shares at $2.50 per share of the
Company's Common Stock, and a Convertible Secured Promissory Note. On September
30, 1996, Pacific Rim Capital received 400,000 shares at $5.00 per share of the
Company's Common Stock and Philip Cavana received 200,000 shares at $5.00 per
share of the Company's Common Stock for $3,000,000 in brokerage fees in
connection with this purchase.
On September 30, 1996, pursuant to a Resolution of the Company's Board
of Directors, the Company issued 425,000 shares at $0.50 per share of the
Company's Common Stock to Pacific Rim Capital on account of funds advanced in
the amount of $271,395 for working capital during the January 1, 1996 to
September 30, 1996 period.
Item 6. Management's Discussion and Analysis or Plan of Operation
The Company assembles and imports writing instruments for sale in the
U.S. During 1995 and 1996, the Company entered into negotiations involving
various transactions intended to increase the Company's inventory and ability to
manufacture, assemble and import writing instruments. None of these transactions
were completed. See Part FINANCIAL STATEMENT, "Consolidated Financial
Statements, Years Ended December 31, 1996 and 1995 -- Notes to Financial
Statements," Item H. "Commitments and Contingencies."
15
<PAGE>
During the first quarter of 1996, the Company acquired a complete line
of cosmetics and the United States trademarked name Camille St. Moritz, under
which the cosmetics will be marketed. The Company does not intend to market the
products in the United States, and is currently seeking overseas importers,
primarily in China, to purchase the inventory and market the products. There
have been no sales of the cosmetic products since the Company acquired the line,
and there can be no assurance that the Company will find importers to purchase
its cosmetic product inventory. See Item 1. "Description of Business --
General."
During the third quarter of 1996, the Company acquired Peony Gardens, a
commercial real estate project in the eastern part of Tongxian in Beijing city,
mainland China, commonly known as the Peony Gardens property. The project, when
completed, will be comprised of three 5-7 story apartment buildings. The
buildings are scheduled for completion in the third quarter of 1997. The Company
has no obligation for construction costs, or any costs relating to the project's
completion and will not assume operating costs until full completion of the
project. Upon the full completion of the project, it is anticipated by
Management that the Company may sell some of the buildings, or units within the
buildings, to provide initial operating funds. Any sale or lease of the
buildings, or of units within the buildings, by real estate brokers in China is
subject to a 5% commission. It is the Company's intent to have the properties
managed by a real estate management company, local to the area, whose services
will be compensated, if possible, through the issuance of the Company's common
Stock. Real estate company management fees for the area are 4% of total rents
collected. There can be no assurance as to when, if ever, the Company will
obtain these initial, or future, operating funds, or whether, or to what extent,
the project will be profitable. See Item 2. "Description of Property - Real
Estate and Operating Data."
During the third quarter of 1996, the Company purchased, in two
separate transactions, an undivided 50% interest in a total of 68 mineral lease
gold lode claims, 34 from each transaction respectively, located in the
Melozitna mining district near Tanana, in southern Alaska. Until such time as an
independent geo-survey company has prepared detailed geo-maps of the area, and
an evaluation of existing studies has been performed on the properties, the
Company does not intend to enter into any mining activities on these claims. The
Company estimates that the cost for the geo-survey service will be approximately
$160,000. Management is establishing a program to finance the administrative and
developmental needs of the gold claims. There can be no assurance, however, as
to when, if ever, the Company will obtain the necessary capital to fulfill the
requirements of the mining project, or whether, or to what extent, the project
will be profitable, should operations commence. See Item 2. "Description of
Property -- Mineral Lease Gold Lode Claims."
In the fourth quarter of 1996, the Company sold Harcourt Investments,
its wholly-owned subsidiary and owner of 52% of the Xinhui JV, to CKES Inc. for
$3,000,000. The Company received a $3,000,000 promissory note which is payable
in installments of $50,000 per month for 60 months starting October 1, 1998.
Interest accrues a 6% per annum and is payable in full at the end of the loan
period. The note is secured by all assets of CKES, Inc.
16
<PAGE>
Also in the fourth quarter of 1996 the Company entered into a
consulting agreement with American Equities, LLC, a California limited liability
company to provide consultation and assistance in finding, acquiring, managing
and developing a real estate portfolio which will include office, commercial,
industrial, residential and raw land. As a minimum the consultant is expected to
increase assets and/or market capitalization of the Company by at least
$50,000,000 by the end of 1997.
RESULTS OF OPERATIONS
The Company's domestic U.S. sales activity commenced, on a limited
basis, during the fourth quarter of 1994 and its Chinese facilities were not
completed and in full operation until the beginning of the third quarter of
1995. In 1996, as discussed previously the Company made some fundamental
changes, including the sale of its interest in the Xinhui JV. Because of the
nature of activities in 1996 as compared to 1995 it is not relevant to attempt a
comparison. The following discussion relates to the twelve months ended December
31, 1996 followed by a discussion of the twelve months ended December 31, 1995.
1996
During 1996, the Company's domestic operations were limited due to the
lack of a comprehensive marketing program and the refocus of Company objectives
and direction. Domestic sales during the year were approximately $272,000 which
included the sale, at auction, of outdated pen inventory for approximately
$92,000. Other domestic sales were primarily from mail order and some over the
counter retail sales. Total revenues of $511,000 include the sales activity of
the Xinhui JV for the first nine months of l996 which was approximately
$238,000. This is an improvement over 1995 due to an increase in their marketing
efforts, however, sales continued to lag behind projections which is reflective
of the slow economic climate in China at this time.
Cost of sales for the year ended December 31, 1996 was $797,667
compared to $159,797 for 1995, representing an increase of 499% over 1995. Cost
of sales for 1996 was very high due the liquidation at auction of outdated
inventory items received from the Xinhui JV. The Company received approximately
30 cents on the dollar. The total loss from this liquidation was approximately
$320,000. This is, of course, a one-time occurrence and the Company expects the
gross margin to be around 50% in the future.
General and administrative expenses were $1,242,756 during 1996,
compared to $1,558,256 in 1995, a decrease of 25%. This decrease reflects an
effort by the Company to cut costs extensively, and also due to the fact that
general and administrative expenses of the Xin Hui JV were not included during
the fourth quarter of 1996. Further, the Company incurred interest expenses of
$360,744 from the Xin Hui JV's indebtedness. This expense from Xin Hui JV will
not occur in 1997 since the Company has sold its interest.
17
<PAGE>
1995
During the 12 months ended December 31, 1995, consolidated sales were
$354,000, compared to $475,000 for 1994, representing a decrease of 25% in 1995
from 1994, due to a decrease in the mail order market. The Company's sales
during the 12 months ended December 31, 1995 consisted of $250,000 by the Xinhui
JV to customers within China and $104,000 from domestic U.S. sales. Sales in
1994 were exclusively from U.S. domestic operations, which consisted primarily
of mail order activities.
Cost of sales for the year ended December 31, 1995, was $160,000,
compared to $32,000 for 1994, representing an increase of 400% over 1994. This
increase was primarily due to the Company's increased sales of low cost pens,
resulting in a lower profit margin.
The gross profit margin for the year ended December 31, 1995 was 54.8%,
compared to 57.3% for 1994. The reduction in gross profit during 1995 is
attributable to competitive pressures to lower prices and pricing decisions by
management intended to increase the Company's market share.
General and administrative expenses were $1,558,000 during 1995,
compared to $429,000 in 1994, an increase of 263%. This substantial increase was
due to expansion of the Company's marketing efforts both domestically and in
China, through the addition of personnel and related costs. Administrative
expenses of the Xinhui JV increased substantially during 1995, as construction
activities were completed and manufacturing operations commenced. In particular,
the commencement of manufacturing operations required the hiring of additional
sales and administrative personnel. In addition, during 1995 the Company
incurred interest expense in the amount of $851,000 in connection with loans in
the aggregate amount $4,900,152, of which $1,227,325 was obtained during 1995 to
finance equipment for the Xinhui IV factory.
Foreign Currency
The Xinhui JV reports its operating results and financial condition in
the local currency, the Chinese Renminbi (the "RMB"). The effect of changes in
foreign currency exchange rates had minimal effect on the sales and cost of
sales of the Xinhui JV during the period in which the Company was joint venture
partner, since it operates almost exclusively within China and engages in
minimal importing or exporting activities. For the international operations,
assets and liabilities are translated into U.S. dollars at year-end exchange
rates and revenues and expenses are translated at average exchange rates
prevailing during the year. Translation adjustments, resulting from fluctuations
in exchange rates, are recorded as a separate component of shareholder's equity.
18
<PAGE>
Liquidity and Capital Resources
1996
The Company's current ratio improved significantly, at the end of 1996
over 1995 due to the sale of the Company's interest in the Xinhui JV because of
the heavy debt incurred by the Joint Venture. Despite the sale of the Xinhui JV,
total assets almost doubled at the end of 1996 over 1995. This was due to the
various investments made by the Company during 1996 as has been previously
discussed. These investments were financed primarily from the issuance of the
Company's common stock.
During 1996 the Company experienced a deficit in cash flows from
operations due primarily to the sale of the Company's interest in the Xinhui JV
and because the Joint Venture had an extremely high overhead compared to sales
and was unable to generate sufficient sales to cover general and administrative
costs. With the sale of the Company's interest in the Xinhui JV cash flows are
expected to improve. The cash flow deficiency from US operations was minimal
and, with the projected increase in sales, the Company should have a positive
cash flow from operations in the future.
In December 1996 the Company retained the services of a consultant to
develop a $50 million real estate portfolio for the Company. It is planned to
finance the purchase of this portfolio through a combination of debt and the
issuance of the Company's common stock. The real estate portfolio is expected to
produce cash flow for the Company. As part of the agreement with the consultant,
the Company advanced to the consultant $1,500,000 for consulting fees plus
another $150,000 for expenses. The Company paid these amounts by issuing the
consultant shares of the Company's common stock. One million shares were issued
at $1.50 per share and 300,000 shares at $0.50 per share.
The Company also has a stock subscription agreement with foreign
investors that will provide the Company with up to $20,000 per month during the
twelve month period beginning November 1996. The Agreement provides for the sale
of up to 480,000 shares of the Company's common stock for $0.50 per share,
however, the Company is not obligated to sell any of the shares and in its sole
discretion can determine the amount sold.
Prepaid expenses increased by $828,000 or 1,115% to $900,000 on
December 31, 1996 from $72,000 on December 31, 1995. The primary reason was the
consulting fees to American Equities to develop a real estate portfolio for the
Company. In addition, there was a current portion of $133,764 of notes
receivable, totaling $2,526,779, resulting from various loans giving to
companies and private parties.
Property, plant and equipment decreased by $8,985,692, or 99.5% as the
Company sold its interest in the Xin Hui JV company. On December 31, 1996, total
property, plant and equipment was only $44,809. The decrease in property and
equipment is due to the sale of the Company's interest in the Xinhui JV. The
sale of the interest was also the reason why current liabilities decreased by
$6,176,578, or 94% to $388,503 on December 31, 1996 comparing to $6,565,081 on
December 31, 1995. At December 31, 1996 the Company had a capital lease with
Anja Engineering, in the amount of $576,615, that relates to equipment that was
19
<PAGE>
purchased for the Xinhui JV. The Company is currently in dispute with Anja
Engineering over the amount of the note because the equipment has not performed
in accordance with expectations. The Company expects to work out a settlement
that will cancel the capital lease and result in a substantial forgiveness of
debt.
The Company believes that, with the sale of the interest in the Xinhui
JV and the anticipated settlement of the Note and capital lease with Anja
Engineering, the Company will be well positioned in 1997 to pursue the planned
investment program of sound real estate projects and profitable, cash producing
businesses.
1995
Changes in cash flows resulting from the Company's operating activities
for the year ended December 31, 1995 as compared to the prior year were due to
the commencement of full operations of the Xinhui JV during the third quarter of
1995. Accounts receivable increased by $59,000, or 616%, to $69,000 at December
31, 1995 from $10,000 at December 31, 1994, and inventories increased by
$294,000, or 40.8%, to approximately $1,011,000 at December 31, 1995 from
$718,000 at December 31, 1994 primarily as a result of the commencement of
operations by the Xinhui JV. Domestic operations also showed modest increases in
accounts receivable and inventories for the same reasons.
At December 31, 1995 the Company was experiencing a deficiency in
operating cash flow. This deficiency was primarily the result of the operations
of the Xinhui JV and, to a lesser extent, to U.S. domestic operations. In China,
it is customary commercial practice to provide customers purchasing "on account'
with substantially more liberal payment terms than are generally available with
the U.S., with terms of net 120 or even 180 days commonplace.
Prepaid expenses decreased by $128,000, or 63.9%. to $72,000 at
December 31, 1995 from $200,000 at December 31,1994, due to the transfer of
amounts from prepaid expenses and construction in progress to property, plant
and equipment during 1995. In addition, Common Stock subscriptions receivable
decreased in recognition of receipt, by the Company, of the proceeds of Common
Stock subscription agreements fulfilled prior to December 31, 1995.
Property, plant and equipment increased by $1,906,000, or 26.8%, to
$9,031,000 at December 31, 1995 from $7,125,000 at December 31,1994, and
deposits and other assets decreased by $595,000, or 96.3%, to $23,000 at
December 31, 1995 from $618,000 at December 31, 1994, as a result of the
transfer of certain amounts to property, plant and equipment from construction
in progress in connection with completion of the Xinhui JV plant and from
deposits in connection with equipment on order at the end of 1994 and delivered
during 1995.
Current liabilities increased by $3,092,000, or 82.6%, to $6,837,000 at
December 31, 1995 from $3,745,000 at December 31, 1994, because of the transfer
of long-term debt to current debt and due to additional borrowing by the Xinhui
JV to meet cash flow needs for completion of construction of the manufacturing
facilities and to finance operations while sales and marketing programs are
implemented within China. Long-term debt decreased by approximately $480,000, or
20
<PAGE>
48.9%, to approximately $502,000 at December 31, 1995 from $982,000 at December
31, 1994, due to transfer of a portion thereof to current debt.
At December 31, 1995, $773,000 of the Company's debt was attributable
to 12 loans from various banks and companies within China to the Xinhui JV.
These loans have various maturity dates during calendar year 1996, and currently
bear interest at various rates ranging from 11.7% to 22.8%. One of these loans,
in the principal amount of $682,600, is secured by machinery and equipment, and
the remaining amounts are unsecured.
The Company's indebtedness at December 31, 1995, made up of primarily
Xinhui JV debt, included several loans that were in default and therefore, were
classified as due with one year for financial statement reporting purposes.
21
<PAGE>
Item 7. Financial Statements
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES:
We have audited the accompanying consolidated balance sheets of The Hartcourt
Companies, Inc. (a Utah corporation) and Subsidiaries as of December 31, 1996,
and the related consolidated statements of operations, shareholders' equity, and
cash flows for the year then ended. 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. The consolidated
financial statements of the Hartcourt Companies, Inc. and Subsidiaries as of
December 31, 1995, were audited by other auditors whose report dated May 6,
1996, expressed an unqualified opinion on those 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 this audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Hartcourt
Companies, Inc. and Subsidiaries as of December 31, 1996, and the results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
Harlan & Boettger LLP
San Diego, California
March 18, 1997
22
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
1996 1995
----------- -----------
ASSETS
CURRENT ASSETS
Cash $ 822 $ 142,047
Accounts receivable net of allowance for
doubtful accounts of $19,034 and $116,490
in 1996 and 1995, respectively 19,034 69,119
Trade dollar receivables 72,054 -
Accrued interest receivable 3,877 -
Note receivable, current portion (Note F) 133,764 -
Inventory, net 311,424 1,011,332
Prepaid expense 150,000 72,051
Prepaid consulting fees (Note H) 750,000 -
Due from related party 32,356 168,575
----------- -----------
TOTAL CURRENT ASSETS 1,473,331 1,463,124
PROPERTY AND EQUIPMENT, net (Note D) 44,809 9,030,501
INVESTMENTS (Note B) 17,906,520 -
NOTES RECEIVABLE, net (Note F) 1,190,795 -
DEPOSITS AND OTHER ASSETS 7,550 23,181
INTANGIBLE ASSETS - 715,658
----------- -----------
$20,623,005 $11,232,464
The accompanying notes are an integral part of these financial statements.
23
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
December 31, December 31,
1996 1995
------------ -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 148,569 $ 502,653
Accrued expenses 133,747 1,539,012
Bank overdrafts 5,691 -
Other loans - 2,468,302
Notes payable - current portion (Note E) 56,396 1,930,114
Capital lease obligations - current portion - 125,000
Subscription deposits received (Note N) 45,000 -
------------ -----------
TOTAL CURRENT LIABILITIES 389,403 6,565,081
RELATED PARTY PAYABLE - 272,416
MINORITY INTEREST - 1,913,361
NOTES PAYABLE, net of current portion (Note E) 524,369 501,736
CAPITAL LEASE OBLIGATIONS,
net of current portion - 575,000
------------ -----------
TOTAL LIABILITIES 913,772 9,827,594
COMMITMENTS AND CONTINGENCIES (Note H) - -
SHAREHOLDERS' EQUITY
Original preferred stock, $0.01 par value
1,000 shares authorized, issued and
outstanding 10 10
Common stock, $0.001 par value, 50,000,000
(10,000,000 in 1995) shares authorized;
10,560,352 shares outstanding at
December 31, 1996, and 2,745,803 shares
issued and outstanding at December 31, 1995 10,560 2,746
Treasury stock, at cost (24,364 shares in 1996) (279,928) -
Additional paid-in capital 23,204,260 3,424,662
Retained deficit (3,225,669) (2,135,892)
Foreign currency translation adjustment - 113,344
------------ -----------
TOTAL SHAREHOLDERS' EQUITY 19,709,233 1,404,870
------------ -----------
$20,623,005 $11,232,464
The accompanying notes are an integral part of these financial statements.
24
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31,
1996 1995
----------- -----------
REVENUES
Product sales $ 510,692 $ 353,674
----------- -----------
TOTAL REVENUES 510,692 353,674
COST OF SALES 797,667 159,797
----------- -----------
Gross profit (loss) (286,975) 193,877
OPERATING EXPENSES
General and administrative 570,774 1,006,828
Depreciation and amortization 671,982 551,428
----------- -----------
TOTAL OPERATING EXPENSES 1,242,756 1,558,256
----------- -----------
LOSS FROM OPERATIONS (1,529,731) (1,364,379)
SALE OF SUBSIDIARY (Note B) - -
OTHER INCOME (EXPENSES)
Minority interest - 564,261
Interest expense (443,042) (851,076)
Forgiveness of debt (Note O) 384,735 --
Interest income 10,100 2,351
Exchange gain (loss) - 54,952
----------- -----------
TOTAL OTHER INCOME (EXPENSE) (48,207) (229,512)
----------- -----------
NET LOSS BEFORE INCOME TAXES (1,577,938) (1,593,891)
Income taxes (Note G) 1,800 -
----------- -----------
NET LOSS $(1,579,738) $(1,593,891)
=========== ===========
NET LOSS PER COMMON SHARE $ (.33) $ (.62)
=========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 4,814,303 2,565,098
=========== ===========
The accompanying notes are an integral part of these financial statements.
25
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Preferred Stock Additional Common Stock
-------------------------- ------------------------- Paid-in Subscription
Shares Amount Shares Amount Capital Receivable
----------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 2,735,952 $2,736 1,000 $10 $3,289,672 $(700,000)
Shares issued to attorney
for legal fees 9,851 10 -- -- 64,990 --
Capital contribution -
officer's compensation -- -- -- -- 70,000 --
Cash paid on common stock
subscription -- -- -- -- -- 700,000
Foreign currency translation
adjustment -- -- -- -- -- --
Net loss -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1995 2,745,803 $2,746 1,000 $10 $3,424,662 $--
=========== =========== =========== =========== =========== ===========
Shares issued to attorney 27,000 27 -- -- 466,533 --
Shares issued for Xin Hui 5,000 5 -- -- 106,770 --
Shares issued for inventory 13,267 13 -- -- 191,382 --
Shares issued for settlement
of payables 94 -- -- -- 2,813 --
Shares issued for Peony
Gardens deposit 4,600,000 4,600 -- -- 11,927,900 --
Shares issued for consulting
agreement 1,300,000 1,300 -- -- 898,700 --
Shares issued for Alaska mines 1,298,700 1,299 -- -- 5,972,721 --
Shares issued to convert debt
to equity 425,000 425 -- -- 212,075 --
Stock dividends 169,852 170 -- -- 679 --
Treasury stock acquired (24,364) (25) -- -- 25 --
Sale of Harcourt Investments -- -- -- -- -- --
Net loss -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1996 10,560,352 $10,560 1,000 $10 $23,204,260 $--
=========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(continued)
<TABLE>
<CAPTION>
Foreign
Treasury Stock Currency Total
--------------------------- Retained Translation Shareholders'
Shares Amount Deficit Adjustment Equity
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 -- -- $(542,001) $(915) $2,049,502
Shares issued to attorney
for legal fees -- -- -- -- 65,000
Capital contribution -
officer's compensation -- -- -- -- 70,000
Cash paid on common stock
subscription -- -- -- -- 700,000
Foreign currency translation
adjustment -- -- -- 114,259 114,259
Net loss -- -- (1,593,891 -- (1,593,891)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1995 -- -- $(2,135,892) $113,344 $1,404,870
============ ============ ============ ============ ============
Shares issued to attorney -- -- -- -- 466,560
Shares issued for Xin Hui -- -- -- -- 106,775
Shares issued for inventory -- -- -- -- 191,395
Shares issued for settlement
of payables -- -- -- -- 2,813
Shares issued for Peony
Gardens deposit -- -- -- -- 11,932,500
Shares issued for consulting
agreement -- -- -- -- 900,000
Shares issued for Alaska mines -- -- -- -- 5,974,020
Shares issued to convert debt
to equity -- -- -- -- 212,500
Stock dividends -- -- (849) -- --
Treasury stock acquired 24,364 (279,928) -- -- (279,928)
Sale of Harcourt Investments -- -- 490,810 (113,344) 377,466
Net loss -- -- (1,579,738) -- (1,579,738)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1996 24,364 $(279,928) $(3,225,669) -- $19,709,233
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
27
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
1996 1995
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,579,738) $(1,593,891)
Adjustments to reconcile net income
to net cash
used in operating activities:
Minority interest in loss of joint venture (1,339,225) (564,261)
Write off of intangible assets 698,039 --
Depreciation and amortization 671,982 551,428
Allowance for doubtful accounts (97,456) 116,490
Forgiveness of debt (384,735) -
Accrued interest income (8,871) -
Stock dividends 849 -
Sale of Harcourt Investments 489,961 -
Changes in operating assets and liabilities:
Increase in:
Accounts receivable 132,342 (175,958)
Inventory 647,256 (293,697)
Prepaid expenses (9,863) 127,512
Note receivables and other receivables (347,824) 603,159
Accounts payable and accrued expenses 341,912 1,363,056
----------- -----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (785,371) 133,838
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (427,454) (259,919)
Construction in progress - (2,169,550)
Purchase of other assets (574) (36,851)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (428,028) (2,466,320)
----------- -----------
The accompanying notes are an integral part of these financial statements.
28
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
Year ended December 31,
1996 1995
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Bank overdraft 5,691 -
Common stock subscriptions 45,000 200,000
Loan from Bank of China 507,801 849,535
Loans from shareholders 177,485 205,984
Issuance of common stock 186,632 835,000
Other loans 149,565 171,806
Additional contributions by foreign partner - 15,634
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,072,174 2,277,959
----------- -----------
NET DECREASE IN CASH (141,225) (54,523)
CASH, BEGINNING OF PERIOD 142,047 196,570
----------- -----------
CASH, END OF PERIOD $ 822 $ 142,047
=========== ===========
The accompanying notes are an integral part of these financial statements.
29
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Summary of Significant Accounting Policies:
Organization and Nature of Operations
Hartcourt Investments (USA), Inc., (Harcourt Investments) was
incorporated on April 23, 1993. Principal business activities are the
design, manufacture and sale of writing instruments. During its first
two years of operation, Harcourt Nevada used foreign contract
manufacturers to produce various types of pens and markers which were
then imported for sale in the U.S. market. In August 1994, Harcourt
Investments acquired a 60% interest in the Xinhui Harchy Modern Pens,
Ltd. Joint Venture (Xinhui JV) owned by a Hong Kong corporation for
common stock valued at $2,149,200. The Xinhui JV is located in the
Guangdong Province of China. Pursuant to an amendment to the joint
venture agreement governing the Xinhui JV entered into in October 1995,
the Company's interest was reduced to a 52% interest in the Xinhui JV.
In November 1994, Stardust, Inc., Production-Recording-Promotion
(Stardust) acquired 100% of the outstanding shares of Harcourt
Investments for 8,280,000 shares of its common stock in a transaction
accounted for as a recapitalization of Harcourt Investments with
Harcourt Investments as the acquirer (reverse acquisition). Therefore,
the historic cost of assets and liabilities were carried forward to the
consolidated entity. In 1996, a reverse stock split changed the number
of shares issued and outstanding to 2,735,952. The consolidated
financial statements were restated to reflect this capital stock
transaction. Stardust's name was changed to the "Hartcourt Companies,
Inc."
Hartcourt Pen Factory, Inc. (Hartcourt Pen) was incorporated in October
1993. Principal business activities are the sale of writing instruments.
In December 1994, Harcourt Investments acquired 100% of the outstanding
shares of the common stock of Hartcourt Pen for 52,500 shares of its
common stock and 1,000 shares of its original preferred stock in a
transaction accounted for similar to a pooling of interests. In 1995,
stock dividends and a reverse stock split changed the number of shares
issued to 38,625 to acquire Hartcourt Pen. The consolidated financial
statements were restated to reflect these capital stock transactions.
In August 1996, Hartcourt Companies, Inc. (Company) entered into a
purchase and sale agreement with NuOasis International, Inc.
("NuOasis"), a corporation incorporated under the laws of the
Commonwealth of the Bahamas, for the purchase of a commercial real
estate project, consisting of three 5-7 story apartment buildings,
commonly known as the Peony Gardens Property ("Peony Gardens"), located
in the eastern part of Tongxian in Beijing city, mainland China. The
Company issued 4,000,000 shares of its common stock with respect to this
purchase (Note B).
30
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
A. Summary of Significant Accounting Policies (continued):
In September 1996 Hartcourt Pen was spun-off from Harcourt Investments
to Hartcourt Companies, Inc. by Harcourt Investments transferring 100%
of stock ownership in Hartcourt Pen to Hartcourt Companies, Inc.
Pursuant to the spin-off in September 1996 the Company sold Harcourt
Investments to CKES, Inc. of Sunnyvale, California (Note B).
In September 1996, the Company entered into a sales agreement with
Mandarin Overseas Investment Co., Ltd. (Mandarin) and Promed
International Ltd. ("Promed"), both unaffiliated Turks and Caicos
chartered companies, for the purchase of their 50% interest in
sixty-eight mineral lease gold lode claims in the state of Alaska, known
as Lodestar claims 1-68 and consisting of 320 acres. All claims are
located in the Melozitna mining district near Tanana, Alaska. The
Company issued 1,298,700 shares of its common stock with respect to this
purchase (Note B).
Basis of Accounting
The Company's policy is to use the accrual method of accounting and to
prepare and present financial statements which conform to generally
accepted accounting principles.
Cash
Cash includes cash on hand and cash in checking and savings accounts.
Inventory
Inventory is stated at the lower of cost or market, cost being
determined on the first-in, first-out (FIFO) method.
Plant and Equipment
Plant and equipment are stated at cost, and substantially all balances
relate to Xinhui JV in 1995. Depreciation is provided over the estimated
useful lives of the respective assets on the straight-line basis ranging
from five to twenty years.
All direct and attributable costs relating to the acquisition or
construction of the plant facilities, machinery and molds (including
interest and exchange differences on related borrowings during the
construction period) were capitalized as construction-in-progress.
Construction-in-progress was reclassified to property and equipment upon
completion in 1995.
31
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
A. Summary of Significant Accounting Policies (continued):
Chinese Joint Venture
Xinhui JV is a joint venture between Xin Hui Orient Light Industry,
Ltd., a Chinese government-owned company with an anticipated 48%
interest, and Harcourt Investments with an anticipated 52% interest. The
ownership interest of each investor has not been finalized. Xinhui JV
was incorporated in November 1992 as a limited liability Chinese-foreign
equity joint venture. No material transactions occurred until April 1993
when construction began on the plant facilities. Limited manufacturing
commenced in December 1994; and by July 1995 the manufacturing plant was
fully operational. All sales are domestic in China in 1995 and 1994. The
joint venture had approximately $40,000 of export sales in 1996.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of The Hartcourt Companies, Inc. and its wholly-owned subsidiaries:
Harcourt Investments, which includes the accounts of majority-owned
Xinhui JV and Hartcourt Pen. For purposes of these consolidated
financial statements, the Hartcourt Companies, Inc. and its subsidiaries
will be referred to collectively as "the Company." All material
intercompany transactions and balances have been eliminated. In
accordance with generally accepted accounting principles, all of the
assets, liabilities and operations of Xinhui JV are reflected on the
consolidated financial statements. The interest of the joint venture
partner in the net assets and net loss of the joint venture are reported
as "Minority Interest" on the consolidated balance sheets and statements
of operations.
Foreign Currencies (Xinhui JV)
Assets and liabilities denominated in foreign currencies are translated
into the currency of U.S. dollars using the exchange rates at the
balance sheet date. For revenues and expenses, the average exchange rate
during the year was used to translate China (RMB) into U.S. dollars.
Transaction gains and losses resulting from changes in the exchange rate
are included in the determination of the net loss for the period.
Translation gains and losses are excluded from the consolidated
statements of operations and are credited or charged directly to a
separate component of shareholders' equity.
32
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
A. Summary of Significant Accounting Policies (continued):
Income Taxes
Income taxes, are provided for using the liability method of accounting
in accordance with Statement of Financial Accounting Standards No. 109
(SFAS 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.
Investments
Investments are provided for using the deposit method of accounting in
accordance with Statement of Financial Accounting Standards No. 66 (SFAS
66), "Accounting for Sales of Real Estate." The deposit method of
accounting shall be used until a sale has been consummated.
"Consummation" usually requires that all conditions precedent to closing
have been performed, including that the buildings, in the Peony Gardens
acquisition, be certified for occupancy and that the geological survey
of the Lodestar claims in Alaska have a minimum value of $6,000,000
(Note B).
Loss Per Share
Net loss per share has been calculated by dividing the net loss for each
period presented by the average number of common shares outstanding for
the respective period. Common stock equivalents, such as the preferred
stock outstanding, have not been considered in the calculation since
their effect would be anti-dilutive. The number of common shares issued
under the stock subscription agreement as well as the number of shares
issued to the Company's attorney for legal fees were included in the
calculation since these shares were issued in July 1995.
Use of Estimates
The preparation of consolidated 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 at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Fair Value
The Company has cash, receivables and accounts payable for which the
carrying value approximates fair value due to the short-term nature of
these instruments.
33
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
B. Investments:
Sale of Harcourt Investments, Inc.
In September 1996 the Company sold its wholly-owned subsidiary, Harcourt
Investments (USA), Inc., (Harcourt Investments) to CKES, Inc. located in
Sunnyvale, California. Harcourt Investments owned a 52% interest in Xin
Hui Harcy Modern Pens, Ltd., a joint venture in the Peoples Republic of
China. All of the outstanding shares of Harcourt Investments were sold
for a $3 million dollar note receivable which is payable in 60 equal
monthly installments of $50,000 each, beginning October 1, 1998.
Interest accrues at 6% per annum and is payable in full at the end of
the loan period. The note receivable is secured by a security agreement.
This agreement allows the Company to have a security interest in all
assets of CKES, Inc.
General accepted accounting principles require the recording of the note
receivable at its fair value when the face amount does not reasonably
represent the value of consideration received. Under Accounting
Principles Board No. 21 the note receivable is discounted ($753,985) to
its approximate fair value at December 31, 1996. Per Financial
Accounting Standards No.114, the note receivable was considered impaired
at December 31, 1996 due to the present operating condition of Xin Hui
plant and the length of time before payment begins by CKES, Inc. The
Company has decided to reserve a substantial portion ($1,202,220) of the
receivable due to payments being deferred to a later period.
Investment in Peony Gardens
In August 1996 the Company purchased an apartment complex located near
Beijing, China for $22 million from NuOasis International, Inc. The
purchase price included the issuance of 4 million shares of common
stock, valued at $10 million, and a promissory note to NuOasis for $12
million. The Note is due and payable on August 17, 1997 or, if
construction is not complete, then the note is extended to the date the
certificate of occupancy is received. Under the deposit method of
accounting in accordance with Financial Accounting Standards No. 66 the
promissory note for $12,000,000 is currently being deferred until the
complete consummation of the Peony Gardens sale. Also the 4 million
shares of common stock is recorded as a deposit at December 31, 1996.
34
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
B. Investments: (continued)
Investment in Alaskan Gold Claims
In September 1996 the Company purchased several gold mining claims
encompassing 320 acres of land in the state of Alaska for $6 million.
The purchase was made by issuing 1,298,700 shares of the Company's
common stock. Under the deposit method of accounting in accordance with
Financial Accounting Standards No. 66, the 1,298,700 shares of common
stock is recorded as a deposit at December 31, 1996.
C. Inventories:
Inventories consist of the following:
December 31, December 31,
1996 1995
--------- ----------
Raw materials $ - $ 265,847
Work in process - 30,693
Finished goods 311,424 714,792
--------- ----------
$ 311,424 $1,011,332
========= ==========
The majority of inventory in 1995 is related to the Xin Hui JV, thus the
sale of Xin Hui JV has significantly reduced inventory at December 31,
1996.
35
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
D. Property and Equipment:
Property and equipment are summarized as follows:
December 31, December 31,
1996 1995
------- ----------
Furniture and fixtures $28,600 $3,479,275
Leasehold improvements 6,197 264,108
Office equipment 34,926 5,520,301
Lab equipment 1,500 68,987
Vehicles - 123,791
------- ----------
71,223 9,456,462
Less accumulated depreciation 26,414 425,961
------- ----------
Property and equipment, net $44,809 $9,030,501
======= ==========
The majority of property and equipment in 1995 is related to the Xin Hui
JV, thus the sale of Xin Hui JV has significantly reduced property and
equipment at December 31, 1996.
E. Notes Payable:
Notes payable are summarized as follows:
December 31, December 31,
1996 1995
----------- -----------
Loan payable, Bank of China, maturity in
March 1997 with interest at a floating
rate (17.3% at December 31, 1995) and
repayment terms specified by the Bank
of China. $ - $1,901,265
36
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
E. Notes Payable: (continued)
December 31, December 31,
1996 1995
---------- ----------
Loan payable, vendor, with interest at 12%
and monthly payments of principal and
interest of $15,253 through March 1998 - 429,585
Loan payable, shareholder, with interest
at 6% and monthly payments of principal
and interest of $4,000 through Mid 1995 - 40,000
Loan payable, vendor, with interest at 10%
and monthly payments of principal of
$5,000 through November 1996. The
$4,150 balance was paid in full in 1997 4,150 61,000
Loan payable, Anja Engineering, with
interest at 8.5% and monthly principal
and interest payments of $12,075
beginning May 1, 1997 through April
2002. 576,615 -
---------- ----------
580,765 2,431,850
Less current portion 56,396 1,930,114
---------- ----------
$ 524,369 $ 501,736
========== ==========
The Company is currently negotiating with Anja Engineering to settle the
loan payable with regards to the cancellation of the capital lease.
37
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
E. Notes Payable: (continued)
The following is a summary of principal maturities of long-term debt:
Year ending December 31,
-----------------------
1997 $ 56,396
1998 104,329
1999 113,551
2000 123,588
2001 134,512
Thereafter 48,389
--------
Total $580,765
========
F. Notes Receivable:
Notes receivable at December 31, 1996 and 1995, consisted of the
following:
1996 1995
---------- ----------
Note receivable from former attorney
Kevin Quinn, interest at 8%,
balance due December 31, 1997,
secured by real estate $ 109,764 $ -
Note receivable from CKES, Inc., $3,000,000
face amount, 6% interest per annum, due
in monthly installments of principal
only of $50,000 beginning October 1,
1998, interest and unpaid principal due
and payable on October 1, 2003, (less
unamortized discount based on 12%
imputed interest of $753,985 and
$1,202,220 of loan impairment) $1,043,795 -
38
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
F. Notes Receivable: (continued)
1996 1995
---------- ----------
Note receivable from Yafa, Inc., 9%
interest per annum, due in monthly
installments of $2,000, accrued
interest and unpaid principal due
and payable on or before August 15,
1999. 171,000 -
---------- ----------
Total 1,324,559 -
Less current portion 133,764 -
---------- ----------
$1,190,795 $ -
========== ==========
G. Income Taxes:
As discussed in Note A, the Company accounts for income taxes in
accordance with SFAS 109. The provision for income taxes for the year
ended December 31, 1996 consists of the $800 minimum California
franchise tax and $100 minimum Utah tax for both 1996 and 1995.
Provisions for income taxes are summarized as follows:
Year ended
--------------------------
December 31, December 31,
1996 1995
----------- -----------
Current income taxes $1,800 $ -
Deferred income taxes - -
------ ------
Provision for income taxes $1,800 $ -
====== ======
39
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
G. Income Taxes (continued):
As a result of adopting SFAS 109, the Company has recognized deferred tax
assets for the tax effects of temporary differences for the years ended
December 31, 1996 and 1995 as follows:
1996 1995
--------- ---------
Deferred tax assets:
Net operating losses $ 569,592 $ 248,000
--------- ---------
Gross deferred tax assets 569,592 248,000
Valuation adjustment (569,592) (248,000)
--------- ----------
Net deferred tax assets $ - $ -
========= =========
The Company has net operating loss carryforwards remaining of
approximately $2,344,000. The regular net operating loss carryforwards,
which are approximately the same as the alternative net operating loss
carryforwards, if not utilized, will expire in varying amounts through
2011.
H. Commitments and Contingencies:
Operating Leases
The Company leases its facilities under an operating lease agreement from
Larry M. Mitobe which expires in May, 2001. Rental expense for the year
ended December 31, 1996 was $27,732.
Minimum future rental payments under the operating lease are as follows:
December 31, Amount
------------ --------
1997 $ 17,220
1998 22,140
1999 24,600
2000 24,600
2001 10,250
--------
Total future rental payments $98,810
========
40
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
H. Commitments and Contingencies:(continued)
Consulting Agreement
On December 30, 1996 the Company has entered into a consulting agreement
with American Equities, LLC (American Equities), a California Limited
Liability Company. The Company intends to acquire, manage and develop a
real estate portfolio including office, retail, industrial and
multi-family properties and raw land. The consulting period expires on
December 31, 2001. The minimum performance requirements of the
consulting agreement will increase assets and/or market capitalization
of Harcourt Companies, Inc. by at least $50,000,000 by December 31,
1997.
Pursuant to the terms of the agreement the Company issued 1,000,000
shares at $1.50 per share as an advance against future fees to be earned
by American Equities. The Company also advanced 300,000 shares at $0.50
per share to American Equities for future operating expenses. Both
transactions have been discounted due to the restriction on the shares
issued.
I. Supplemental Cash Flow Information:
1996 1995
---------- ---------
Cash paid for interest and income
taxes:
Interest $ - $ 9,524
Income taxes $ 900 $ -
Noncash investing and financing
activities:
Common stock issued for inventory $ 191,414 -
Common stock issued for interest
in gold claims $5,974,020 -
Treasury stock acquired $ 418,618 -
Common stock issued to settle
liabilities $ 109,589 -
Common stock issued for purchase of
Peony Gardens $9,920,000 -
Common stock issued for brokerage fees $2,012,500 -
Common stock issued for converting
debt to equity $ 212,500 -
Common stock issued for prepayment of
Consulting fees $ 900,000 -
Note received for sale of subsidiary $1,043,795 -
41
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
J. Capital Stock:
In April 1995, the Company's Articles of Incorporation (Articles) were
amended to authorize the issuance of preferred stock. As amended, the
Articles provide that the total number of shares of stock which the
Company shall have the authority to issue is 60,001,000, consisting of
50,000,000 shares of Common Stock, $0.001 par value; 1,000 shares of
original preferred stock having a par value of $0.01 per share (the
Original Preferred Stock); and 10,000,000 shares of Preferred Stock,
having a par value of $0.01 per share (the Class A Preferred Stock).
Original Preferred Stock
Until December 31, 2010, with respect to the election of directors,
holders of Original Preferred Stock shall be entitled to elect that
number of directors which constitutes three-fifths (3/5ths) of the
authorized number of members of the Board of Directors and, if such
three-fifths (3/5ths) is not a whole number, then the holders of
Original Preferred Stock shall be entitled to elect the nearest higher
whole number of directors that is at least three- fifths (3/5ths) of
such membership.
The holders of shares of Original Preferred Stock shall not be entitled
to receive any dividends.
The holders of record of shares of Original Preferred Stock shall, at
their option, be entitled to convert each share of Original Preferred
Stock into 1,000 shares of fully paid and non-assessable Common Stock.
Such shares are owned by the President of the Company.
In the event of liquidation, dissolution, or winding up of the affairs
of the Company whether voluntary of involuntary, the holders of record
shall be entitled to be paid the full par value of Original Preferred
Stock, and no more.
J. Capital Stock: (continued)
Class A Preferred Stock
The 10,000,000 shares of authorized and unissued Class A Preferred Stock
may be split with such designations, powers, preferences and other
rights and qualifications, limitations and restrictions thereof as the
Company's Board of Directors elects for a given series. To date, only
one series has been authorized with defined rights and privileges
(Series B Preferred Stock). No shares have been issued.
On August 2, 1996 the Company effectuated a one for five (1:5) reverse
stock split. The effect of this event has been restated retroactively on
the statement of stockholders' equity.
42
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
K. Stock Option Plan:
In April 1995, the Company adopted a stock option plan (the Plan) to
attract and retain qualified persons for positions of substantial
responsibility as officers, directors, consultants, legal counsel, and
other positions of significance to the Company. The Plan provides for
the issuance of both Incentive Stock Options and Non - Qualified Stock
Options. The Plan, which is administered by the Board of Directors,
provides for the issuance of a maximum of 2,000,000 options to purchase
shares of common stock at the market price thereof on the date of grant.
Such options are generally exercisable over a 10 year period from the
date of grant. Each option lapses 90 days after the optionee has
terminated his continuous activity with the Company, except that if his
continuous activity with the Company terminates by reason of his death,
such option of the deceased optionee may be exercised within one year
after the death of such optionee. Options granted under the Plan are
restricted as to sale or transfer. No options have been granted under
this plan as of December 31, 1995. One million shares of common stock
options were granted to an officer of Hartcourt Companies, at $0.50 per
share as of December 31, 1996.
These options expire December 31, 2004.
L. Warrants:
As of December 31, 1996 there are 2,000,000 outstanding warrants to
purchase 2,000,000 shares of $.001 par value common stock at $0.30 -
$2.10 per share. No warrants have been exercised as of December 31,
1996.
M. Foreign Operations:
Selected financial data for the Company's foreign operations is as
follows:
September 27, 1996 December 31, 1995
------------------ -----------------
Revenues $ 458,236 $ 249,784
Operating loss $(2,132,168) $ (1,499,598)
Total assets $ 9,228,255 $ 10,366,707
N. Stock Subscription Agreements:
In October 1996 the Company entered into two stock subscription
agreements. Terms of the agreement include that the subscribers can
purchase up to 20,000 common shares of Hartcourt Companies, Inc. per
month for 12 months at $0.50 per share.
43
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
O. Forgiveness of Debt:
During 1996 the Company recognized debt forgiveness of $367,983 relating
to several notes owed to three vendors and $16,752 in accounts payable
owed to one additional vendor, which were forgiven.
P. Subsequent Events:
On April 8, 1997 the Company entered into a preliminary stock purchase
agreement with Michael V. Caruana, officer and owner of Pego Systems,
Inc. The Company intends to acquire all outstanding shares of Pego
Systems, Inc. The parties are negotiating final terms of this agreement
and estimates completion of the transaction mid - year 1997.
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
None
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
The following table sets forth certain information about the directors and
executive officers of the Company.
Name Age Position
- ---- --- --------
Dr. Alan V. Phan 51 Chairman of the Board, President,
Chief Executive Officer
and Chief Financial Officer
Frederic Cohn 57 Secretary, Treasurer and Director
Kenneth Silva 70 Vice-President, Marketing
and Sales and Director
Michael L. Caruana 53 Director
James De Rosa 65 Director
Dr. Alan V. Phan is the founder of the Company and has been Chairman, President,
Chief Executive Officer and Chief Financial Officer since November 1993. He also
is the founder of Harcourt Investments and Hartcourt Pen. See Part I, Item 1,
"Description of Business--General." From 1986 to October 1993, Dr. Phan was the
44
<PAGE>
owner of Hartcourt Consulting, an export management firm and, from 1980 to 1986,
he was the Executive Vice President of EM Kay Group (which owned Magic Marker
Industries). In addition to his activities in the export and writing instrument
business, Dr. Phan has been involved in gold mining operations, as manager in
the Phillippines (1971-1972) for Eisenberg Group, a company located in Israel.
He was active in the real estate industry from 1976 until 1982 as owner of Alpha
Development, a California real estate company. Dr. Phan received his academic
training and degrees at Pennsylvania State University (1967), and Sussex College
of Technology, Sussex England (1975).
Frederic Cohn has been a director and Secretary since November 1993. He is
responsible for all financial, tax, accounting, personnel, management
information system and administrative functions. From 1990 to 1993, Mr. Cohn was
the President and Chief Executive Officer of Aladdin Enterprises, Inc., an
entertainment equipment leasing firm, located in Santa Monica, California. Mr.
Cohn is a graduate of New York Law School (1978).
Kenneth Silva has been Vice President, Sales and Marketing and a director, since
January 1996. Prior to joining the Company, Mr. Silva was a Vice President and a
Manager for a number of banks, including Capital National Bank (two years), Bank
of Downey (four years), Interstate Bank (10 years), and 22 years at Wells Fargo
Bank where he served as Vice President of Business Development. Mr. Silva holds
a B.A. degree in accounting and banking from Armstrong College in San Francisco,
California (1964), and attended graduate courses at American Institute of
Banking.
Michael L. Caruana has been a director since June 1994. Mr. Caruana is a
graduate of California State University at Long Beach (1972) with a degree in
engineering. He currently is the President, Chief Executive Officer and majority
owner of Pego Systems, Inc., an engineering and industrial equipment
manufacturing company, and has held various positions with Pego since 1975. See
Part I, Item 1, "Description of Business--General" and Part III, Item 12,
"Certain Relationships and Related Transactions."
James De Rosa has been a director of the Company since September 1996. A
graduate of Tufts College (1960), and Suffolk Law School, Boston, Massachusetts
(1963), Mr. De Rosa is a Real Estate investor and developer and has been active
in the real estate business since 1974. Mr. De Rosa is President of De Rosa
Properties, Inc.
Directors serve for a term of one year or until their successors are elected and
qualified. Directors do not receive any cash compensation for serving as such,
although the Company is contemplating the adoption of a plan to compensate
directors through the issuance of shares of Common Stock. The terms of such a
plan currently are under consideration and there can be no assurance as to when,
if ever, it will be implemented.
Executive officers are appointed by and serve at the will of the Board of
Directors. There are no family relationships between or among any of the
directors or executive officers of the Company.
45
<PAGE>
As the sole holder of the 1,000 outstanding shares of Original Preferred Stock,
Dr. Phan is entitled to elect 3/5 of the number of members of the Company's
Board of Directors, whereas the holders of the outstanding shares of Common
Stock are entitled to elect 2/5 of that number. See Part I, Item 8, "Description
of Securities" for more information about the rights of the Common, and Original
Preferred stockholders.
By virtue of his activities in founding and organizing the Company, as well as
his beneficial ownership of its voting securities, Dr. Phan may be deemed to be
a "promoter" of the Company.
Item 10. Executive Compensation.
The following summary compensation table sets forth certain information
regarding compensation paid during each of the three fiscal years ended December
31,1996, 1995 and 1994 to the person serving as the Company's Chief Executive
Officer during the years ended December 31, 1996. No annual compensation in
excess of $100,000 was awarded to, earned by or paid to any director or
executive officer of the Company for services rendered in any/all capacity/ies
in any of the fiscal years indicated.
Name and Principal Position Fiscal Year Annual Salary
- --------------------------- ----------- -------------
Dr. Alan V. Phan, Chief Executive Officer 1996 $100,000
1995 $ 70,000
1994 $ 35,000
There is no employment agreement with any executive officer. There are no
salary, bonus or incentive plans covering cash or securities except the
Company's 1995 Stock Option Plan (the "Plan"). Under the Plan, incentive and
non-qualified stock options may be granted to directors, officers and key
employees to purchase up to 2,000,000 shares of Common Stock at an option price
not less than the fair market value of the stock at the time the option is
granted; the option period shall not exceed ten years from the date of grant.
Except in the case of the death or disability of an option holder, vested
options lapse 90 days following termination of continuous employment by the
Company. Vested options lapse one year after the death or disability of an
option holder. No options have been granted under the Plan.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information as of December 31, 1996 with respect
to persons known to the Company to be the beneficial owners of more than 5% of
its voting securities and with respect to the beneficial ownership of such
securities by each director of the Company and by all directors and executive
officers of the Company as a group.
46
<PAGE>
Name and Address of Amount and Nature of Percent of
Beneficial Owner Beneficial Ownership (1) (2) Common Stock
- ------------------- ---------------------------- ------------
Dr. Alan V. Phan 1,478,878 (3) 14.0%
19104 South Norwalk Boulevard
Artesia, California 90701
Frederic Cohn 1,609 *
19104 South Norwalk Boulevard
Artesia, CA 90701
Michael L. Caruana 1,609 *
19104 South Norwalk Boulevard
Artesia, CA 90701
James De Rosa 1,609 *
19104 South Norwalk Boulevard
Artesia, CA 90701
Philadep & Co. 617,989 (8) 5.8%
P.O. Box 15891
Philadelphia, PA 19103-0891
CEDE & Co. 536,351 (7) 5.1%
55 Water Street 2SL
New York, NY 10041
Tiana Corporation 1,022,949 (4) (5) 9.7%
Kai Tak Commercial Building
Room 704A
317 Des Voeux Road Central
Hong Kong, China
NuOasis International, Inc. 4,000,000 (6) 37.8%
2 Park Plaza, Suite 470
Irvine, California 92714
All officers and directors
as a group 1,483,705 14.1%
___________________
*Less than 1%
(1) Except as otherwise indicated, each of the parties listed has sole
voting and investment power with respect to all shares of Common Stock
indicated. Beneficial ownership is calculated in accordance with Rule
13-d-3(d) under the Securities Exchange Act of 1934, as amended.
(2) Except as otherwise indicated, shares held are Common Stock.
47
<PAGE>
(3) Includes (i) an aggregate of 1,000,000 shares issuable upon conversion
of 1,000 shares of Original Preferred Stock and (ii) an aggregate of
171,718 shares held by two sons who reside with Dr. Phan when not
attending college and law school, respectively. the sole holder of the
1,000 outstanding shares of Original Preferred Stock, Dr. Phan is
entitled to elect 3/5 of the number of members of the Company's Board
of Directors.
(4) As the owner of 20,000 shares of stock in Tiana corporation, Dr. Alan
V. Phan's son, Art Phan, holds a 20% interest in Tiana Corporation.
Dr. Phan disclaims any beneficial ownership in these shares.
(5) Tiana Corporation is a British Virgin Islands corporation owned
20% by Art Phan, 80% by Tan Geok Ser in Singapore and various Asian
business groups located in Hong Kong, Singapore, Malaysia, and
Indonesia.
(6) In August 1996 the Company purchased an apartment complex located near
Beijing, China for $22 million from NuOasis International, Inc. (a
wholly owned subsidiary of Nona Morelli's II). The purchase price
included the issuance of 4 million shares of common stock, valued at
$10 million, and a promissory note to NuOasis for $12 million. The Note
is due and payable on August 17, 1997 or, if construction is not
complete, then the note is extended to the date the certificate of
occupancy is received. NuOasis is a non-affiliate of the Company.
(7) CEDE & Co. Is a deposit trust corporation (stock brokerage company).
(8) Philadep & Co. is a deposit trust corporation (stock brokerage
company).
The Company is not aware of any arrangement which might result in a change in
control in the future.
Item 12: Certain Relationships and Related Transactions
Dr. Alan Phan, a director, executive officer and promoter of the Company,
acquired ten shares of Hartcourt Investments for nominal consideration upon its
organization in April 1993. Pursuant to a stock exchange agreement dated August
8, 1994 with Eastern Rocester Limited, Harcourt Investments acquired a 60%
interest in the Xinhui JV in exchange for 250,000 shares of Harcourt Investments
common stock, representing 80% of the common stock of Harcourt Investments
outstanding immediately subsequent to the transaction. After giving effect to
this transaction, Harcourt Investments was held 80% by Eastern Rocester Limited,
3% by Dr. Phan and 18% by Pacific Rim Capital. See Part I, Item I, "Description
of Business--General" and Part III, Item 9, "Directors, Executive Officers,
Promoters and Control Persons."
48
<PAGE>
The Company acquired all of the outstanding shares of Harcourt Investments in
exchange for 6,110,337 shares of the Company's Common Stock pursuant to an
Agreement and Plan of Reorganization dated November 5, 1994. In connection with
this transaction, Dr. Phan received 38,625 of such shares. Michael Caruana, who
currently serves as a director of the Company, was Vice President of the Company
at the time of this transaction. See Part I, Item 1, "Description of
business--General" and Part III, Item 9, "Directors, Executive Officers,
Promoters and Control Persons.
Dr. Phan acquired ten shares of Hartcourt Pen for nominal consideration upon its
organization in October 1993. All of the outstanding shares of Hartcourt Pen
were acquired by the Company pursuant to an Agreement and Plan of Reorganization
dated December 1, 1994. As the sole stockholder of Hartcourt Pen, Dr. Phan
received all 38,625 shares of the Company's Common Stock and 1,000 shares of
Original Preferred Stock issued by the Company in connection with this
transaction. See Part I, Item 1, "Description of Business--General" and Part
III, Item 9, "Directors, Executive Officers, Promoters, and Control Persons."
During 1994 and 1995, the Company made advances in the aggregate amount of
$168,575 to the Company's joint venture partner in the Xinhui JV. All of these
advances are non-interest bearing and due on demand. These advances were
additional monies lent to Xin Hui which were converted to capital contributions.
During 1994 and 1995, Pacific Rim Capital ("Pacific Rim"), a non-affiliated
financier for the Company advanced a total of $272,416 to the Company. The
advance was unsecured, bearing interest at the rate of 24% per annum and subject
to no fixed repayment terms. On September 30, 1996, Pacific Rim agreed to
convert this loan for 425,000 shares at $0.50 per share of the Company's Common
Stock.
In June 1995, the Company entered into an Agreement and Plan of Reorganization
with Pego Systems, Inc. to acquire all of the outstanding shares of Pego common
stock in exchange for 1,500,000 shares of the Company's Class A Preferred Stock.
The transaction was terminated prior to its completion. The owner of Pego,
Michael L. Caruana is a current director of the Company. See Part II, Financial
Statements, "Consolidated Financial Statements, years ended December 31, 1996
and 1995 - Notes to Financial Statements, "Item H" Commitments and
Contingencies".
In August 1996 the Company purchased an apartment complex located near Beijing,
China $22 million from NuOasis International, Inc. (a wholly owned subsidiary of
Nona Morell's II). The purchase price included the issuance of 4 million shares
of common stock, valued at $10 million, and a promissory note to Nuoasis for $12
million. The Note is due and payable on August 17, 1997 or, if construction is
not complete, then the note is extended to the date the certificate of occupancy
is received. NuOasis is a non-affiliate of the Company. Under the deposit method
of accounting in accordance with Financial Accounting Standards No. 66 the
promissory note for $12,000,000 is currently being deferred until the complete
consummation of the Peony Gardens sale. Also the 4 million shares of common
stock is recorded as a deposit at December 31, 1996.
49
<PAGE>
PART IV.
Item 13. Exhibits and Reports on Form 8-K
The following list describes the exhibits filed as part of this Annual Report
Form 10-KSB.
Exhibit No. Description of Document
- ----------- -----------------------
2.01 Agreement and Plan of Reorganization, dated November
5, 1994 among Stardust,
Inc.-Production-Recording-Promotion, Harcourt
Investments (USA) Inc. ("Harcourt USA") and the
shareholders of Harcourt USA. (1)
2.02 Agreement and Plan or Reorganization dated December
1, 1994 Among Harcourt USA. The Hartcourt Pen
Factory, Inc. ("Hartcourt Pen") and the Hartcourt
Pen shareholder. (1)
3.01 Articles of Incorporation of the Company, as
amended. (1)
3.02 Bylaws of the Company. (1)
3.03 Amendment to the Bylaws of the Company. (1)
4.01 Articles of Amendment to Articles of Incorporation
of the Company regarding the Creation of Preferred
Stock and the Statement of Rights and Preferences of
Common Stock, Original Preferred Stock and Class A
Preferred Stock. (1)
10.01 Lease between the Company and Larry M. Mitobe for
the Company's headquarters facility, dated April 9,
1996. (1)
10.02 Equipment Lease between Harcourt USA and Anja
Engineering Corporation, dated April 4, 1994. (1)
10.03 Stock Exchange Agreement between Harcourt USA and
Eastern Rocester, dated August 8, 1994. (1)
10.04 1995 Stock Option Plan. (1)
10.05 Purchase Contract between The Hartcourt Companies,
Inc. and Exceptional Specialty Products, Inc., dated
March 21, 1996. (1)
10.06 Purchase and Sale Agreement, dated August 8, 1996,
between The Hartcourt Companies, Inc. and NuOasis
International, Inc., and Addendum to Purchase and
Sale Contract. (1)
50
<PAGE>
10.07 Convertible Secured Promissory Note, dated August 8,
1996, in connection with Purchase and Sale
Agreement, dated August 8, 1996 between The
Hartcourt Companies, Inc. and NuOasis International,
Inc. (1)
10.08 Convertible Secured Promissory Note, dated August 8,
1996, in connection with Purchase and Sale
Agreement, dated August 8, 1996 between The
Hartcourt Companies, Inc. and NuOasis International,
Inc., as amended. (1)
10.09 Sales Agreement, dated September 17, 1996, between
The Hartcourt Companies, Inc. and Promed
International, Ltd. (1)
10.10 Sales Agreement, dated September 17, 1996, between
The Hartcourt Companies, Inc. and Mandarin Overseas
Investment Co., Ltd. (1)
10.11 Purchase and Sale Agreement, dated September 27,
1996, between The Harcourt Companies, Inc. and CKES
Acquisitions, Inc. (1)
10.12 Secured Promissory Note, dated September 27, 1996,
in connection with Purchase and Sale Agreement
between The Hartcourt Companies, Inc. and CKES
Acquisitions, Inc. (1)
10.13 Consulting Agreement, dated December 30, 1996,
between Hartcourt Companies, Inc. and American
Equities LLC, a California limited liability
company.
21.01 Subsidiaries of the Company. (1)
23.01 Consent of Independent Certified Public Accountants.
27.01 Financial Data Schedule.
Pursuant to Rule 12b-32 under Securities and Exchange Act of 1934, as amended.
(1) Incorporated by reference to the Registrant's Registration Statement on
Form 10 and exhibits thereto, as filed with the Securities and Exchange
Commission, Registration Number 001-12671 and which was declared effective
on March 24, 1997.
(b) Reports on Form 8-K - none
51
<PAGE>
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT.
The Registrant did not send an Annual Report covering the fiscal year ending
December 31, 1996 nor did it send proxy materials to security holders. If such
report and proxy materials are mailed to security holders, the Registrant shall
furnish to the Commission, for its information, four (4) copies of the Annual
Report to security holders and four (4) copies of the proxy materials.
52
<PAGE>
SIGNATURES
In accordance with Section 13 or 15 (d) of the Securities Exchange Act of 1934,
the registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized.
THE HARTCOURT COMPANIES, INC.
Date: June 24, 1997 By:/s/ Alan V. Phan
-----------------------
Alan V. Phan, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
/s/ Alan V. Phan Chairman of the Board, June 24, 1997
- ------------------ President, Chief Executive
Alan V. Phan Officer and Chief Financial
Officer
/s/ Frederick Cohn Secretary, Treasurer and June 24, 1997
- ------------------- Director
Frederic Cohn
/s/ Kenneth Silva Vice President, Marketing June 24, 1997
- ------------------- and Sales and Director
Kenneth Silva
/s/ Michael Caruana Director June 24, 1997
Michael Caruana
/s/ James De Rosa Director June 24, 1997
- -------------------
James De Rosa
53
Exhibit 10.13
CONSULTING AGREEMENT
This Consulting Agreement (the "Agreement") is entered into on December 30,
1996, by and between Hartcourt Companies, Inc., a Utah corporation and its
subsidiaries or affiliates (the "Company"), and American Equities LLC, a
California limited liability company ("Consultant").
WHEREAS, the Company's desires to acquire, manage and develop a large real
estate portfolio for its real estate division (the "Business"), including, but
not limited to, office, retail, industrial and multi-family properties, and raw
land;
WHEREAS, the Company recognizes that the Consultant can contribute to the
acquisition, management and development of a real estate portfolio;
WHEREAS, the Company believes it to be important both to the future prosperity
of the Business and to the Company's general interest to retain Consultant as an
exclusive consultant to the Company and have Consultant available to the Company
for consulting services in the manner and subject to the terms, covenants, and
conditions set forth herein;
WHEREAS, the Company and Consultant have entered into that agreement dated
December 20, 1996 which contains a summary of the provisions herein (the "Term
Sheet") and hereby desire to more fully document the agreement contained in the
Term Sheet in accordance with the provisions therein; and
WHEREAS, in order to accomplish the foregoing, the Company and Consultant desire
to enter into this Agreement, effective on January 1, 1997, to provide certain
assurances as set forth herein.
NOW THEREFORE, in view of the foregoing and in consideration of the premises and
mutual representations, warranties, covenants and promises contained herein and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto, intending to be legally bound hereby
agree as follows:
1. RETENTION. The Company hereby retains the Consultant during the
Consulting Period (as defined in Section 2 below), and Consultant
hereby agrees to be so retained by the Company, all subject to the
terms and provisions of this Agreement.
2. CONSULTING PERIOD. The Consulting Period shall commence on January
1, 1997 and terminate no earlier than December 31, 2001. After December
31, 2001, either party may terminate this agreement upon at least 30
days written notice.
3. DUTIES OF CONSULTANT. During the Consulting Period, the Consultant
shall use reasonable and best efforts to perform those actions and
responsibilities necessary to analyze, purchase, sell, refinance and
manage real property (the "Services"), throughout the world. Consultant
shall render such services diligently and to the best of its ability.
Consultant shall report to Dr. Alan V. Phan, President. Consultant
54
<PAGE>
shall present various opportunities to the Company, and the Company
shall be under no obligation to accept such opportunities. The Company
shall not retain or hire any other person to perform services similar
or related to the Services, including but not limited to, real estate
brokers, mortgage brokers or property managers. The Company shall
provide all necessary financing required in order to purchase
properties approved by the Company, including cash or freely tradable
or restricted securities. Such securities may include freely tradable
Common Stock, restricted Common Stock, preferred stock in the Company,
debt, convertible debt or any other security.
4. OTHER ACTIVITIES OF CONSULTANT. The Company recognizes the Consultant
shall perform only those services that are reasonably required to
accomplish the goals and objectives set forth herein, and that
Consultant shall provide services to other businesses and entities
other than the Company. Consultant shall be free to directly or
indirectly own, manage, operate, join, purchase, organize or take
preparatory steps for the organization of, build, control, finance
acquire, lease or invest or participate in the ownership, management,
operation, control or financing of, or be connected as an officer,
director, employee, partner, principal, manager, agent,
representative, associate, consultant, investor, advisor or otherwise
with (collectively, be "Affiliated" with), any business or enterprise,
or permit its name or any part thereof to be used in connection with
any business or enterprise engaged in any business, including but not
limited to, any business that is the same as, substantially similar to
or otherwise competitive with, adverse, to affiliated with, or
otherwise related to the Company. Consultant may be Affiliated with any
entity which may provide services to the Company. In the event
Consultant is Affiliated with any entity which proposes to sell real
property to, or purchase real property from, the Company, Consultant
shall disclose the nature of such relationship to the Company prior to
the Company making any decision, and shall obtain the approval of the
Company, which approval shall be conclusively deemed granted upon
written notice from Dr. Alan V. Phan or his or the Company's designated
representative. The Company hereby waives any conflict of interest that
may arise from a relationship between Consultant and any entity which
Consultant is Affiliated with. This Agreement may be assigned by
Consultant to an entity designated by Consultant, whether Affiliated or
not Affiliated with Consultant, and wherever located.
Consultant shall present any real estate project which it is
considering acquiring for its own account first to the Company, and
Consultant hereby grants to the Company an exclusive right to acquire
any such real estate project prior to Consultant making such
acquisition for its own account. In the event that the Company elects
not to go forward with said acquisition of real property, Consultant
may, in and for its own account, acquire said property.
5. COMPENSATION. In consideration for Consultant entering into this
Agreement, the Company shall compensate Consultant as follows:
a. MONTHLY FEES AND BENEFITS:
I. Retainer. The Company shall pay to Consultant a
non-refundable monthly retainer of $5,000.
55
<PAGE>
ii. Expenses. The Company shall pay all such expenses
reasonably incurred during the Consulting Period
by the Consultant for business purposes related to
or in furtherance of the goals and objectives of
the Company and/or the provision of the Services
(collectively, "Company Purposes"), including,
without limitation, expenses incurred with respect
to the Consultant's travel (including business
class travel for flights of less than three hours
and first class travel for flights of three hours
or more), meals and entertainment and other
customary and reasonable expenses for Company
Purposes. The Company shall pay such expenses
directly, or, upon submission of bills, receipts
and/or vouchers by the Consultant, by direct
reimbursement to the Consultant.
iii. Automobile Allowance. The Company shall pay to
Consultant an automobile allowance of $750 per
month, and shall pay for fuel, maintenance and
automobile insurance. The Company acknowledges that
Consultant may have a master automobile insurance
policy covering more than one automobile, and that,
for purposes of this paragraph, Consultant will
reasonably determine the portion of the insurance
premium to be allocated to the automobile used by
Consultant for Company Purposes.
iv. Benefit Plans. Two employees of Consultant, which
shall be designated by Consultant, shall be
entitled to participated in and receive benefits
under any retirement plan, health and dental plan,
disability plan and life insurance plan or employee
benefit plan or arrangement currently or in the
future made available by the Company to its
employees and/or consultants ("Benefit Plans") and
to which Consultant is eligible, in accordance with
the terms, conditions and overall administration of
such Benefit Plans; provided, however, that if
under the terms of any Benefit Plan, the Company
shall provide the Consultant with benefits that are
substantially similar to the benefits that would
have been provided under such Benefit Plan. At the
Company's option, and with at least 30 days notice,
in lieu of providing the benefits under any or all
of the Benefit Plans, the Company may elect to pay
to the Consultant a monthly amount equal to the
Company's cost of providing such benefits to
Consultant. Nothing in this Agreement shall limit
the Company's ability to adopt, terminate or amend
any such benefits at any time provided the
Consultant is provided with benefits that are at
least substantially similar to the benefits
provided prior to such adoption, amendment
56
<PAGE>
or termination. Any Benefit Plans that are
determined according to annual compensation shall
be calculated assuming an annual salary of $250,000
for each of Consultant's two designated employees.
b. Advance. The Company shall pay to the Consultant the
following advance and Warrants (as defined below). The
Warrants and any unearned portion of the advance described in
this section shall not be refundable and shall be considered
earned by Consultant in the event the Agreement is terminated
by the Company, with or without cause.
i. The Company shall transfer or cause to be
transferred 1,000,000 shares of the Company's
common stock (the "Common Stock") as an advance
against future fees to be earned from the
acquisition, sale or refinance of real property, or
any other fees due and payable hereunder. Such
Common Stock shall not be freely tradable. The
Company shall be obligated to prepare and file a
registration statement (the "Registration
Statement") and amendments thereto, with the
Securities and Exchange Commission (the
"Commission") for the registration of the Common
Stock under the Securities and Exchange Act of 1933
(the "Act)") and shall be obligated to cause such
registration statement, and amendments thereto, to
be declared effective by the Commission on or prior
to May 1, 1997. The Company shall be obligated to
the Consultant to continually maintain, at the
Company's own expense, the currency and
effectiveness of such registration statement of the
Company, including the filing of any and all
applications and other notifications, filings and
post effective amendments and supplements
(collectively, the "Current Registration
Statement"), as may be necessary, so as to permit
the resale of the Common Stock until the earlier of
the time that all shares of Common Stock have been
sold pursuant to the Current Registration Statement
or two years from the date of the effectiveness of
the Registration Statement. In lieu of filing such
Registration Statement, the Company may exchange
the Common Stock for common stock of the Company,
which is freely tradable pursuant to a registration
statement filed on Form S-8.
As fees are earned pursuant to paragraph 5(d) below, the advance
will be considered earned at the rate equal to the Bid Price on the
date prior to the date of this Agreement. For example, if the Bid
Price on the date prior to the execution of this Agreement was $3.00,
then the advance will have been earned after the Consultant will have
become entitled to $3,000,000 of fees pursuant to paragraph 5(d)
below.
57
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c. WARRANTS. The Company shall issue warrants to purchase Common
Stock (the "Warrants"), which shall vest immediately, and which
may be exercised by Consultant at any time through the payment
of cash or a promissory note bearing interest at six percent
(6%) per annum, at Consultant's option. The exercise price of
the Warrants shall be based on the closing bid price of the
Common Stock as quoted on the NASDAQ Bulletin Board, or such
other U.S. stock market as it shall be quoted on, on the day
prior to the date of this Agreement (the "Bid Price"). The
Company shall, at its sole expense, cause the Common Stock
underlying the Warrants to be registered with the Securities and
Exchange Commission upon demand, or upon the first registration
of any of the Common Stock of the Company after the date of this
Agreement. In the event the Company issues or sells Common Stock
or any other equity securities of the Company after the date of
this agreement to any party other than Consultant for cash
consideration or non-cash consideration which has a fair value
below the closing bid price as of the date prior to such
issuance or sale, the terms of the Warrants herein shall be
adjusted so as to protect Consultant against any dilution of its
interest in the Common Stock underlying the Warrants. Within
five business days of the execution of this Agreement, the
Company shall issue the following Warrants to Consultant and/or
its assignee:
I. 400,000 Warrants at 20% of the Bid Price
ii. 400,000 Warrants at 40% of the Bid Price
iii. 400,000 Warrants at the Bid Price
iv. 400,000 Warrants at 120% of the Bid Price
v. 400,000 Warrants at 140% of the Bid Price
d. ACQUISITION AND DISPOSITION FEES. The Company shall pay to the
Consultant the following fees for the acquisition or sale of
real property in each year during the Consulting Period, which
fees may be paid in cash or Common Stock at the closing of each
transaction:
I. Six percent (6%) of the first 100,000,000 of gross purchase
or sale price in each year;
ii. Five percent (5%) of the second $100,000,000 of gross
purchase or sale price in each year;
iii. Four percent (4%) of the third $100,000,000 of gross
purchase or sale price in each year;
iv. Three percent (3%) of the fourth $1,000,000 of gross
purchase or sale price in each year;
v. Two percent (2%) of the fifth $1,000,000 of gross purchase
or sale price in each year;
vi. 1%of the aggregate gross purchase and sales prices in each
year during the Consulting Period in excess of $600,000,000
on any one year.
e. PROPERTY MANAGEMENT, ASSET MANAGEMENT AND REFINANCING FEES. The
Company shall pay to Consultant the following fees for services
to be provided:
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i. Management Fee: Six percent (6%) of all gross income
or receipts from all properties owned or controlled by
the Company ("Company Properties"), including, but not
limited to, rental fees, storage fees, application fees and
any other operating income.
ii. Asset Management Fee: One percent (1%) per annum of the
gross value of all real property assets owned by the
Company, including, but not limited to, all Company
Properties.
iii. Refinancing Fee: One percent (1%) of the gross amount of
all refinancings that take place on any of the real
property assets owned or controlled by the Company.
iv. All fees under this section shall be payable monthly
commencing January 1, 1997. In the event the Company shall
defer payment of such fees, for a maximum of six months
from January 1, 1997, the deferred fees shall accrue
interest at 1% per month.
f. THIRD PARTY COMMISSIONS. Consultant and/or its Affiliates shall
be entitled to share in any fees or commissions payable by third
parties on any transaction contemplated herein, including, but
not limited to, real estate or mortgage brokerage commissions
payable by third party sellers or purchasers arising from any
acquisition or sale of real property by the Company (a
"Commission"). The Company hereby waives any conflict of
interest that may arise due to any transaction wherein
Consultant receives such a Commission, including, but not
limited to, any conflict of interest which may arise as a result
of the dual representation by Consultant of the seller or
purchaser of real property on the one hand, and the Company on
the other. The Company acknowledges that, from time to time, the
Consultant may present to the Company as a possible acquisition
real property owned or controlled by Consultant. Consultant
shall fully disclose to the Company the nature of Consultant's
interest in such real property prior to the Company entering
into any agreement to purchase said real property. In cases in
which Consultant owns or controls all or any part of real
property which has been presented to the Company as a possible
acquisition, the Company is encouraged, and shall have the right
to retain an unaffiliated consultant to assist the Company in
evaluating that property only.
6. OFFICE AND STAFF. The Company shall provide Consultant with a
reasonable office and staff, along with the necessary costs and
expenses to carry out the objectives of the Company. Such office and
staff shall be commensurate with the offices and staff reasonably
required by other companies with similar real estate assets and
operations. It is acknowledged that until such time as additional
office space and personnel are needed to service the real estate
operations of, and properties acquired by, the Company, the Company
will provide an executive suite to Consultant in the West Los Angeles
area at an approximate cost of $2,000 per month, plus operating
expenses including, but not limited to, telephone (including cellular),
utility, facsimile and copy machine charges as well as required office
staff.
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<PAGE>
7. TERMINATION. Subject to the cure provisions contained herein, the
Company may terminate the Consulting Period upon written notice for
Cause at any time. Cause shall mean that during the Consulting Period,
the Consultant engaged in gross and willful misconduct that is
materially and significantly injurious to the Company, and, after
written notice of such conduct, Consultant has failed to cease such
conduct within not less than 30 days. Any termination pursuant to this
section shall be communicated by written Notice of Intended
Termination. For purposes of this Agreement, a "Notice of Intended
Termination" shall mean a notice which shall clearly state the specific
termination provision in this Agreement relied upon and shall set forth
in reasonable and specific detail the facts and circumstances claimed
to provide a basis for termination of the Consulting Period. No Notice
of Intended Termination shall be valid unless it is signed by the
entire board of directors of the Company (the "Board").
a. Not less than 15 days after receipt of the Notice of Intended
Termination, Consultant shall have the opportunity to a full,
complete and fair hearing in the presence of the entire Board.
The Board shall present to Consultant its reasons for the
termination, including the specific actions, inactions, omissions
or other facts relied upon by the Board in making its
determination that Consultant has engaged in gross and willful
misconduct and that the Company has the right to terminate this
Agreement for Cause. Consultant shall have the right to rebut any
evidence or allegations of wrongdoing and shall have the right to
be represented by counsel of Consultant's choice at such hearing.
After such hearing, should the Board determine that this
Agreement shall be terminated for Cause, it shall issue a written
Final Notice of Termination to Consultant, signed by all members
of the Board, setting forth in detail the specific facts,
conclusions and findings of the Board in determining that Cause
exists for the termination of this Agreement. The Final Notice of
Termination shall contain an effective termination date, which
effective termination date shall be no less than thirty (30) days
from the date of the Final Notice of Termination.
b. For a term of one (1) year, in the event the Company terminates
this Agreement, then the Company shall pay to Consultant, as
liquidated damages, 87,500 shares of freely tradable Common Stock
for each month or fraction thereof commencing with January 1,
1997 through the effective date of such termination, up to a
maximum of 1,000,000 shares. All compensation paid to Consultant
pursuant to Section 5 hereof shall be deemed earned, including,
but not limited to, the Warrants; provided, however, that after
Company has delivered the liquidated damages as described above,
Consultant shall return to Company the unearned portion of the
1,000,000 shares advanced to Consultant pursuant to Section 5(a).
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<PAGE>
8. NOTICE. Any notice required, permitted or desired to be given pursuant
to any of the provisions of this Agreement shall be deemed to have been
sufficiently given or served for all purposes if delivered in person or
sent by certified mail, return receipt requested, postage and fees
prepaid, or by national overnight delivery prepaid service to the
parties at their addresses set forth above. Copies of notices to
Consultant shall be sent to the attention of Reid Breitman, Esq. at the
address below. Notice to Consultant shall be sent to Consultant at the
address below. Any party hereto may at any time and from time to time
hereafter change the address to which notice shall be sent hereunder by
notice to the other party given under this paragraph. The date of the
giving of any notice sent by mail shall be the day two days after the
posting of the mail, except that notice of an address change shall be
deemed given when received. The addresses of the parties are as
follows:
TO CONSULTANT: With a Copy to:
AMERICAN EQUITIES, LLC Reid Breitman, Esq.
1860 N. Fuller Avenue, #401 Kaye, Scholer, Fierman,
Los Angeles, California 90046 Hays & Handler LLP
Telephone: (213) 850-1478 1999 Avenue of the Stars, 17th Floor
Los Angeles, California 90067
Telephone: (310) 788-1077
TO THE COMPANY:
Dr. Alan V. Phan, President
Hartcourt Companies, Inc.
19104 S. Norwalk Blvd.
Artesia, California 90701
Telephone: (310) 403-1126
Facsimile: (310) 403-1130
9. WAIVER. No course of dealing nor any delay on the part of either party
in exercising any rights hereunder will operate as a waiver of any
rights of such party. No waiver of any default or breach of this
Agreement or application of any term, covenant or provision hereof
shall be deemed a continuing waiver or a waiver of any other breach or
default or the waiver of any other application of any term, covenant or
provision.
10. DEFINITION OF "REASONABLE AND BEST EFFORTS". Reasonable and best
efforts shall not include the payment of any non-reimbursable
out-of-pocket costs or other payments by Consultant. Consultant shall
not guarantee, make any representation concerning (which representation
would survive the closing of any escrow or other transaction) or
warrant (1) the condition, performance, value, or profitability of any
real property purchased, sold by, or otherwise considered for purchase
by the Company; (2) the validity, marketability or insurability of any
title to any real property purchased, sold by, or otherwise considered
for purchase by the Company; (3) the validity, enforceability or value
of any leases of or pertaining to all or any part of any real property
purchased, sold by, or otherwise considered for purchase by the
Company; (4) the market value of any real property purchased, sold by,
61
<PAGE>
or otherwise considered for purchase by the Company; (5) the ability to
finance, refinance or otherwise mortgage or encumber any real property
purchased, sold by, or otherwise considered for purchase by the
Company; or (6) that Consultant will find or present any real property
which the Company will consider, approve or ultimately purchase or be
able to purchase.
11. SUCCESSORS; BINDING AGREEMENTS. Prior to the effectiveness of any
succession (whether direct or indirect, by purchase, merger
consolidation or otherwise) to all or substantially all of the business
and/or assets of the Company, the Company will require the successor to
expressly assume and agree to perform it if no such succession had
occurred. As used in this Agreement, "Company" shall mean the Company
as defined above and any successor to its business and/or assets which
executes and delivers the Agreement provided for in this Section 10 or
which otherwise becomes bound by all the terms and provisions of this
agreement by operation of law.
12. SURVIVAL OF TERMS. Notwithstanding the termination of this Agreement
for whatever reason, the provisions hereof shall survive such
termination, unless the context requires otherwise.
13. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all
of which together shall constitute one and the same instrument. Any
signature by facsimile shall be valid and binding as if an original
signature were delivered.
14. CAPTIONS. The caption headings in this Agreement are for convenience
of reference only and are not intended and shall not be construed as
having any substantive effect.
15. GOVERNING LAW. This Agreement shall be governed, interpreted and
construed in accordance with the laws of the state of California
applicable to agreements entered into and to be performed entirely
therein. Any suit, action or proceeding with respect to this Agreement
shall be brought exclusively in the state courts of the State of
California or in the federal courts of the United States which are
located in Los Angeles, California. The parties hereto hereby agree to
submit to the jurisdiction and venue of such courts for the purposes
hereof. Each party agrees that, to the extent permitted by law, the
losing party in a suit, action or proceeding in connection herewith
shall pay the prevailing party its reasonable attorneys' fees incurred
in connection therewith.
16. ENTIRE AGREEMENT/MODIFICATIONS. This Agreement constitutes the entire
agreement between the parties and supersedes all prior understandings
and agreements, whether oral or written regarding Consultant's
retention by the Company, including, but not limited to, the Term
Sheet. This Agreement shall not be altered or modified except in
writing, duly executed by the parties hereto.
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<PAGE>
17. WARRANTY. The Company and Consultant each hereby warrant and agree that
each is free to enter into this Agreement, that the parties signing
below are duly authorized and directed to execute this agreement, and
that this Agreement is a valid, binding and enforceable against the
parties hereto.
18. SEVERABILITY. If any term, covenant or provision, or any part thereof,
is found by any court of competent jurisdiction to be invalid, illegal
or unenforceable in any respect, the same shall not affect the
remainder of such term, covenant or provision, any other terms,
covenants or provisions or any subsequent application of such term,
covenant or provision which shall be given the maximum effect possible
without regard to the invalid, illegal or unenforceable term, covenant
or provision, the parties hereto intend that there shall be added as
part of this Agreement a term, covenant or provision as similar in
terms to such invalid, illegal or unenforceable term, covenant of
provision, or part thereof, as may be possible and be valid, legal and
enforceable.
IN WITNESS HEREOF, the parties hereto have duly executed and delivered this
Agreement as of the day and year first written above.
AMERICAN EQUITIES LLC HARTCOURT COMPANIES, INC.
By: /s/ Reid Breitman By: /s/ Alan V. Phan
- ----------------------- ---------------------------
Reid Breitman, President Dr. Alan V. Phan, President
63
<PAGE>
ADDENDUM TO CONSULTING AGREEMENT
This Addendum to Consulting Agreement is entered into on December 30, 1996, by
and between Hartcourt Companies, Inc., a Utah corporation and its subsidiaries
or affiliates (the "Company"), and American Equities LLC, a California limited
liability company ("Consultant").
The parties hereby acknowledge that the "Bid Price," as defined in the
Consulting Agreement, is One Dollar and Fifty Cents ($1.50).
IN WITNESS HEREOF, the parties hereto have duly executed and delivered this
Addendum as of the day and year first above written.
AMERICAN EQUITIES LLC HARTCOURT COMPANIES, INC.
By: /s/ Reid Breitman By: /s/ Alan V. Phan
- --------------------------- ---------------------------
Reid Breitman, President Dr. Alan V. Phan, President
64
<PAGE>
December 20, 1996
Dr. Alan Phan
Hartcourt Investments, Inc.
19104 S. Norwalk Blvd.
Artesia, California 90701
Re:American Equities LLC Consulting Agreement
Dear Dr. Phan:
This letter shall clarify certain issues raised by you in connection with the
consulting agreement (the "Consulting Agreement") between American Equities LLC
("American Equities") and Hartcourt Investments, Inc. ("Hartcourt") and shall be
incorporated as part of such Consulting Agreement reached on December 20, 1996.
Hartcourt and American Equities agree to the following:
1. EXCLUSIVITY. All real estate purchases shall be for Harcourt
only. Not to go forward with said property, Consultant agrees
not to purchase said property.
2. MINIMUM PERFORMANCE OBJECTIVE. Consultant shall have increased
the assets and/or market capitalization of Harcourt by a
minimum of $50,000,000 by December 31, 1997. In the event
Consultant shall not meet this minimum performance objective,
Consultant shall return that portion of the 1,000,000 shares
of Common Stock advanced to Consultant, valued at $.50 per
share, which has not been earned pursuant to the terms set
forth in the Consultant Agreement, or shall pay to Hartcourt
the sum equal to the number of shares unearned multiplied by
$0.50. For purposes of the minimum performance objective, the
assets of Hartcourt shall be defined as all assets that
Hartcourt acquires of any kind, including real estate, other
operating companies, all other tangible and intangible assets,
and any increase in the market capitalization of Hartcourt.
The market capitalization as of December 17, 1996 is agreed to
be $18,569,432. Therefore, if the market capitalization of
Hartcourt exceeds $68,569,432 at any time, or if the total
assets of Hartcourt exceeds approximately $82,000,000 at any
time, or, if in the aggregate, the total assets plus market
capitalization of Hartcourt shall exceed $100,500,000 at any
time, this minimum performance objective will have been
satisfied. To the extent any assets are sold or removed from
Hartcourt's balance sheet, this calculation will be adjusted
to the extent of the dollar value of such sale or removal so
as to reduce the minimum performance objective.
3. Expense Cap. Hartcourt shall sell to Consultant 300,000 shares
of restricted Common Stock at $0.50 per share. Hartcourt shall
advance to Consultant $50,000 to be used for the opening and
operating of an office. The initial budget to open said office
shall not exceed $10,000. The parties agree that Hartcourt
shall pay the monthly operating expenses of this office
65
<PAGE>
pursuant to the Consulting Agreement. Hartcourt shall advance
twelve thousand dollars ($12,000) per month towards the agreed
upon budget. Consultant shall advance any portion in excess of
$12,000 per month which shall be reimbursed by Hartcourt upon
approval of such expenses. Any travel expenses, except for
local travel, must be approved in advance by Hartcourt and
will be reimbursed by Hartcourt. Hartcourt agrees to set aside
an additional $100,000 in a segregated account to pay for the
operating expenses of the consultant.
IN WITNESS WHEREOF, the parties hereby agree to this modification of
the Consulting Agreement. All other terms remain the same and are in
full force and effect.
AMERICAN EQUITIES LLC HARTCOURT INVESTMENTS, INC.
By: /s/ Reid Breitman By: /s/ Alan V. Phan
- ---------------------- ---------------------------
Reid Breitman, President Dr. Alan V. Phan, President
66
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the inclusion in this Annual Report Form 10-KSB/A of our report
dated March 18, 1997, on our audits of the consolidated financial statements and
schedules of Hartcourt Companies, Inc. and Subsidiaries ("The Company").
Harlan & Boettger LLP
June 26, 1997
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 822
<SECURITIES> 0
<RECEIVABLES> 1,362,627
<ALLOWANCES> 19,304
<INVENTORY> 311,424
<CURRENT-ASSETS> 1,473,331
<PP&E> 77,223
<DEPRECIATION> 26,414
<TOTAL-ASSETS> 35,426,137
<CURRENT-LIABILITIES> 389,403
<BONDS> 0
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<COMMON> 10,560
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<TOTAL-LIABILITY-AND-EQUITY> 20,623,005
<SALES> 510,692
<TOTAL-REVENUES> 510,692
<CGS> 797,667
<TOTAL-COSTS> 2,040,423
<OTHER-EXPENSES> 394,835
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 443,042
<INCOME-PRETAX> (1,577,938)
<INCOME-TAX> 1,800
<INCOME-CONTINUING> (1,579,738)
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