SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(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, 1997
Commission file number 001-12671
THE 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
562-403-1126
(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: $4,723,905
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 8, 1998, $14,027,830.
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 8, 1998, there were 16,466,103 shares of common stock
outstanding.
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THE HARTCOURT COMPANIES, INC.
1997 Form 10-KSB Annual Report
Table of Contents
Page
PART I
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Item 1.Description of Business 3
Item 2.Description of Property 9
Item 3.Legal Proceedings 11
Item 4.Submission of Matters to a Vote of Security Holders 11
PART II
Item 5. Market for Common Equity and Related Stockholder Matters 11
Item 6.Management's Discussion and Analysis or Plan of Operation 15
Item 7. Consolidated Financial Statements 20
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 52
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 52
Item 10. Executive Compensation 54
Item 11. Security Ownership of Certain Beneficial Owners and
Management 54
Item 12. Certain Relationships and Related Transactions 56
PART IV
Item 13. Exhibits and Reports on Form 8-K 57
Signatures 61
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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").
Pego Systems, Inc. ("Pego") and Electronic Components and Systems, Inc. ("ECS").
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. Through
1995, the Company conducted certain limited research and development activities
in the United States, but has not engaged in any domestic manufacturing
activities.
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. Currently, the Company's primary objective is to acquire
established operating companies with histories of growth and profitability. 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 (562) 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
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operational by July 1995. By July 1996, the plant was operating at approximately
20% of its capacity and employed approximately 80 people. It was estimated by
management that additional working capital in the amount of approximately
$3,000,000 would be required to permit the plant to operate at full capacity
(300,000,000 pens annually). There was 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 Scripto-Toaki
Corporation ("Anja"), for the use of five special ball pen assembly machines by
the Xinhui JV. The lease provided 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 have
ranged from zero, if annual purchases were in excess of $1,000,000, to $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 Xinhui JV to the Company and arrived in January 1997. The
Company and Anja agreed to terminate the lease upon delivery of the machinery to
Anja and pay Anja a termination fee of $200,000. Terms of the Termination
Agreement call for the Company to pay $100,000 in May 1998 and thereafter,
quarterly payments of $6,414.72, including 10% interest, over five years.
In September 1996, CKES Acquisitions, Inc. ("CKES"), a corporation organized
under the laws of the State of Nevada in September 1996, a non-affiliate,
acquired the Xinhui JV of the Company's wholly-owned subsidiary Hartcourt
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.
Ownership in the joint venture was transferred to CKES in return for a Secured
Promissory Note in the principal sum of $3,000,000, payable monthly, beginning
October 1998, 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 principal payments of $2,000 with the remaining balance due and
accrued interest at 9% per annum in full on August 15, 1999. To date, all
payments have been made pursuant to the settlement agreement.
Pursuant to a Purchase Contract dated March 21, 1996, between the Company and
Exceptional Specialty Products, Inc., a California corporation and
non-affiliate, 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, however, the
Company is currently seeking overseas importers, primarily in China, to purchase
all 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
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purchase price consists of a Convertible Secured Promissory Note granted to
NuOasis, in the principal amount of $12,000,000, a security interest in the
property 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 Agreement 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 was
anticipated by the Company that the project would 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. As of December 31,
1997, the project is still incomplete because the developer has elected to wait
a period of time for the Beijing real estate market to return to conditions
which existed prior to the recent Asian financial crisis. 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 to 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 to this
additional amount.
When it becomes financially feasible, the Company intends to obtain the services
of an independent geo-survey company to prepare detailed geo-maps of 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, $10,000,000, 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
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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, 1997
and 1996 --Notes to Consolidated Financial Statements," Note R. "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.
In July 1997, the Company entered into an agreement with Capital Commerce, Ltd.
("Capital") (as Isle of Man Corporation) whereby Capital agreed to provide the
Company $6,000,000 in free trading securities for the purchase of Pego Systems,
Inc. and the formation of Electronic Components and Systems, Inc., a Nevada
corporation. In consideration for the $6,000,000 in securities, the Company
issued to Capital. $4,000,000 in Series A and $2,000,000 in Series B, both 9%
convertible preferred stock. See Part II, F/S "Consolidated Financial
Statements, Years Ended December 31, 1997 and 1996 - Notes to Consolidated
Financial Statements," Notes D and T, "Marketable Securities" and "Capital
Stock, respectively.
In March 1997, the Company entered into an agreement with DanAllen Investments,
Inc. (DanAllen) to provide investment banking services to the Company. DanAllen
will make recommendations on the Company's merger and acquisition activities,
especially on financing structure and options. DanAllen will also assist in the
due diligence and negotiation process. The Company issued to DanAllen 100,000
common stock shares, at $1.50 per share, for these services to be performed.
In July 1997, the Company agreed to purchase a shopping center located in
Perris, California called Freeway Plaza for a total purchase price of $6.75
million. The building complex has 85,000 square feet with 82 percent leased and
an average income of $620,000 per year. Terms of the transaction include,
$25,000 cash down payment, bank financing of $3,725,000, and 34 of the Company's
68 mineral lease gold lode claims, valued at $3,000,000. As of December 31,
1997, the transaction is in escrow pending the availability of bank financing.
On October 3, 1997, the Company purchased the outstanding shares of Pego
Systems, Inc., a California corporation (Pego) where Pego became a wholly-owned
subsidiary of the Company. Pego, a manufacture's representative organization for
air and gas handling equipment, offers a full line of value added services
including distribution, service and manufacturing of custom process equipment
packages. The acquisition was accounted for using the purchase method of
accounting. In connection with the purchase, the Company paid $500,000 in cash,
issued 450,000 shares of restricted common stock, 1,500 shares of Series "C"
redeemable preferred stock, and entered into a non-compete agreement with Pego's
majority shareholder and director of the registrant. Total value of transaction
was approximately $2,300,000.See Part II, F/S, "Consolidated Financial
Statements, Years Ended December 31, 1997 and 1996 - Notes to Consolidated
Financial Statements, Notes C and T, "Investments and Business Acquisitions" and
"Capital Stock", respectively.
On October 28, 1997, the Company through a wholly-owned subsidiary, acquired
Electronic Components and Systems, Inc., an Arizona Corporation (ECS) and Pruzin
Technologies, Inc., an Arizona corporation , a related entity of ECS. The
acquisition was structured as a tax-free reorganization and was accounted for
using the purchase method of accounting. In connection with the acquisition, the
Company paid $250,000 in cas, issued a note payable for $250,000, issued 3,400
shares of Series "D" convertible preferred stock and 2,500,000 of its common
stock shares. Total value of the transaction was approximately $9,500,000. See
Part II, F/S, "Consolidated Financial Statements, Years Ended December 3, 1997
and 1996 - Notes to Consolidated Financial Statements", Notes C and T,
"Investments and Business Acquisitions" and "Capital Stock", respectively.
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ECS specializes in high technology contract manufacturing and assembly of
printed circuit boards, phone and cable wires. ECS has three facilities, and
contracts with a maquiladora in the free trade zone in Sonora, Mexico. Annual
revenues of ECS are approximately $14 million.
Except for limited operations involving the manufacturer and distribution of
writing instruments in the United States through Hartcourt Pen and its newly
acquired manufacturing businesses, Pego and ECS, 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 operating companies and real property for
potential acquisition. The Company's future business, including expansion of its
current limited operations and acquisition plans requires additional equity
and/or debt financing, which may not be available in a timely manner, on
commercially reasonable terms, or at all.
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, Hartcourt Pen, Pego
and ECS.
See Part I, Item 2, "Description of Property," for information about the
Company's facilities.
Principal Products, Distribution and Competitive Conditions
The Company includes three subsidiaries, operating three different unrelated
businesses - ECS specializes in higher technology contract manufacturing and
assembly of printed circuit boards, phone and cable wires, coil winding and
plastic injection parts. ECS is also a pioneer in the new technology of
ball-grid array connection for the semi-conductor industry. ECS maintains
manufacturing operations under maquiladora agreements in Nogales, Mexico. The
sole owner of the maquiladora is also the President of ECS and shareholder of
the Company. A substantial amount of ECS's cables and electronic components are
manufactured and assembled at the Mexico facility by the maquiladora. ECS has
smaller manufacturing facilities in Tucson and Chandler, Arizona and a
distribution facility in Nogales, Arizona.
Pego is a manufacturer's representative organization and also offers a full line
of value added services including distribution, service, and the manufacturing
of custom process equipment packages. The Company's primary focus is air and gas
handling equipment. Key applications for the products and services that Pego
Systems sell include pneumatic conveying, combustion process air, wastewater
secondary treatment applications of aeration and digester gas mixing, bottle and
can drying, contaminated soil vapor extraction, and landfill gas handling.
Pego's markets include the Petro-Chemical industry combustion process air,
wastewater secondary treatment applications of aeration and digester gas mixing,
bottle can drying, contaminated soil vapor extraction, and landfill gas
handling. Pego's markets include the Petro-Chemical industry, most processing
companies, food industry, brewing industry, cement plants and many general
industrial operations, as well as waste water treatment plants. The
environmental market for pollution control through vapor extraction and other
means is emerging as an area of major focus for Pego.
Hartcourt Pen distributes a wide range of writing instruments from low cost,
popular pens to high-price luxury pens. Popular pens include ball-point pens,
roller pens, white board markers, water color markers, permanent markers,
highlighters, and magic ink pens. Luxury pens include sterling silver fountain
pens, and a variety of ball-point and roller pens made of brass or stainless
steel.
Management believes that the materials and equipment used in the assembly, of
all 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.
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The Company believes that the markets for its broad range of products are
relatively fragmented and highly competitive. 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 and Mexico
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 resulting changes in the Chinese economy, could significantly
adversely 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.
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.
Under the maquiladora program with the Mexican affiliate, the Company advances
cash to the affiliate for operating expenses. The Company provides the raw
materials, production machinery and equipment for manufacture and assembly. It
is reasonably possible that operations located outside an entity's home country
will be disrupted in the near term, however remote.
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 two full-time employees at its principal executive
offices in the United States. Hartcourt Pen is located at this headquarters
location. The executive offices provide corporate administrative services. Pego
employs thirty-four full-time people at its two sites located in Long Beach and
Novato, California.
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ECS has sixty total and fifty-seven full-time employees at its three locations
in Chandler, Tucson and Nogales, Arizona.
Research and Development
The Company has conducted 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, 1996 and 1997, $0 and $0, respectively, was expended in
connection with such activities. Management does not anticipate incurring any
significant costs for research and development in the near term.
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. 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.
ECS operates from three facilities throughout Arizona. The location, site size
and terms, if leased are as follows:
Chandler, Arizona - 6532 W. Flint Street, Chandler, AZ 85226 - 16,240
square feet office and production facility. Lease payments of $12,000
per month triple net expiring November 2001.
Tucson, Arizona - 2,520 N. Coyote Drive, Tucson, AZ 85745 - 20,800
square feet office and production facility. Lease payments of $9,547,
including taxes per month, with annual increases of 5%. Lease expires
March 2001.
Nogales, Arizona - 137 E. Baffert Drive, Nogales, AZ 85621 - 37,000
square feet office and warehouse facility. Lease is month to month with
monthly payments of $9,113 including insurance and taxes.
Pego operates out of two facilities. The principal manufacturing building is
located at 1196 E. Willow Street, Long Beach, California. The Long Beach
building has 23,000 square feet and was purchased by Pego in 1995 for
$1,250,000. Pego owes $1,200,000 on the first mortgage which is payable monthly,
$9,543 principal and interest over 20 years. Additionally, Pego leases a 2,700
square foot office/warehouse facility at 42 Digital Drive, #1, Novato,
California. The terms include monthly payments of $1,800 per month, adjusted
annually for cost of living, expiring May 2003.
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 entered into an agreement to purchase 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.
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 1997, the project is still uncompleted at the option of the
developer due to the current real estate market conditions caused by the Asia
financial crisis. 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. Presently, 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. Presently, the property is not
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."
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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.
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 are 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,
$10,000,000, the Company intends to complete the transaction to purchase the
gold lode claims and 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, 1997 and 1996:
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<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
High Bid Low Bid High Asked Low Asked
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
- ------------------------------------------------------------------------------------------------------------------------------
March 31, 1997 3.00 1.50 4.00 3.00
- ------------------------------------------------------------------------------------------------------------------------------
June 30, 1997 3.125 2.25 3.375 2.6875
- ------------------------------------------------------------------------------------------------------------------------------
September 30, 1997 2.375 .6875 2.6875 .875
- ------------------------------------------------------------------------------------------------------------------------------
December 31,1997 3.125 .875 3.375 1.00
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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, 1997, 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 450,000 and 170,000 outstanding Rule 144 shares exist at
December 31, 1997 and 1996 held by principal and directors, respectively.
As of December 31, 1997 and 1996 there were 421 and 428 holders of the Company's
common stock, respectively. 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.
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
12
<PAGE>
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 Xinhui
and to expedite completion of molds.
On June 3, 1996, the Company issued a total of 1,267 shares of its common stock
for the purchase of inventory valued at $30,145 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 94 shares of the Company's common stock to
Idea International, Inc. in settlement of $2,813 in accounts payable.
Pursuant to a Sales Agreement dated September 17, 1996, the Company agreed to
contingently acquire 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 agreed to
contingently acquire 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.
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.
13
<PAGE>
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.
On January 29, 1997, the Company issued 18,672 shares of the Company's common
stock to various vendors in settlement of $40,225 in accounts payable.
Pursuant to an investment banking services agreement with DanAllen Investments,
Inc. dated February 1997, the Company issued 100,000 shares of its common stock
at a value of $1.50 per share for investment banking services. See Part I, Item
1 "Description of Business" for details regarding the investment banking
agreement.
On March 17, 1997 and May 7, 1997, the Company issued 1,000,000 and 138,000
shares, respectively, of the Company's common stock, pursuant to Regulation "S"
to Pacific Rim Capital for $569,000 in cash. Cash was used for working capital
and acquisition of Pego Systems, Inc.
On April 7, 1997 and October 4, 1997, the Company issued 289,000 shares at a
value of $.50/share and 50,000 shares, at a value of $1.00/share of the
Company's common stock to various officers, directors and employees of the
Company as follows:
Dr. Alan Phan 200,000 shares
Directors 35,000 shares
Employees 104,000 shares
Pursuant to an agreement with Capital Commerce Ltd., dated July 31, 1997, the
Company issued to Mercantile Investment Trust, Ltd. 685,715 shares of common
stock valued at $600,000 for services as intermediary, broker and finder with
respect to this agreement.
Pursuant to an agreement with Capital Commerce, Ltd., dated July 31, 1997, the
Company issued 4,000 shares of Series A 9% Convertible Preferred Stock and 2,000
shares of Series B 9% Convertible Preferred Stock. Dividends are declared and
paid monthly. See Part I, Item 1, "Description of Business" for additional
details of the marketable securities agreement.
In connection with the acquisition of Pego Systems, Inc., dated October 3, 1997,
the Company issued 1,500 shares, stated value $1,000 per share, redeemable
preferred stock to Michael Caruana, along with 200,000 shares of the Company's
common stock. Additionally, 250,000 shares of the Company's common stock was
issued to Simerco Trading, Ltd., a British Virgin Island Company. See Part I,
Item 1, "Description of Business" for additional details.
On November 30, 1997, the Company issued 650,000 shares of the Company's common
stock to Mandarin Overseas Investment Co., Ltd. (Mandarin); pursuant to
Regulation S for $520,000 in cash. Cash was used in part for the acquisition of
Electronic Components and Systems, Inc.
On October 28, 1997, pursuant to the reorganization agreement, the Company
issued 3,400 shares of 9% Convertible Preferred Stock, stated value $1,000 per
share, and 2,500,000 shares of the Company's common stock in connection with the
acquisition of Electronic Components and Systems, Inc. See Part I, Item 1,
"Description of Business" for additional details.
14
<PAGE>
Item 6. Management's Discussion and Analysis or Plan of Operation
Overview
The Company's primary business has been the assembly and importing of writing
instruments for sale in the U.S. and the establishment of a real estate
portfolio which would include office, commercial, industrial, residential and
raw land. As previously discussed, management hired a consultant, American
Equities, LLC, to provide consultation and assistance in finding, acquiring,
managing and developing such a portfolio.
During the third quarter of 1996, the Company acquired Peony Gardens, a
commercial real estate project in the eastern part of Tougxian 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. See Part 1,
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. See Part 1, Item 2, "Description of
Property - Mineral Lease Gold Lode Claims."
Early in 1996, the Company began exploring new business opportunities in
unrelated fields. 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 continues to seek overseas
importer, 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."
In the fourth quarter of 1996, the Company, through its wholly-owned subsidiary,
Harcourt Investments, sold its 52% interest 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 at 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.
During the first and second quarters of 1997, the Company actively began
negotiations with two operating companies, Pego Systems, Inc. and Electronic
Components and Systems, Inc. Both companies were acquired by the Company during
the fourth quarter of 1997.
On October 3, 1997, the Company purchased Pego Systems, Inc. (Pego) from Michael
Caruana and a Company owned by Michael Caruana and Simerco Trading, Ltd., a
British Virgin Island company for Company common stock and cash. Mr. Caruana was
and still is a director of the Hartcourt Companies, Inc. See Part F/S
"Consolidated Financial Statements, Years ended December 31, 1997 and 1996 -
Notes to Consolidated Financial
Statements", Note C, "Investments and Business Acquisitions."
On October 28, 1997, the Company acquired Electronic Components and Systems,
Inc. (ECS) and a entity related to ECS from Mr. Jim Pruzin for Company stock,
cash and a promissory note. See Part F/S, "Consolidated Financial Statements,
Years Ended December 31, 1997 and 1996 - Notes to Consolidated Financial
Statements", Note C, "Investments and Business Acquisitions." and Part 1, Item 1
"Description of Business, General" for additional details.
15
<PAGE>
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. Subsequently,
the Company sold its joint venture interest in the Chinese facilities during the
third quarter of 1996.
In 1997 and 1996, as discussed previously, the Company made some fundamental
changes, including the engagement of a investment consultants, American Equities
and DanAllen and the acquisitions of Pego and ECS. Because of the nature of
activities in 1997 and 1996, a comparison of one given year to the previous year
is not relevant. Thus, the following discussion relates to the twelve months
ended December 31, 1997, followed by a discussion of the twelve months ended
December 31, 1996.
1997
During 1997, the Company's domestic writing instrument operations were limited
due to the continued lack of a comprehensive marketing program and the Company's
refocus of overall objective and corporate direction. Domestic sales for writing
instruments was $156,336 for the year. In addition the Company's total revenues
consist of $1,881,159 of revenue from three months of operations from Pego, and
$2,686,410 of revenue from two months of operations from ECS. Total 1997
revenues from these three sources amounted to $4,723,905. The Company's
subsidiary, ECS, has one major customer, Next Level Systems, Inc., which
provided $1,493,686 in revenue or 32% of the Company's total revenue.
Components of cost of sales were as follows: writing instruments $65,032, Pego,
$1,204,657, 64% as a percent of Pego's sales; and ECS, $2,418,753, 90% as a
percent of ECS's sales. Total cost of sales, $3,688,442 is 78% of total product
revenues.
Components of gross profit were as follows: writing instruments, $91,304, Pego,
$675,002, 36% as a percent of Pego sales; and ECS, $267,159, 10% as a percent of
ECS's sales. Total gross profit, $1,035,463 is 22% of total product revenues.
Gross profit as a percent of total revenues should improve over the next twelve
months following the effects of certain accounting treatment of the acquired
inventory in the Pego and ECS acquisitions.
Gross profits, as a percent of total revenues, for both Pego and ECS were
negatively impacted for the year ended December 31, 1997 due to the effects of
Accounting Principles Board pronouncement number 16 (APB 16), which states that
the inventory of a company being acquired using the purchase method of
accounting, must be stated as fair value at the time of the acquisition.
However, with respect to the inventories, the accounting treatment is to record
beginning inventories at selling prices, less any cost to complete and cost to
sell (including selling profit) for inventories. The result of this accounting
treatment was to increase beginning inventories for both Pego and ECS and
increase cost of sales for the year ended December 31, 1997.
Components of selling, general and administrative expenses were as follows:
corporate, $202,048, writing instruments, $573,711, Pego $417,332, and ECS,
$524,339. Total selling, general and administrative expenses for corporate and
writing instruments, $775,759 for 1997, compared to $1,242,756 during 1996, a
decrease of 38%. This decrease reflects a continued effort by the Company to cut
cost and also due to the sale of the Xinhui JV in 1996. Management believes
selling, general and administrative expenses as a percent of total revenues,
36%, should hold relatively constant over the next twelve months.
Goodwill related to the Pego and ECS acquisition is being amortized over 25
years. Amortization costs of $71,390 were recorded in calendar year 1997.
Management believes the two acquisitions will generate operating income that
will significantly exceed the goodwill amortization.
During 1997, the Company recorded $376,615 in other income for the forgiveness
of debt with respect to the Anja lease agreement. The Company has agreed to pay
Anja $200,000 over five years. In return Anja has agreed to
16
<PAGE>
terminate the lease agreement for the five ball point pen assembly machines. The
Company incurred interest expense of $113,000 during 1997 in connection with
mortgages, notes and lines of credit, $68,000; capital leases, $17,000 and
factoring agreement, $28,000.
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 1996 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
turn around accordingly.
Selling, 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
selling, general and administrative expense of the Xinhui JV were not included
during the fourth quarter of 1996. Further, the Company incurred interest
expenses of $360,744 from the Xinhui JV's indebtedness. This expense from Xinhui
JV will not occur in 1997 since the Company has sold its interest.
Liquidity and Capital Resources
The Company's principal capital requirements during 1997 and 1996 were to fund
the acquisitions of real estate, mineral rights and operating businesses. The
Company has historically satisfied its cash requirements through the issuance of
the Company's preferred and common stock. See Part 1, Item 5, "Market for Common
Equity and Related Stockholder Matters" for additional details regarding stock
transactions.
1997
The Company's current ratio at December 31, 1997 was 2.4 compared to 3.8 at
December 31,1996. The decrease is primarily attributable to the Company's
assumption of liabilities in connection with the acquisition of Pego and ECS.
Concurrently, the Company experienced an increase in working capital of
approximately $6,396,000 from $1,084,000 at December 31, 1996 to $7,480,000 at
December 31, 1997. The increase in working capital is primarily due to the
marketable securities agreement entered into with Capital Commerce, Ltd. The
increase in working capital will provide funds for operations and capital for
additional acquisitions.
The Company's operating activities consumed cash of approximately $800,000 for
the year ended December 31,1997. For the year ended 1997, the Company had an
operating loss of approximately $620,000, excluding the effects of depreciation,
amortization and reserve for bad debts. In addition, increases in accounts
receivable and inventory, offset by increases in accounts payable, consumed
additional cash of approximately $180,000.
Cash used for investing activities for the year ended December 31, 1997 totaled
$281,000. This amount represents $750,000 paid in connection with the Pego and
ECS acquisitions and the purchase of property and equipment of $59,000. These
cash outlays were offset by the sale of marketable securities of $525,000.
17
<PAGE>
Cash provided by financing activities was $1,161,000 for the year ended December
31, 1997, consisting primarily of the proceeds from the issuance of the
Company's common stock, $1,063,000, shareholder loans, $110,000, line of credit,
$100,000, and offset by payments on long-term debt, $21,394 and payments on
capital leases of $26,800, and payments with respect to the shareholder loans of
ECS, $84,300.
As a result of the above, the Company experienced an increase in cash from $800
as of December 31,996 to $78,000 for the year ended December 31, 1997.
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 selling, 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. The Company has 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 $137,641 of notes receivable, totaling
$1,328,436, 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 Xinhui 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
purchased for the Xinhui JV. The Company has worked out a settlement that will
cancel the capital lease and result in a substantial forgiveness of debt. See
Item 6, "Results of Operations, 1997" for additional details.
The Company believes that, with the sale of the interest in the Xinhui JV, the
settlement of the note and capital lease
with Anja Engineering, and the acquisitions of Pego and ECS, the Company is well
positioned in 1998 to pursue the
planned investment program of sound real estate projects and profitable, cash
producing businesses. The Company
18
<PAGE>
anticipates that additional capital will be required in the near term to finance
additional acquisitions and working capital needs. The sources for this funding
will come from a combination of the sale of the Company's common and preferred
stock and issuance of debt.
Impact of Year 2000
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruption of normal business activities.
Based on a recent and ongoing assessment, the Company has determined that it
will be required to modify or replace portions of its software and software that
has been sold to customers so that computer systems will function properly with
respect to dates in the year 2000 and thereafter. The Company presently believes
that with modifications to existing software or conversions to new software, the
Year 2000 Issue will not pose significant operational problems and will not
materially affect future financial results.
The Company has initiated communications with its significant suppliers and
major customers to determine the extent to which the Company is vulnerable to
any third party's failure to remedy their own Year 2000 issues.
The Company will utilize both internal and external resources to modify, or
replace, and test software for Year 2000 compliance. The Company currently
anticipates completing the Year 2000 project within one year, but not later than
March 31, 1999, which is prior to any anticipated impact on its operating
systems.
The costs of the project, which at the current time are projected to not be
material, and the date on which the Company believes it will complete Year 2000
modifications are based on management's best estimates, which were derived
utilizing numerous assumptions of future events, including the continued
availability of certain resources, third party modification plans and other
factors. However, there can be no guarantee that these estimates will be
achieved and actual results could materially differ from those anticipated.
Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"), and Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 130
establishes standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains and losses) in a full set of general
purpose financial statements. SFAS 131 establishes standards for the way that
public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. Both standards must be adopted in 1998 and
are not expected to have a significant impact on the Company's disclosures.
19
<PAGE>
Item 7. Consolidated Financial Statements
C O N T E N T S
<TABLE>
<CAPTION>
PAGE
<S> <C>
INDEPENDENT AUDITOR'S REPORT...................................................................... 1
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated balance sheets as of December 31, 1997 and 1996.......................................... 2 -3
Consolidated statements of operations for the years ended
December 31, 1997, 1996 and 1995........................................................................ 4
Consolidated statements of changes in shareholders' equity for the years ended
December 31, 1997, 1996 and 1995...................................................................... 5 - 6
Consolidated statements of cash flows for the years ended
December 31, 1997, 1996 and 1995.......................................................................... 7
Notes to consolidated financial statements..................................................................... .. 8 - 31
</TABLE>
20
<PAGE>
INDEPENDENT AUDITOR'S 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, 1997
and 1996, and the related consolidated statements of operations, changes in
shareholders' equity, and cash flows for the years ended December 31, 1997 and
1996. 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, 1997 and 1996, and the
results of their operations and their cash flows for the years ended December
31, 1997 and 1996 in conformity with generally accepted accounting principles.
Harlan & Boettger, LLP
San Diego, California
February 10, 1998
21
<PAGE>
<TABLE>
<CAPTION>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
1997 1996
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash $ 77,688 $ 822
Marketable securities (Note D) 5,474,966 -
Accounts receivable, net (Note B) 2,332,977 19,034
Trade dollar receivables 22,670 72,054
Notes receivable, current portion (Note F) 293,673 137,641
Inventory (Note E) 3,541,321 311,424
Prepaid expenses 130,554 150,000
Prepaid consulting fees (Note R) 664,770 750,000
Due from related parties (Note G) 131,398 32,356
TOTAL CURRENT ASSETS 12,670,017 1,473,331
PROPERTY AND EQUIPMENT, net (Note H) 3,568,507 44,809
INVESTMENTS (Note C) 17,906,520 17,906,520
NOTES RECEIVABLE, net of current portion (Note F) 1,058,267 1,190,795
OTHER ASSETS 552,289 7,550
INTANGIBLES, net (Note I) 9,365,000 -
$45,120,600 $20,623,005
</TABLE>
The accompanying notes are an integral part of
these financial statements.
22
<PAGE>
<TABLE>
<CAPTION>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
December 31, December 31,
1997 1996
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
<S> <C> <C>
Accounts payable $ 2,824,419 $ 154,260
Accrued expenses and other current liabilities (Note P) 1,046,881 133,747
Payables to Mexican affiliate (Note K) 352,942 -
Line of credit (Note O) 200,000 -
Notes payable, related parties - current portion (Note N) 295,000 -
Notes payable - current portion (Note M) 205,245 56,396
Capital lease obligations - current portion (Note R) 200,222 -
Debentures (Note L) 50,000 -
Subscription deposits received (Note X) 15,000 45,000
TOTAL CURRENT LIABILITIES 5,189,709 389,403
NOTES PAYABLE, RELATED PARTIES, net of current portion (Note N) 125,000 -
NOTES PAYABLE, net of current portion (Note M) 1,334,327 524,369
CAPITAL LEASE OBLIGATIONS, net of current portion (Note R) 612,477 -
TOTAL LIABILITIES 7,261,513 913,772
COMMITMENTS AND CONTINGENCIES (Notes J and R) - -
SHAREHOLDERS' EQUITY Preferred Stock:
Original preferred stock, $0.01 par value, 1,000 shares
authorized, issued and outstanding 10 10
Series A, $1,000 stated value, 4,000 shares authorized,
issued and outstanding 4,000,000 -
Series B, $1,000 stated value, 2,000 shares authorized,
issued and outstanding 2,000,000 -
Series C, $1,000 par value, 1,500 shares authorized,
issued and outstanding 1,500,000 -
Series D, $1,000 stated value, 10,000 shares authorized,
3,400 shares issued and outstanding 3,400,000 -
Class A, no par, 10,000,000 shares authorized,
none issued and outstanding - -
TOTAL PREFERRED STOCK 10,900,010 10
Common stock, $0.001 par value, 50,000,000
shares authorized; 16,441,739 shares issued and outstanding at
December 31, 1997 and 10,560,352 shares issued and outstanding at
December 31, 1996 16,442 10,560
Stock subscription receivable (26,000) -
Treasury stock, at cost (24,364 shares in 1997 and 1996) (279,928) (279,928)
Additional paid-in capital 31,083,604 23,204,260
Accumulated deficit (3,835,041) (3,225,669)
TOTAL SHAREHOLDERS' EQUITY 37,859,087 19,709,233
$45,120,600 $20,623,005
</TABLE>
The accompanying notes are an integral part of
these financial statements.
23
<PAGE>
<TABLE>
<CAPTION>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31,
1997 1996 1995
REVENUES
<S> <C> <C> <C>
Product sales $4,723,905 $ 510,692 $ 353,674
TOTAL REVENUES 4,723,905 510,692 353,674
COST OF SALES 3,688,442 797,667 159,797
Gross profit (loss) 1,035,463 (286,975) 193,877
OPERATING EXPENSES
Selling, general and administrative 1,717,430 570,774 1,006,828
Depreciation and amortization 97,154 671,982 551,428
TOTAL OPERATING EXPENSES 1,814,584 1,242,756 1,558,256
LOSS FROM OPERATIONS (779,121) (1,529,731) (1,364,379)
OTHER INCOME (EXPENSES)
Minority interest - - 564,261
Interest expense (113,026) (443,042) (851,076)
Forgiveness of debt (Note Z) 376,615 384,735 -
Interest income 28,184 10,100 2,351
Exchange gain 14,676 - 54,952
TOTAL OTHER INCOME (EXPENSE) 306,449 (48,207) (229,512)
NET LOSS BEFORE INCOME TAXES (472,672) (1,577,938) (1,593,891)
Income taxes (Note Q) 1,700 1,800 -
NET LOSS $ (474,372) $(1,579,738) $(1,593,891)
BASIC AND FULLY DILUTED LOSS PER SHARE (Note Y)$ (.05) $ (.33) $ (.55)
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 12,550,337 4,814,303 2,915,655
</TABLE>
The accompanying notes are an integral part of
these financial statements.
24
<PAGE>
<TABLE>
<CAPTION>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Common Foreign
Stock Currency Total
Common Stock Preferred Stock Paid-in Subscription Treasury Stock Accumulated TranslationShareholders'
Shares Amount Shares Amount Capital Receivable Shares Amount Deficit Adjustment Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 31,
1994 2,735,952 $ 2,736 1,000 $ 10 $ 3,289,672 $ (700,000) $ - - $ (542,001) $ (915) $2,049,502
Shares issued
to attorney
for legal fees 9,851 10 - - 64,990 - - - - - 65,000
Capital
contribution
- officer's
compensation - - - - 70,000 - - - - - 70,000
Cash paid on
common stock
subscription - - - - - 700,000 - - - - 700,000
Foreign currency
translation
adjustment - - - - - - - - - 114,259 114,259
Net loss - - - - - - - - (1,593,891) (1,593,891)
Balance, December
31, 1995 2,745,803 $ 2,746 1,000 $ 10 $ 3,424,662 $ - - $ - $(2,135,892) $113,344$1,404,870
Shares issued
to attorne 27,000 27 - - 466,533 - - - - - 466,560
Shares issued
for Xinhui JV 5,000 5 - - 106,770 - - - - - 106,775
Shares issued
for inventory 13,267 13 - - 191,382 - - - - - 191,395
Shares issued
for settlement of
payables 94 - - - 2,813 - - - - - 2,813
Shares issued
for Peony Gardens
deposit 4,600,000 4,600 - - 11,927,900 - - - - -11,932,500
Shares issued
for consulting
agreement 1,300,000 1,300 - - 898,700 - - - - - 900,000
Shares issued for
Alaska land 1,298,700 1,299 - - 5,972,721 - - - - - 5,974,020
Shares issued to
convert debt to
equity 425,000 425 - - 212,075 - - - - - 212,500
Stock dividends 169,852 170 - - 679 - - - (849) - -
Treasury stock
acquired (24,364) (25) - - 25 - 24,364 (279,928) - - (279,928)
Sale of Xinhui
joint venture- - - - - - - - - 490,810 (113,344) 377,466
Net loss - - - - - - - - (1,579,738) - (1,579,738)
Balance, December
31, 1996 10,560,352 $ 10,560 1,000 $ 10 $23,204,260$ - 24,364 $(279,928) $(3,225,669)$ -$19,709,233
</TABLE>
The accompanying notes are an integral part of
these financial statements.
25
<PAGE>
<TABLE>
<CAPTION>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Continued)
Common Foreign
Additional Stock Currency Total
Common Stock Preferred Stock Paid-in Subscription Treasury Stock Accumulated Translation Shareholders'
Shares Amount Shares Amount Capital Receivable Shares Amount Deficit Adjustment Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December
31, 1996 10,560,352 $10,560 1,000 $ 10 $23,204,260 $ - 24,364 $(279,928)$(3,225,669)$ $19,709,233
Shares issued
for settlement
of payables 18,672 19 - - 40,206 - - - - - 40,225
Shares issued
for consulting
agreement 100,000 100 - - 149,900 - - - - - 150,000
Shares issued
for Reg. S Sale 1,788,000 1,788 - - 1,087,212 (26,000) - - - - 1,063,000
Shares issued to
employees 339,000 339 - - 194,161 - - - - - 194,500
Shares issued
for broker/finder
fees 685,715 686 - - 599,314 - - - - - 600,000
Shares issued
for marketable
securities - - 6,000 6,000,000 - - - - - - 6,000,000
Shares issued
in connection with
Pego acquisition 450,000 450 1,500 1,500,000 211,051 - - - - - 1,711,501
Shares issued in
connection with ECS
acquisition 2,500,000 2,500 3,400 3,400,000 5,597,500 - - - - - 9,000,000
Dividends on
preferred stock - - - - - - - - (135,000) - (135,000)
Net loss - - - - - - - - (474,372) - (474,372)
Balance, December
31, 1997 16,441,739 $16,442 11,900$10,900,010$31,083,604$(26,000 24,364 $(279,928) $(3,835,041)$ - $37,859,087
</TABLE>
The accompanying notes are an integral part of
these financial statements.
26
<PAGE>
<TABLE>
<CAPTION>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31,
1997 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net loss $ (474,372) $(1,579,738) $(1,593,891)
Adjustments to reconcile net loss 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 145,003 671,982 551,428
Allowance for doubtful accounts 57,443 (97,456) 116,490
Forgiveness of debt (376,615) (384,735) -
Accrued interest income (26,494) (8,871) -
Stock dividends - 849 -
Sale of Xinhui joint venture - 489,961 -
Changes in operating assets and liabilities:
Accounts receivable (275,772) 132,342 (175,958)
Inventory (413,340) 647,256 (293,697)
Prepaid expenses and other 110,790 (10,437) 90,661
Payables to Mexican affiliate (112,001) - -
Accounts payable and accrued expenses 562,858 347,603 1,363,056
NET CASH USED IN OPERATING ACTIVITIES (802,500) (432,430) (506,172)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (59,239) (427,454) (259,919)
Construction in progress - - (2,169,550)
Proceeds on sale of marketable securities 525,034 - -
Proceeds on notes receivable 37,990 - 603,159
Payments on notes receivable (35,000) (347,824) -
Payments on acquisitions (750,000) - -
NET CASH USED IN INVESTING ACTIVITIES (281,215) (775,278) (1,826,310)
CASH FLOWS FROM FINANCING ACTIVITIES
Common stock subscriptions (30,000) 45,000 200,000
Proceeds on loan from Bank of China - 507,801 849,535
Proceeds on loans from shareholders 110,000 177,485 205,984
Proceeds from issuance of common stock 1,063,000 186,632 835,000
Net proceeds from line of credit 100,000 - -
Payments on loans from shareholders (84,258) - -
Payments on capital lease obligations (26,767) - -
Payments on long-term debt (21,394) - -
Proceeds on loans - 149,565 171,806
Proceeds on debentures 50,000 - -
Additional contributions by foreign partner - - 15,634
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,160,581 1,066,483 2,277,959
NET INCREASE (DECREASE) IN CASH 76,866 (141,225) (54,523)
CASH, BEGINNING OF YEAR 822 142,047 196,570
CASH, END OF YEAR $ 77,688 $ 822 $ 142,047
</TABLE>
The accompanying notes are an integral part of
these financial statements.
27
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Summary of Significant Accounting Policies:
Organization and Nature of Operations
Harcourt 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 September 1996, Harcourt Investments sold its investment in Xinhui JV
to CKES, Inc. of Sunnyvale, California (Notes C and F).
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 1995 and 1996, reverse stock splits changed the
number of shares issued and outstanding to 6,110,337, then to 2,735,952.
The consolidated financial statements were restated to reflect this
capital stock transaction. Stardust's name was changed to the "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, The 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 C).
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 C).
The accompanying notes are an integral part of
these financial statements.
28
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Summary of Significant Accounting Policies: (continued)
Organization and Nature of Operations (continued)
In October 1997, the Company purchased the outstanding shares of Pego
Systems, Inc. (Pego) whereby Pego became a wholly-owned subsidiary of
the Company. Pego, a manufacturer's representative organization for air
and gas handling equipment, offers a full line of value added services
including distribution, service and the manufacturing of custom process
equipment packages. In connection with the purchase, the Company paid
$500,000 in cash, issued 450,000 shares of common stock, 1,500 shares of
Series C redeemable preferred stock, and entered into a non-compete
agreement with Pego's majority shareholder (Note C).
On October 28, 1997, the Company, through a wholly-owned subsidiary,
acquired Electronic Components and Systems, Inc. (ECS) and Pruzin
Technologies, Inc. (Pruzin) a related entity of ECS. ECS and Pruzin
specialize in high technology contract manufacturing and assembly of
printed circuit boards, phone and cable wires. ECS has three facilities
in Arizona and has a service contract with a maquiladora in the free
trade zone in Sonora, Mexico. The Company issued 3,400 shares of Series
D convertible preferred stock, 2,500,000 shares of the Company's common
stock, $250,000 in cash and a $250,000 promissory note (Notes C and N).
ECS maintains manufacturing operations under maquiladora agreements in
Nogales, Mexico. The 100% shareholder of the maquiladora is also the
President of ECS. A substantial amount of ECS's cables and electronic
components are manufactured and assembled at the Mexico facility. ECS
also has smaller manufacturing facilities in Tucson and Chandler,
Arizona and a distribution facility in Nogales, Arizona.
In 1997, the Company's total revenue amounted to $4,723,905, which
consists of twelve months of domestic sales of writing instruments,
$156,336 from Hartcourt Pen, three months of revenue, $1,881,159 from
Pego and two months of revenue, $2,686,410 from ECS.
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 and Cash Equivalents
For purposes of the Statement of Cash Flows, the Company considers all
highly liquid investments purchased with an initial maturity of three
months or less to be cash equivalents.
Accounts Receivable
In the normal course of business, the Company extends unsecured credit
to customers located in North America. Credit is extended based on an
evaluation of the customer's financial condition. The allowance for
doubtful accounts is based on management's evaluation of outstanding
accounts receivable at the end of the period. The allowance for doubtful
accounts was $76,477 and $19,034 at December 31, 1997 and 1996,
respectively. It is reasonably possible that the Company's estimate of
allowance for doubtful accounts will change.
29
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
A. Summary of Significant Accounting Policies: (continued)
Inventory
Inventory is stated at the lower of cost or market, cost being
determined on the first-in, first-out (FIFO) method, and includes
material, labor, and overhead.
Property and Equipment
Plant and equipment are stated at cost or estimated fair market value on
the date of acquisition. Depreciation is provided over the estimated
useful lives of the respective assets on the straight-line basis ranging
from five to twenty years. The Company's policy is to evaluate the
remaining lives and recoverability in light of current conditions. It is
reasonably possible that the Company's estimate to recover the carrying
amount of property and equipment will change.
Advertising Costs
Advertising costs are generally expensed as incurred. Advertising
expense included in selling, general and administrative expenses were
$84,573, $14,182 and $26,134 for 1997, 1996 and 1995, respectively.
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 Hartcourt Pen, Pego
Systems, Inc., and Electronic Components and Systems, Inc. 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. All assets, liabilities and operations of Xinhui JV are
reflected in the consolidated financial statements. The interest of the
joint venture partner in the assets and net loss of the joint venture
are reported as "Minority Interest".
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.
Translation 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.
30
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
A. Summary of Significant Accounting Policies: (continued)
Accounting for Business Combinations
The acquisitions were recorded as purchases in accordance with
Accounting Principle Board Opinion No. 16 (APB No. 16) "Business
Combinations", and the purchase prices were allocated to the assets
acquired, (except for finished goods and work-in-process inventory), and
liabilities assumed based upon their estimated fair value at the
purchase date. The finished goods and work-in-process inventory
(percentage completed) at the purchase date was valued, in accordance
with APB No. 16, at the "sales price" less reasonable profit allowances
for selling effort consisting of sales profit and selling costs. The
operating results of the acquired entities are included in the Company's
consolidated financial statements from the dates of acquisition.
Income Taxes
Income taxes are provided for using the liability method of accounting
in accordance with Statement of Financial Accounting Standards No. 109
(SFAS No. 109), "Accounting for Income Taxes." A deferred tax asset or
liability is recorded for all temporary differences between financial
and tax reporting. Deferred tax expense (benefit) results from the net
change during the year of deferred tax assets and liabilities. The
components of the deferred tax asset and liability are individually
classified as current and non-current based on their characteristics.
Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or
all of the deferred tax assets will not be realized. Deferred tax assets
and liabilities are adjusted for the effects of changes in tax laws and
rates on the date of enactment.
Reclassification
Certain 1996 and 1995 amounts have been reclassified to conform to the
1997 consolidated financial statement presentation. These
reclassifications have no effect on previously reported net loss.
Investments
Investments are provided for using the deposit method of accounting in
accordance with Statement of Financial Accounting Standards No. 66 (SFAS
No. 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 $10,000,000
(Note C).
31
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
A. Summary of Significant Accounting Policies: (continued)
Loss Per Share
Net loss per share is provided in accordance with Statement of Financial
Accounting Standard No. 128 (SFAS No. 128) "Earnings Per Share". Basic
earnings per share are computed by dividing earnings available to common
shareholders by the weighted average number of common shares outstanding
during the period. Diluted earnings per share reflect per share amounts
that would have resulted if dilutive common stock equivalents had been
converted to common stock. The net loss per share calculations reflect
the effect of stock dividends and stock splits. As required by SFAS No.
128, prior year earnings per share amounts have been restated. Earnings
per share for the years ended December 31, 1996 and 1995 increased $.00
and $.07, respectively, as a result of this restatement.
Stock Option Plan
Effective January 1, 1996, the Company adopted a method of accounting
for stock-based compensation plans
as required by Statement of Financial Accounting Standard No. 123 (SFA
No. 123) "Accounting for Stock-
Based Compensation". SFAS No. 123 allows for two methods of valuating
stock-based compensation. The
first method allows for the continuing application of Accounting
Principle Board Opinion No. 25 (APB No.
25) in measuring stock-based compensation, while complying with the
disclosure requirements of SFAS No.
123. The second method uses an option pricing model to value stock
compensation and record as such within
the consolidated financial statements. The Company will continue to
apply APB No. 25, while complying
with SFAS No. 123 disclosure requirements (Note U).
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 consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Intangibles
Goodwill and other intangible assets are amortized on the straight-line
basis over the estimated future periods to be benefitted (not exceeding
25 years). Goodwill, the excess of the Company's purchase price over the
fair value of the net assets acquired, is amortized over 25 years.
Covenant not to compete is amortized on the straight line basis over
five years. It is reasonably possible that the Company's estimate of the
recoverability of goodwill will change.
Fair Value of Financial Instruments
The following methods and assumptions were used by the Company to
estimate the fair values of financial instruments as disclosed herein:
Cash and cash equivalents: The carrying amount approximates fair value
because of the short period to maturity of the instruments.
32
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
A. Summary of Significant Accounting Policies: (continued)
Fair Value of Financial Instruments (continued)
Marketable securities: For marketable securities, the carrying amounts
approximate fair value, which is based on prices guaranteed by Capital
Commerce, Ltd.
Notes receivable: The fair value of notes receivable is estimated based
on discounted cash flows using a current risk-weighted interest rate and
on the current rates offered by the Company for notes of the same
remaining maturities.
Short-term borrowings: The carrying amount approximates fair value since
the interest rate fluctuates with the lending banks' prime rate.
Long-term debt: The fair value of long-term debt is estimated based on
interest rates for the same or similar debt offered to the Company
having the same or similar remaining maturities and collateral
requirements.
B. Accounts Receivable:
<TABLE>
<CAPTION>
Accounts receivable consists of the following:
December 31, December 31,
1997 1996
<S> <C> <C>
Accounts receivable, unassigned $2,216,395 $ 38,068
Accounts receivable, assigned (Note J) 193,059 -
2,409,454 38,068
Less allowance for doubtful accounts (76,477) (19,034)
$2,332,977 $ 19,034
</TABLE>
C. Investments and Business Acquisitions:
Sale of Xinhui Joint Venture
In September 1996, the Company sold its Xinhui joint venture interest to
CKES, Inc. located in Sunnyvale, California. Harcourt Investments owned
a 52% interest in Xinhui Harcy Modern Pens, Ltd., a joint venture in the
Peoples Republic of China. The joint venture interest was 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 and
allows the Company to have a security interest in substantially all
assets of CKES, Inc. (Note F).
33
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
C. Investments and Business Acquisitions: (continued)
Sale of Xinhui Joint Venture (continued)
Generally 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 the Xinhui plant and the length of time before payment
begins by CKES, Inc. At December 31, 1996, the Company decided to
reserve $1,202,220 of the receivable due to payments being deferred to a
later period. At December 31, 1997, the impairment was increased
$364,110 to a balance of $1,584,330 to offset the amortization of the
discounts.
Investment in Peony Gardens
In August 1996, the Company purchased an apartment complex located near
Beijing, China for $22 million from NuOasis International, Inc.
(NuOasis). 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 upon completion of
construction and the date the certificate of occupancy is received.
Under the deposit method of accounting in accordance with SFAS No. 66,
the promissory note for $12,000,000 is currently being deferred until
the complete consummation of the Peony Gardens sale. Additionally, the 4
million shares of common stock was recorded as a deposit at December 31,
1997 and 1996. At December 31, 1997, the construction of the complex has
been halted due to the downturn in the economy in Asia. The Company has
the unilateral option of extending the date for completion of the
contract or rescinding the purchase contract. The Company's management
believes the contract will be completed as originally intended.
Therefore, no adjustments have been made to assets or liabilities
associated with this contract.
Investment in Alaskan Gold Claims
In September 1996, the Company purchased a 50% interest in 68 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 SFAS No. 66, the 1,298,700 shares of common stock was
recorded as a deposit at December 31, 1997 and 1996 pending a formal
geological survey of the land. Management believes there have been no
changes in the value in the land from the date of acquisition. The
Company may rescind the purchase if the probable valuation of the land
is below $10,000,000.
Purchase of Pego Systems, Inc.
On October 3, 1997, the Company purchased all the outstanding shares of
Pego Systems, Inc. (Pego). Payment terms of the transaction include a
cash payment of $500,000, the issuance of $450,000 of restricted common
stock and 1,500 shares or $1,500,000 of Series C Redeemable Preferred
Stock. Included in the acquisition price is a covenant not-to compete
(Note I). The excess purchase price over the fair value of the net
assets of $1,326,083 was recorded as goodwill and is being amortized
over 25 years (Note I).
34
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
C. Investments and Business Acquisitions: (continued)
Purchase of Electronic Components and Systems, Inc. and Pruzin
Technologies, Inc.
On October 28, 1997, the Company acquired Electronic Components and
Systems, Inc. and Pruzin Technologies, Inc. through a tax-free
reorganization. The Company paid $250,000 in cash, issued a note for
$250,000, issued 3,400 shares of Series D 9% Convertible Preferred Stock
and 2,500,000 shares of common stock. The excess purchase price over the
fair value of the net assets of $8,010,307 was recorded as goodwill and
is being amortized over 25 years (Note I).
The following unaudited proforma consolidated results of operations
assume that the above purchases occurred on January 1, 1996:
<TABLE>
<CAPTION>
December 31,December 31,
19 1996
<S> <C> <C>
Total revenues $20,688,930 $19,912,309
Loss before taxes (36 (1,024,227)
Net loss (364,587) (1,026,027)
Basic and fully diluted loss per share (0.03) (0.21)
</TABLE>
The proforma data gives effect to actual operating results prior to the
acquisition and adjustments to interest expense, goodwill amortization
and income taxes. These proforma results of operations do not purport to
be indicative of the results which would actually have been obtained had
the purchases occurred on the dates indicated or which may be obtained
in the future.
D. Marketable Securities:
In July 1997, the Company entered into an agreement with Capital
Commerce, Ltd. (Capital) (as Isle of Man Corporation) whereby Capital
agreed to provide the Company $6,000,000 in free trading securities for
the purchase of Pego Systems, Inc. and the formation of Electronic
Components and Systems, Inc., a Nevada Corporation. The Agreement
stipulates that should the value of the stock received by the Company
decrease, Capital shall compensate for such reduction by issuing
additional shares to equate the total value of
$6,000,000. In consideration for the $6,000,000 in securities,
the Company issued to Capital $4,000,000 in Series A and
$2,000,000 in Series B, both 9% convertible preferred stock
(Note T). Dividends are declared and paid monthly at 9% per
annum. Terms of this agreement are over a ten year period.
Included in accrued expenses is accrued dividends of $135,000
associated with this agreement.
As of December 31, 1997, the Company had sold $525,034 worth of its
securities, and has available $5,474,966. Marketable securities are
reported at the guaranteed value of the contract.
35
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
E. Inventory:
Inventory consists of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
<S> <C> <C>
Raw materials $2,756,923 $ -
Work-in-process 378,602 -
Finished goods 405,796 311,424
$3,541,321 $311,424
</TABLE>
F. Notes Receivable:
<TABLE>
<CAPTION>
Notes receivable consist of the following:
December 31, December 31,
1997 1996
<S> <C> <C>
Note receivable from CKES Acquisitions, Inc., $3,000,000 face amount,
interest at 6% per annum, due in monthly principal installments of
$50,000 beginning October 1, 1998, secured by substantially all assets
of CKES, interest and unpaid principal due and payable on October 1,
2003. The note is reported less unamortized discount of $753,985, based
on 12% imputed interest, and $1,584,330 and $1,202,220 of loan
impairment for 1997 and 1996, respectively (Note C). $1,043,795 $1,043,795
Note receivable from former attorney Kevin Quinn, interest at 9% per
annum, due on demand and secured by real estate. Included in the balance
is accrued interest of $6,753 and $8,871 at December 31, 1997
and 1996, respectively. 111,523 113,641
Note receivable from Yafa, Inc., interest at 9% per annum, due in
monthly principal installments of $2,000, accrued interest and unpaid
principal due and payable on or before August 15, 1999, secured by
common stock of Yafa, Inc. Included in the balance is accrued interest
of $18,113 and $3,878 at December 31, 1997
and 1996, respectively. 164,112 171,000
Note receivable from individual, principal and interest at 5% per annum,
due in fourteen monthly installments of $300, then fifty monthly
installments of $622, with
the final payment due February 1, 2003, unsecured. 30,510 -
</TABLE>
36
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
F. Notes Receivable: (continued)
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
<S> <C> <C>
Other $ 2,000 $ -
Total 1,351,940 1,328,436
Less current portion 293,673 137,641
Notes receivable, net of current portion $1,058,267 $1,190,795
</TABLE>
G. Due from Related Parties:
<TABLE>
<CAPTION>
Related party loans consist of the following:
December 31, December 31,
1997 1996
<S> <C> <C>
Loan to officer of Hartcourt, unsecured,
non-interest bearing, due on demand. $ 96,691 $32,356
Loan to officer of ECS, unsecured,
non-interest bearing, due on demand. 31,009 -
Loan to officer of ECS, unsecured,
non-interest bearing, due on demand. 3,698 -
Total related party loans 131,398 32,356
Less current portion (131,398) (32,356)
$ - $
</TABLE>
H. Property and Equipment:
Property and equipment are summarized as follows:
December 31, December 31,
1997 1996
Building $1,213,571$ -
Machinery and equipment 2,166,792 36,426
Furniture and fixtures 109,706 28,600
Computer equipment 104,028 -
Vehicles 46,656 -
Leasehold improvements 27,781 6,197
3,668,534 71,223
Less accumulated depreciation
and amortization (100,027) (26,414 )
Property and equipment, net $3,568,507 $44,809
37
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
I. Intangibles:
Intangibles are summarized as follows:
December 31, December 31,
1997 1996
Goodwill $9,336,390 $ -
Non-compete agreement 100,000 -
9,436,390 -
Less accumulated amortization (71,390) -
Intangibles, net $9,365,000 $ -
Goodwill consists of amounts paid in excess of the fair value of the net
assets in the acquisitions of Pego and ECS. The covenant not-to compete
agreement is with the former shareholder of Pego and is in effect for a
five year period.
J. Assigned Accounts Receivable:
ECS has a factoring agreement with a finance company with a limit of
$1,500,000. This contract is in effect until May 10, 1998 and shall be
automatically renewable for successive periods of six months unless
terminated by thirty day written notice by either party.
Under the factoring agreement, the factor purchases substantially all
trade accounts receivable for one of ECS's major customers, Next Level
Systems, Inc., at a price equal to the net face amount of the
receivable, less a discount of 1.25%, 1.75% and 2.25% if the account is
paid within thirty days, thirty to forty-five days, and forty-five to
sixty days of the purchase, respectively. For accounts paid after sixty
days, an additional .50% will be charged for each fifteen day period.
ECS may take advances of up to 75% of the net face amount of the
accounts sold to the factor. ECS is contingently liable to the factor
for merchandise disputes, customer claims, and other chargebacks on
eligible receivables. Accounts not collected within ninety days are
required to be repurchased by ECS. As collateral, the Company has
granted a continuing security interest in substantially all assets of
ECS.
The proceeds received from the factor for the year ended December 31,
1997 totaled $1,694,313. At December 31, 1997, the balance of assigned
accounts receivable and the contingent liability was $772,236, and the
balance due to the factor for advances taken prior to the collection of
the accounts receivable was $579,177.
K. Payables to Mexican Affiliate:
ECS maintains manufacturing operations under a maquiladora program in
Nogales, Mexico. The maquiladora company (the "affiliate") is wholly
owned by the President of ECS.
38
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
K. Payables to Mexican Affiliate: (continued)
Under the maquiladora program, ECS advances cash to the affiliate for
operating expenses. ECS provides the raw materials, production machinery
and equipment for manufacture and assembly. Upon completion, the
finished goods are purchased by ECS. Total purchases from the affiliate
for the year ended December 31, 1997 were $800,516.
At December 31, 1997, the unsecured, non-interest bearing, due upon
demand balance payable to the Mexican affiliate was $352,942.
Additionally, at December 31, 1997, the book value of the production
machinery and equipment and the value of the inventory provided to the
affiliate was $1,036,359 and $1,968,381, respectively. It is reasonably
possible that operations located outside an entity's home country will
be disrupted in the near term, however, management believes it is
remote.
L. Debentures:
Debentures consist of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
Eighteen-month Series "A" Convertible Debentures, principal due November
1998, interest at 10% per annum and paid at the end of each quarter.
Interest payments can be either cash or shares of Hartcourt common
stock, at the holder's option. Debentures were discounted 35% to $32,500
for cash proceeds held in escrow, $17,500 of interest has been
capitalized and will be amortized over the eighteen month period. The
Company has recorded $6,805 of interest expense associated with these
debentures
<S> <C>
for the year ended December 31, 1997. $ 50,000$ -
Total Debentures 50,000 -
Less current portion (50,000) -
$ -$ -
</TABLE>
M. Notes Payable:
<TABLE>
<CAPTION>
Notes payable are summarized as follows:
December 31,December 31,
1997 1996
<S> <C>
Note payable, individual, interest at 8.5% per annum, due November 2024,
monthly principal and interest payments of $9,544,
secured by land and building. $1,209,528$ -
</TABLE>
39
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
M. Notes Payable: (continued)
<TABLE>
<CAPTION>
December 31,December 31,
1997 1996
<S> <C> <C>
Note payable, Anja Engineering, interest at 10% per annum, payment of
$100,000 due May 15, 1998, thereafter, quarterly principal and interest
payments of $6,415 beginning
August 1998 through May 2003, unsecured. $ 200,000 $576,615
Note payable, financial institution, due June 1999, with monthly
installments of $8,039 including interest at 12.29% per annum,
collateralized by equipment and personally
guaranteed by the President of ECS. 130,044 -
Other - 4,150
Total 1,539,572 580,765
Less current portion (205,245) (56,396)
Notes payable, net of current portion $1,334,327 $524,369
</TABLE>
The following is a summary of principal maturities of notes payable:
Year ending December 31,
1998 $ 205,245
1999 75,248
2000 33,284
2001 36,517
2002 40,065
Thereafter 1,149,213
Total $1,539,572
40
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
N. Notes Payable, Related Parties:
Notes payable, related parties consist of the following:
<TABLE>
<CAPTION>
December 31,December 31,
1997 1996
<S> <C> <C>
Note payable due to the President of ECS and shareholder of the Company,
interest at 7% per annum, principal of $125,000 plus accrued interest is
due on July 31, 1998 and
July 31, 1999, unsecured. $250,000$ -
Note payable due to the President of ECS and shareholder of the Company,
interest at 10% per annum, monthly interest payments
of $917, due on demand, unsecured. 110,000 -
Note payable due to an employee of the Company,
interest at 10% per annum, monthly interest
payments of $167, due on demand, unsecured. 20,000 -
Note payable due to a relative of the President of
ECS, interest at 10% per annum, monthly interest
payments of $333, due on demand, unsecured. 40,000 -
Total 420,000 -
Less current portion (295,000) -
Notes payable, related parties, net of current portion $ 125,000 $ -
</TABLE>
The following is a summary of principal maturities of related party
notes payable:
Year ending December 31,
1998 $295,000
1999 125,000
Total $420,000
O. Line of Credit:
The Company has a secured line of credit agreement with a bank which
provides that it may borrow up to $500,000 at the bank's prime rate of
interest (9% at December 31, 1997). The line of credit is secured by
inventory, equipment and accounts receivable of Pego Systems, Inc. The
line of credit is due on demand.
At December 31, 1997, $300,000 was available under this agreement.
41
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
P. Accrued Expenses and Other Current Liabilities:
Accrued expenses and other current liabilities are summarized as
follows:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
<S> <C> <C>
Accrued brokers fees $ 437,000$ -
Accrued wages 175,000 129,500
Accrued dividends (Note T) 135,000 -
Prepaid credits 110,202 -
Accrued sales taxes 46,488 -
Accrued commissions 42,003 -
Other current liabilities 101,188 4,247
$1,046,881 $133,747
</TABLE>
Accrued broker fees represent amounts payable for services provided for
the acquisition of ECS (Note C).
Q. Income Taxes:
Provisions for income taxes are summarized as follows:
Year ended
December 31, December 31, December 31,
1997 1996 1995
Current income taxes $1,700 $1,800 $ -
Provision for income taxes $1,700 $1,800 $ -
The Company has deferred tax assets for the tax effects of temporary
differences between financial and tax reporting for the years ended
December 31, 1997 and 1996 as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Deferred tax assets:
Net operating losses $792,000 $ 569,592
Other 49,000 -
841,000 569,592
Valuation allowance (841,000) (569,592)
Net deferred tax assets $ - $ -
</TABLE>
42
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Q. Income Taxes: (continued)
The Company has net operating loss carryforwards remaining of
approximately $2,266,000. 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
2012. The valuation allowance increased $271,408, and $321,592 for the
years ended December 31, 1997 and 1996, respectively. It is reasonably
possible that the Company's estimate of the valuation allowance will
change.
R. Commitments and Contingencies:
Operating Leases
The Company leases its facilities under long-term, non-cancelable lease
agreements expiring at various dates through June 2003. The
noncancelable operating lease agreements provide that the Company pays
property taxes, insurance and certain operating expenses applicable to
the leased premises. Rent expense for the years ended December 31, 1997,
1996 and 1995 was $68,023, $27,732 and $36,745, respectively. The
Company also leases vehicles and equipment under various long-term
agreements.
The future minimum annual lease payments required under the operating
leases are as follows:
<TABLE>
<CAPTION>
Year ending
December 31, Facilities Vehicles Total
<S> <C> <C> <C> <C>
1998 $ 285,710 $30,357 $ 316,067
1999 313,226 9,391 322,617
2000 316,850 - 316,850
2001 187,110 - 187,110
2002 21,600 - 21,600
Thereafter 32,400 - 32,400
Total future lease payments $1,156,896 $39,748 $1,196,644
</TABLE>
Capital Leases
Pego and ECS lease machinery, equipment and vehicles under capital
leases. The economic substance of the leases is that the Company is
financing the acquisition of the machinery, equipment and vehicles
through the leases, and, accordingly, they are recorded in the Company's
assets and liabilities. The following is an analysis of the book value
of the leased assets included in property and equipment at December 31,
1997:
Machinery and equipment $936,060
Vehicles 20,107
Accumulated depreciation (21,326)
$934,841
43
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
R. Commitments and Contingencies: (continued)
Capital Leases (continued)
The following is a schedule by year of the future minimum lease payments
required under capital leases together with their present value as of
December 31, 1997:
Year ending
December 31,
1998 $ 272,891
1999 250,069
2000 215,049
2001 181,852
2002 67,936
Total future capital lease payments 987,797
Less amount representing interest (175,098)
Net present value of minimum lease payments 812,699
Less current portion of capital lease obligations (200,222)
Capital lease obligations, net of current portion$ 612,477
At December 31, 1997, $708,272 of the total capital lease obligations
was personally guaranteed by the President of ECS.
Consulting Agreements
On December 30, 1996, the Company 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 The Hartcourt Companies, Inc. by at least $50,000,000 by December 31,
1997. The Company is currently renegotiating the minimum performance of
the market capitalization.
Pursuant to the terms of the agreement, the Company issued 1,000,000
common shares at $1.50 per share as an advance against future fees to be
earned by American Equities. The Company also advanced 300,000 common
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. During 1997, the Company expensed to operations
$385,230 of consulting fees from the following: $150,000 (300,000 shares
at $0.50 per share) of prepaid expenses, $45,230 of prepaid consulting
fees from a 2% financial restructuring fee for the Pego acquisition, and
$190,000 of prepaid consulting fees from a 2% financial restructuring
fee for the ECS acquisition.
44
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
R. Commitments and Contingencies: (continued)
Consulting Agreements (continued)
In February 1997, the Company entered into a consulting agreement with
DanAllen Investment Corporation. Terms of the agreement include
providing consulting services to the Company for locating and purchasing
companies for a one year period. The Company issued 100,000 shares of
common stock at $1.50 per share as a retainer to DanAllen Investment
Corporation for future acquisitions. This transaction was discounted due
to the restriction on the shares issued.
S. Supplemental Cash Flow Information:
<TABLE>
<CAPTION>
1997 1996 1995
Cash paid for interest and income taxes:
<S> <C> <C> <C>
Interest $113,026$ - $9,524
Income taxes $ 37,400$ 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 $ 40,225$ 109,589 $ -
Common stock issued for purchase of
Peony Gardens $ - $9,920,000 $ -
Common stock issued for brokerage fees $ 600,000 $2,012,500 $ -
Common stock issued for converting debt to equity$ -$ 212,500 $ -
Common stock issued for prepayment of
consulting fees $ 150,000$ 900,000 $ -
Note received for sale of subsidiary $ - $1,043,795 $ -
Preferred stock issued for marketable securities $6,000,000$ - $ -
Assets purchased through capital leases $ 211,041$ - $ -
Stock subscription receivable $ 26,000$ - $ -
Allocation of common and preferred stock issued for the assets and
liabilities of Pego during 1997 was as follows:
Accounts receivable $ 924,452
Inventory 423,016
Other assets 11,223
Property and equipment 1,309,042
Goodwill 826,083
Non-compete agreement 100,000
Checks drawn in excess of available bank balance (130,348)
Accounts payable (308,548)
Line of credit (100,000)
Accrued expenses (72,876)
Capital lease obligations (11,741)
Note payable (1,213,571)
$ 1,756,732
</TABLE>
45
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
S. Supplemental Cash Flow Information: (continued)
Allocation of common and preferred stock issued for the assets and
liabilities of ECS during 1997 was as follows:
Accounts receivable $1,121,778
Inventory 2,393,541
Other assets 39,644
Property and equipment 2,017,989
Goodwill 8,010,307
Checks drawn in excess of available bank balance (538,701)
Accounts payable (1,555,686)
Notes payable, related parties (310,000)
Accrued expenses (514,000)
Payable to Mexican affiliate (464,943)
Capital lease obligations (616,684)
Note payable (143,245)
$9,440,000
T. 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).
In September and October 1997, the Company's Articles were amended to
authorize the issuance of A, B, C and D preferred stock. As amended, the
Articles provide that the total number of shares of preferred series A,
B, C and D stock are 4,000, 2,000, 1,500 and 10,000, respectively, each
having a stated value of $1,000 per share.
On October 5, 1995 and August 2, 1996 the Company effectuated a five for
seven (5:7) and a one for five (1:5) reverse stock splits, respectively.
The effect of these events have been restated retroactively on the
Statement of Shareholders' Equity.
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.
46
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
T. Capital Stock: (continued)
Original Preferred Stock (continued)
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 or involuntary, the holders of record
shall be entitled to be paid the full par value of Original Preferred
Stock, and no more.
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. No shares have
been issued.
Series A 9% Convertible Preferred Stock
Non-voting convertible preferred stock, 4,000 shares authorized with a
stated value of $1,000 per share. Holders of shares shall be entitled to
receive cumulative dividends at a rate equal to 9% per annum. Series A
convertible preferred stock is subject to redemption at any time, at the
option of the Company, at a redemption price equal to $1,000 per share
plus accrued and unpaid dividends to the date of redemption. Holders of
Series A Convertible Preferred Stock may convert their shares into
either (A) a number of shares of fully paid and non-assessable common
stock of Electronic Components Systems, Inc., a Nevada Corporation,
equal to .0015% of total outstanding shares of ECS or (B) shares of
fully paid and non-assessable common stock of the Company. Dividends are
to be declared and paid monthly. Dividends totaling $90,000 were accrued
at December 31, 1997 for Series A.
Series B 9% Convertible Preferred Stock
Non-voting convertible preferred stock, 2,000 shares authorized with a
stated value of $1,000 per share. Holder of shares shall be entitled to
receive cumulative dividends at a rate equal to 9% per annum. Series B
convertible preferred stock is subject to redemption at any time, at the
option of the Company, at a redemption price equal to $1,000 per share,
plus accrued and unpaid dividends to the date of redemption. Holders of
Series B convertible preferred stock may convert their shares into
either (A) a number of shares of fully paid and non-assessable shares of
common stock of Pego Systems, Inc., a California Corporation, equal to
.015% of total outstanding shares of Pego or, (B) shares of fully paid
non-assessable common stock of the Company. Dividends are to be declared
and paid monthly. Dividends totaling $45,000 were accrued at December
31, 1997 for Series B.
Series C Redeemable Preferred Stock
Non-voting, non-participating redeemable preferred stock, 1,500
authorized, with a par value of $1,000 per share. Series C preferred
stock is junior to the original preferred stock and any other class or
series of capital
47
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
stock of the Company which are specifically ranked senior (senior
securities). Series C preferred stock is redeemable at any time, at the
discretion of the Company, at a redemption price of $1,000 per share.
T. Capital Stock: (continued)
Series D Convertible Preferred Stock
Voting convertible preferred stock, 10,000 shares authorized with a
stated value of $1,000 per share. Holders of Series D Convertible
Preferred Stock shall be entitled to receive, when declared by the Board
of Directors, dividends at a par with holders of the Company's common
stock, as if the Series D Convertible Preferred Stock had been converted
in common stock on the record date for the payment of dividend. Each
outstanding share of Series D Convertible Preferred Stock shall be
convertible, at the option of its holder, at any time, into a number of
shares of common stock of the Company at a conversion rate equal to
$1,000 divided by the market price of the Company's common stock.
U. 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, 1997, 1996 and 1995.
V. Warrants:
As of December 31, 1997 there were 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,
1997.
W. Foreign Operations:
Selected financial data for the Company's foreign operations is as
follows:
<TABLE>
<CAPTION>
(Unaudited) (Unaudited) (Unaudited)
December 31, 1997 September 27, 1996 December 31, 1995
<S> <C> <C> <C>
Revenues $ - $ 458,236 $ 249,784
Operating loss$ -$(2,132,168) $ (1,499,598)
Total assets $3,004,740 $ 9,228,255 $10,366,707
</TABLE>
48
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
X. Stock Subscription Agreements:
In October 1996, the Company entered into two stock subscription
agreements. Terms of the agreements include that the subscribers can
purchase up to 20,000 common shares of The Hartcourt Companies, Inc. per
month for 12 months at $0.50 per share. The Company has $15,000 and
$45,000 on deposit at December 31, 1997 and 1996, respectively.
Y. Loss Per Share:
The following reconciles amounts reported in the financial statements
for the years ended December 31, 1997, 1996 and 1995, respectively:
<TABLE>
<CAPTION>
1997
Income (loss) Shares Per-share
(Numerator) (Denominator) Amount
<S> <C> <C>
Income (loss) from continuous operations $(474,372) - $ -
Less preferred stock dividends (135,000) - -
Income (loss) available to common stock-
holders - basic earnings per share (609,372) 12,550,337 $(0.05)
Effect of dilutive securities - -
Income (loss) available to common stock-
holders - diluted earnings per share $(609,372) 12,550,337 $(0.05)
1996
Income (loss) Shares Per-share
(Numerator) (Denominator) Amount
Income (loss) from continuous operations $ (1,579,738) - $ -
Less preferred stock dividends - - -
Income (loss) available to common stock-
holders - basic earnings per share (1,579,738) 4,814,303 $(0.33)
Effect of dilutive securities - -
Income (loss) available to common stock-
holders - diluted earnings per shar $(1,579,738) 4,814,303 $(0.33)
</TABLE>
49
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Y. Loss Per Share: (continued)
<TABLE>
<CAPTION>
1995
Income (loss) Shares Per-share
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
Income (loss) from continuous operations $ (1,593,891) - $ -
Less preferred stock dividends - - -
Income (loss) available to common stock-
holders - basic earnings per share (1,593,891) 2,915,655 $(0.55)
Effect of dilutive securities - -
Income (loss) available to common stock-
holders - diluted earnings per share $(1,593,891) 2,915,655 $(0.55)
</TABLE>
During 1997 and 1996, the Company had 2,000,000 warrants outstanding,
each convertible into one share of common stock. In addition, during
1997, 1996, and 1995, the Company had convertible preferred stock
outstanding (Note T), each share convertible into common stock. These
instruments were not included in the computation of diluted earnings per
share for any of the years presented, due to their antidilutive effects
based on the net loss reported each year.
Z. Forgiveness of Debt:
During 1997 and 1996, the Company recognized debt forgiveness of
$376,615 and $384,735, respectively. The 1997 forgiveness relates
specifically to the Anja settlement. The 1996 forgiveness relates to
several notes and accounts payable owned to several vendors.
AA.Profit Sharing Plans:
ECS maintains a defined contribution plan (the Plan) for its U.S.
employees that provides for tax deferred benefits under Section 401(K)
of the Internal Revenue Code. The Plan allows employees to make
contributions, 25% of which will be matched by the Company, up to 5% of
an employee's gross salary or the amount allowed by law, as defined. The
Company has made matching contributions to the Plan of approximately
$510 for the year ended December 31, 1997. The Company pays the
administrative costs of the Plan, which approximates $2,000 per year.
Pego has a contributory profit sharing plan (the Plan) as defined under
Sections 401(a) and 501(a) of the Internal Revenue Code. Under the Plan,
employees may contribute 1% to 15% of their compensation. At the
discretion of the Board of Directors, the Company may contribute
additional amounts to the Plan on behalf of those who actively
participate. Company contributions will vest over a six-year period as
established in the Plan. No employer matching contributions were made to
the Plan for the year ended December 31, 1997.
50
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
AB.Major Customers:
During the year ended December 31, 1997, ECS had one significant
customer, Next Level Systems, Inc. Revenue from Next Level Systems, Inc.
for the year ended December 31, 1997 totaled $1,493,686, which
represents 32% of net revenue.
AC.Subsequent Events:
In July 1997, the Company entered into an agreement to purchase a
shopping center located in Perris, California for $6,750,000. The
building complex has 85,000 square feet and has average income of
$620,000 per year. Terms of the transaction include a $25,000 cash down
payment, bank financing of $3,725,000, and 34 of the Company's 68
mineral lease gold lode claims valued at $3,000,000. As of December 31,
1997, the transaction was in escrow pending the availability of bank
financing.
In January 1998, ECS entered into a capital lease agreement with a
financial institution for machinery. The cost of machinery was $186,690
with monthly payments of $3,893 over five years, including interest at
8.8% per annum.
51
<PAGE>
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 52 Chairman of the Board, President,
Chief Executive Officer and Chief
Financial Officer
Frederic Cohn 58 Secretary, Treasurer and Director
Kenneth Silva 71 Vice-President, Marketing and Sales
and Director
Michael L. Caruana 54 Director
James De Rosa 66 Director
James Pruzin 48 Officer
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
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 of the
Company's subsidiary, Pego, an engineering and industrial equipment
manufacturing company, and has held various
52
<PAGE>
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.
James Pruzin became involved in the Company upon the acquisition of ECS. He is a
graduate of Indiana University (1972) with a degree in business administration.
Prior to the ECS acquisition, Mr. Pruzin was the president and sole shareholder
of Electronic Components and Systems, Inc., an Arizona corporation. He is
currently President and Chief Executive Officer of the Company's ECS subsidiary.
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.
As the sole holder of the 1,000 outstanding shares of Company 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.
Rights and Preferences of Preferred Stock
Series A 9% Convertible Preferred Stock
Non-voting convertible preferred stock, 4,000 shares authorized with a stated
value of $1,000 per share. Holders of shares shall be entitled to receive
cumulative dividends at a rate equal to 9% per annum. Series A convertible
preferred stock is subject to redemption at any time, at the option of the
Company, at a redemption price equal to $1,000 per share plus accrued and unpaid
dividends to the date of redemption. Holders of Series A Convertible Preferred
Stock may convert their shares into either (A) a number of shares of fully paid
and non-assessable common stock of Electronic Components Systems, Inc., a Nevada
Corporation, equal to .0015% of total outstanding shares of ECS or (B) shares of
fully paid and non-assessable common stock of the Company. Dividends are to be
declared and paid monthly. Dividends totaling $90,000 were accrued at December
31, 1997 for Series A.
Series B 9% Convertible Preferred Stock
Non-voting convertible preferred stock, 2,000 shares authorized with a stated
value of $1,000 per share. Holder of shares shall be entitled to receive
cumulative dividends at a rate equal to 9% per annum. Series B convertible
preferred stock is subject to redemption at any time, at the option of the
Company, at a redemption price equal to $1,000 per share, plus accrued and
unpaid dividends to the date of redemption. Holders of Series B convertible
preferred stock may convert their shares into either (A) a number of shares of
fully paid and non-assessable shares of common stock of Pego Systems, Inc., a
California Corporation, equal to .015% of total outstanding shares of Pego or,
(B) shares of fully paid non-assessable common stock of the Company. Dividends
are to be declared and paid monthly. Dividends totaling $45,000 were accrued at
December 31, 1997 for Series B.
Series C Redeemable Preferred Stock
53
<PAGE>
Non-voting, non-participating redeemable preferred stock, 1,500 authorized, with
a par value of $1,000 per share. Series C preferred stock is junior to the
original preferred stock and any other class or series of capital stock of the
Company which are specifically ranked senior (senior securities). Series C
preferred stock is redeemable at any time, at the discretion of the Company, at
a redemption price of $1,000 per share.
Series D Convertible Preferred Stock
Voting convertible preferred stock, 10,000 shares authorized with a stated value
of $1,000 per share. Holders of Series D Convertible Preferred Stock shall be
entitled to receive, when declared by the Board of Directors, dividends at a par
with holders of the Company's common stock, as if the Series D Convertible
Preferred Stock had been converted in common stock on the record date for the
payment of dividend. Each outstanding share of Series D Convertible Preferred
Stock shall be convertible, at the option of its holder, at any time, into a
number of shares of common stock of the Company at a conversion rate equal to
$1,000 divided by the market price of the Company's common stock.
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
31,1997, 1996 and 1995 to the person serving as the Company's Chief Executive
Officer during the years ended December 31, 1996.
Name and Principal Position Fiscal Year Annual Salary
Dr. Alan V. Phan, Chief Executive Officer 1997 $175,000
1996 $100,000
1995 $ 70,000
The Company has an employment agreement with its chief executive officer, Alan
Phan. There are no salary, bonus or incentive plans covering cash or Company
stock 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, 1997 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.
Name and Address oAmount and Nature Percent of
Beneficial Owner Beneficial OwnersCommon stock
54
<PAGE>
Dr. Alan V. Phan 1,396,718 (3) 14.0%
19104 South Norwalk Boulevard
Artesia, California 90701
Frederic Cohn7,609 *
19104 South Norwalk Boulevard
Artesia, CA 90701
Michael L. Caruana210,000 13.0%
19104 South Norwalk Boulevard
Artesia, CA 90701
James De Rosa7,609 *
19104 South Norwalk Boulevard
Artesia, CA 90701
Jim Pruzin and Antoinette Pruzin J/T
931 E. Calle Mariposa
Tucson, AZ 857182,500,000 (8) 15.2%
Dragon King Investment Services, Ltd.
c/o Fred Luke
4521 Campus Drive
Irvine, CA 92512880,000 (9) 5.3%
CEDE & Co.4,573,596 (7) 27.8%
55 Water Street 2SL
New York, NY 10041
Tiana Corporation1,767,664 (4) (5) 10.7%
Kai Tak Commercial Building
Room 704A
317 Des Voeux Road Central
Hong Kong, China
NuOasis International, Inc.1,300,000 (6) 7.98%
2 Park Plaza, Suite 470
Irvine, California 92714
All officers and directors
as a group1,621,936 9.9%
*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.
55
<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
occupance is received. NuOasis is a non-affiliate of the Company.
(7) CEDE & Co. Is a deposit trust corporation (stock brokerage company).
(8) Jim Pruzin and his wife, Antoinette, jointly owned the former
Electronic Components and Systems, Inc.,
Arizona Corp. which was acquired by the Company on October 28, 1997.
(9) Subsidiary of NuOasis International, Inc.
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."
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."
56
<PAGE>
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 August 1996, the Company purchased an apartment complex located near Beijing,
China $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 occupance
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, 1997 and 1996.
On October 3, 1997, the Company purchased the outstanding shares of Pego
Systems, Inc. (Pego) where Pego became a wholly-owned subsidiary of the Company.
Pego, a manufacturer's representative organization for air and gas handling
equipment, offers a full line of value added services including distribution,
service and manufacturing of custom process equipment packages. In connection
with the purchase, the Company paid $500,000 in cash, issued 450,000 shares of
restricted common stock, 1,500 shares of Series "C" redeemable preferred stock,
and entered into a non-compete agreement with Pego's majority shareholder,
Michael Caruana, who was prior to the acquisition, and still is, a director of
the Company. See Part II, F/S, "Consolidated Financial Statements, Years Ended
December 31, 1997 and 1996 - Notes to Consolidated Financial Statements, Note B.
"Investments and Business Acquisitions".
During 1997, the Company advanced to Dr. Alan Phan, a director, executive
officer and promoter of the Company, $96,691.
During 1997, a director of the Company loaned the Company $110,000 for working
capital.
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.
<TABLE>
<CAPTION>
Exhibit No. Description of Document
<S> <C>
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)
2.03 Agreement between The Hartcourt Companies, Inc. and the
shareholder of Pego Systems, Inc., "Stock Purchase Agreement",
dated June 29, 1997 (3)
2.04 Agreement and Plan of Reorganization, dated October 28, 1997,
57
<PAGE>
between The Hartcourt Companies, Inc., Electronic Component
and Systems, Inc., and Pruzin Technologies, Inc. (4)
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)
4.02 Articles of Amendment of the Articles of Incorporation of The
Hartcourt Companies, Inc., Designating Series A 9% Preferred Stock.
4.03 Articles of Amendment of Articles of Incorporation of The
Hartcourt Companies, Inc. Designating Series B 9% Preferred Stock.
4.04 Certificate of Amendment of the Articles of Incorporation of The
Hartcourt Companies, Inc. Designating Series C Preferred Stock.
4.05 Articles of Amendment of the Articles of Incorporation of The
Hartcourt Companies, Inc. Designating Series D Preferred Stock.
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)
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,
58
<PAGE>
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 The Hartcourt
Companies, Inc. and American Equities LLC, a California limited
liability company. (2)
10.14 Investment Banking Agreement, dated March 1998, between The Hartcourt
Companies, Inc. and DanAllen Investment Group.
10.16 Marketable Securities Agreement, dated July 31, 1997, between The Hartcourt
Companies, Inc. and Capital Commerce, Ltd.
10.17 Lease Termination Agreement, dated March 24, 1998, between Hartcourt
Investment (USA) Corporation and Scripto-Tokai Corporation.
21.01 Subsidiaries of the Company.
23.01 Consent of Independent Certified Public Accountants.
27.01 Financial Data Schedule.
</TABLE>
Pursuant to Rule 12b-32 under Securities and Exchange Act of 1934, as amended.
(1) Previously filed as an exhibit to the Company's Form 10SB, File No.
97636406 and incorporated herein by
reference.
(2) Previously filed as an exhibit to the Company's 10-KSB, dated April 15,
1997, File No. 97581142 and as
amended by the Company's Form 10-KSB40/A, dated July 3, 1997, File No.
97636294. Incorporate herein
by reference.
(3) Previously filed as an exhibit to the Company's Form 8-K, dated October
21, 1997, file No. 97698732 and as
amended by the Company's Form 8-K/A, dated October 27, 1997, File No.
97701302. Incorporated herein
by reference.
59
<PAGE>
(4) Previously filed as exhibit to the Company's Form 8-K, dated November 12,
1997, File No. 97715149.
Incorporated herein by reference.
b. Reports on Form 8-K
(1) Company's Form 8-K dated October 21, 1997, File No. 97698732 and as
amended by the Company's form 8-
K/A, dated October 27, 1997, File No. 97701302.
Acquisition of Pego Systems, Inc., including audited financial statements
of Pego Systems, Inc. for the years
ended June 30, 1997 and 1996.
(2) Company Form 8-K, dated November 12, 1997, File No. 97715149.
Agreement and Plan of Reorganization, dated October 28, 1997, between The
Hartcourt Companies, Inc.,
Electronic Components and Systems, Inc. and Pruzin Technologies, Inc.
including audited financial statements
of Electronic Components and Systems, Inc. and Pruzin Technologies, Inc.
for the year ended December
31,1996 and the seven months ended July 31, 1997.
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.
60
<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: April 8, 1998 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 Chairman April 8, 1998
Alan V. Phan President, Chief Executive
Officer and Chief Financial
Officer
/s/ FredeSecretaryApril 8, 1998nd
Frederic Cohn Director
/s/ KenneVice PresApril 8, 1998ing
Kenneth Silva and Sales and Director
/s/ MichaDirectoraApril 8, 1998
Michael Caruana
/s/ JamesDirector April 8, 1998
James De Rosa
61
<PAGE>
ARTICLES OF AMENDMENT
OF THE
ARTICLES OF INCORPORATION
OF
THE HARTCOURT COMPANIES, INC.
DESIGNATING SERIES A PREFERRED STOCK
Alan Phan and Frederic Cohn certify that they are the President and
Secretary, respectively, of The Hartcourt Companies, Inc., a Utah corporation
(hereinafter referred to as the "Corporation" or the "Company"); that, pursuant
to the Articles of Incorporation, as amended, and Section 16-10a-602 of the Utah
Business Corporation Act, the Board of Directors of the Corporation acting
without shareholder approval, which is not required under such Section
16-10a-602 adopted the following amendment to Article IV of the Articles of
Incorporation on October __, 1997:
The following is hereby appended to the end of Article IV of the
Articles of Incorporation:
SERIES A CONVERTIBLE PREFERRED STOCK
1. Creation of Series A Convertible Preferred Stock. There is hereby
created a series of preferred stock, consisting of 4,000 shares and designated
as the Series A Convertible Preferred Stock, having the voting powers,
preferences, relative, participating, optional and other special rights and the
qualifications, limitations and restrictions thereof that are set forth below.
2. Dividend Provisions. In the event the Corporation declares a
dividend payable to shareholders of Common Stock of the Corporation, the holders
of shares of Series A Convertible Preferred Stocks shall be entitled to receive,
out of any funds at the time legally available therefor, dividends (the
"Dividends") at a rate equal to the amount which such holders would be entitled
to receive, if such holders of Series A Convertible Preferred Stock had
converted their shares into Common Stock of the Company as set forth in Section
5(a)(1)(B) on the business day immediately prior to the record date for the
payment of such dividend. Each share of Series A Convertible Preferred Stock
shall rank on a parity with each other share of Series A Convertible Preferred
Stock and Series B Convertible Preferred Stock with respect to Dividends.
3. Redemption Provisions. The Series A Convertible Preferred Stock
shall be subject to redemption, at any time at the option of the Corporation, at
a redemption price equal to $1,000 per share plus accrued and unpaid dividends
to the date of redemption. Such redemption shall be effected by the Corporation
on no less than ten day's written notice to the holders of the Series A
Convertible Preferred Stock, such notice to be deemed given, when delivered by
person or by facsimile transmission, provided such delivery is followed by
delivery by overnight courier or personal delivery within two business days
thereof, provided, however, that such notice and redemption will be terminated
and of
1
<PAGE>
no force or effect in the event a holder submits a Notice of conversion prior to
the date of redemption.
4. Liquidation Provisions. In the event of any liquidation, dissolution
or winding up of the Corporation, whether voluntary or involuntary, the Series A
Convertible Preferred Stock shall be entitled to receive an amount equal to
$1,000.00 per share, plus accrued but unpaid Dividends. After the full
preferential liquidation amount has been paid to, or determined and set apart
for, all other series of Preferred Stock hereafter authorized and issued, if
any, the remaining assets of the Corporation available for distribution to
shareholders shall be distributed ratably to the holders of the common stock. In
the event the assets of the Corporation available for distribution to its
shareholders are insufficient to pay the full preferential liquidation amount
per share required to be paid to the holders of the Corporation's Series A
Convertible Preferred Stock, the entire amount of assets of the Corporation
available for distribution to shareholders shall be paid up to their respective
full liquidation amounts first to the Series A Convertible Preferred Stock, the
Series B Convertible Preferred Stock and the Series C Convertible Preferred
Stock, and to any other series of Preferred Stock hereafter authorized and
issued, all pari passu, all of which amounts shall be distributed ratably among
holders of each such series of Preferred Stock, and the holders of common stock
shall receive nothing. A reorganization or any other consolidation or merger of
the Corporation with or into any other corporation, or any other sale of all or
substantially all of the assets of the Corporation, shall not be deemed to be a
liquidation, dissolution or winding up of the Corporation within the meaning of
this Section 4, and the Series A Convertible Preferred Stock shall be entitled
only to (i) the right provided in any agreement or plan governing the
reorganization or other consolidation, merger or sale of assets transaction,
(ii) the rights contained in the Utah General Corporation Law and (iii) the
rights contained in other Sections hereof.
5. Conversion Provisions. The holders of shares of Series
A Convertible Preferred Stock shall have conversion rights as
follows (the "Conversion Rights"):
(a) Right to Convert.
(1) Each share of Series A Convertible Preferred
Stock (the "Preferred Shares") shall be convertible, at the
option of its holder, upon 75 days notice at any time, into
either (A) a number of shares of fully-paid and non-assessable
common stock of Electronic Companies and Services, Inc., a
Nevada corporation and a wholly owned subsidiary of the
Corporation ("ECS Nevada") equal to .0075% of the total
outstanding shares of ECS Nevada common stock (the "ECS Nevada
Conversion Rate") or (B) a number of shares of fully paid and
non-assessable Common Stock of the Corporation at the
conversion rate (the
2
<PAGE>
"Conversion Rate") equal to $1,000 divided by the Market
Price. For purposes of this Section 5(a)(1), Market Price
shall be the closing bid price of the Common Stock on the
Conversion Date, as reported by the Electronic Bulletin Board
sponsored by the National Association of Securities Dealers,
the closing bid price on the NASDAQ Small Cap Market, if the
Common Stock is then trading on the NASDAQ Small Cap Market or
the last sale price of the Common Stock on any stock exchange
or NASDAQ National Market System, if the Common Stock is then
trading on such exchange or NASDAQ/NMS. The ECS Nevada
Conversion Rate shall be determined based on the number of
shares of ECS Nevada Common Stock then outstanding on a fully
diluted basis, after giving effect to the conversion of all
outstanding convertible securities and the exercise of all
options or warrants to purchase ECS Nevada Common Stock;
provided, however, that on and after the Public Date the ECS
Nevada Conversion Rate shall be determined based on the number
of fully diluted shares of ECS Nevada Common Stock outstanding
as of the Public Date, after giving effect to the conversion
of all convertible securities and the exercise of all options
or warrants to purchase ECS Nevada common stock outstanding as
of the Public Date. For purposes of this Section 5(a)(1), the
"Public Date" shall be the earlier of (x) the date on which a
registration statement filed by ECS Nevada under the
Securities Act of 1933 or the Securities Exchange Act of 1934,
or successor statutes, has become effective, whether by
acceleration or by operation of law, or (y) the first date on
which a class of the common stock of ECS Nevada first trades
on an inter-dealer quotation system or any stock exchange.
The holder shall notify the Corporation, by facsimile
notice to the Corporation at (310) 403-1130, copy by overnight
courier at 19104 S. Norwalk Boulevard, Artesia, California
90701 of the holder's intent to convert (the "Notice of
Conversion") in the form set forth in Section 5(a)(3) hereof,
executed by the holder of the Preferred Share(s) evidencing
such holder's intention to convert these Preferred Share(s) or
a specified portion (as above provided) hereof, and
accompanied, if required by the Corporation, by proper
assignment thereof in blank. Such conversion shall be
effectuated by surrendering the Preferred Shares to be
converted.
The date on which notice of conversion shall be given
shall be the date on which the holder has delivered to the
Corporation, by facsimile or hand delivery, the Notice of
Conversion duly executed to the Corporation. The Corporation
shall cause its transfer agent or the ECS Nevada transfer
agent, as the case may be, to complete the issuance of
securities within ten (10) business days
3
<PAGE>
of receipt of such Notice of Conversion, provided that the
Corporation has received the Series A Convertible Preferred
Stock certificates which are the subject of the conversion on
or prior to such tenth business day.
(2) No less than 10 (or multiple thereof) shares of
Series A Convertible Preferred Stock may be converted at any
one time. No fractional shares of common stock shall be issued
upon conversion of the Series A Convertible Preferred Stock.
In lieu of fractional shares, the Corporation shall pay cash.
(3) The Notice of Conversion shall read
substantially as follows:
The undersigned holder ( the "Holder") is
surrendering to The Hartcourt Companies, Inc., a Utah
corporation (the "Company"), one or more certificates
representing shares of Series A Convertible Preferred Stock of
the Corporation (the "Preferred Stock") in connection with the
conversion of all or a portion of the Preferred Stock into:
Check applicable box
[ ] shares of Common Stock, $.01 par value per share,
of the Corporation (the "Common Stock")
[ ] shares of Common Stock, $.001 par value per share,
of ECS Nevada (the "ECS Common Stock")
1. The Holder understands that the Preferred Stock
was issued by the Corporation pursuant to the exemption from
registration under the United States Securities Act of 1933,
as amended (the "Securities Act"), provided by Section 4(2)
thereof.
2. The Holder represents and warrants that all offers
and sales of the Common Stock or ECS Common Stock issued to
the Holder upon such conversion of the Preferred Stock shall
be made (a) pursuant to an effective registration statement
under the Securities Act, (b) in compliance with Rule 144, or
(c) pursuant to some other exemption from registration.
Number of Shares of Preferred Stock being converted:
Number of Shares to be issued:
Conversion Date:
Delivery Instructions for certificates of Common Stock or ECS
Common Stock and for new certificates representing any
remaining shares of Preferred Stock:
4
<PAGE>
NAME OF HOLDER:
(Signature of Holder)
(4) Upon receipt of the original certificates
representing the Series A Convertible Preferred Stock, the
Corporation shall issue, or cause to be issued, and deliver to
the Holder the appropriate number of shares of Common Stock or
ECS Nevada Common Stock no later than ten (10) business days
thereafter. If the fails to issue such Common Stock or ECS
Nevada Common Stock within ten (10) business days following
the date of receipt of the original certificates representing
the Series A Convertible Preferred Stock, the Corporation
shall promptly pay the following payments to such Holder.
<TABLE>
<CAPTION>
Number of Business Days
After Receipt of Series A
Convertible Preferred Stock Payment
<S> <C> <C>
11 $ 500
12 1,000
13 1,500
14 2,000
15 2,500
16 3,000
17 3,500
18 4,000
19 4,500
20 5,000
20 Additional $1,000/day
</TABLE>
To the extent that the failure of the Corporation to issue the Common
Stock or ECS Nevada Common Stock pursuant to Section 5(a) is due to the
unavailability of authorized but unissued shares of Common Stock, the provisions
of this Section 5(a)(4) shall not apply but instead the provision of Section
5(f)(2) shall apply.
The Corporation shall pay any payments incurred under this Section
5(a)(4) in immediately available funds within 7 business days from the date of
issuance of the applicable Common Stock, or ECS Nevada Common Stock. Nothing
herein shall limit a holder's right to pursue actual damages for the
Corporation's failure to issue and deliver shares of Common Stock or ECS Nevada
Common Stock to the holder in accordance with the terms of these Articles of
Amendment of the Articles of Incorporation.
5
<PAGE>
(b) Adjustments to Conversion Rate.
(1) Reclassification, Exchange and Substitution. If
the common stock of either the Corporation or ECS Nevada (each
of which may be referred to in this Section 5 as the "Issuer")
issuable on conversion of the Series A Convertible Preferred
Stock shall be changed into the same or a different number of
shares of any other class or classes of stock, whether by
capital reorganization, reclassification, reverse stock split
or forward stock split or stock dividend or otherwise (other
than a subdivision or combination of shares provided for
above), the holders of the Series A Convertible Preferred
Stock shall, upon its conversion, be entitled to receive, in
lieu of the Issuer common stock which the holders would have
become entitled to receive but for such change, a number of
shares of such other class or classes of stock that would have
been subject to receipt by the holders if they had exercised
their rights of conversion of the Series A Convertible
Preferred Stock immediately before that change.
(2) Reorganizations, Mergers, Consolidations or Sale
of Assets. If at any time there shall be a capital
reorganization of the Issuer's common stock (other than a
subdivision, combination, reclassification or exchange of
shares provided for elsewhere in this Section (b) or merger of
the Issuer into another corporation, or the sale of the
Issuer's properties and assets as, or substantially as, an
entirety to any other person), then, as a part of such
reorganization, merger or sale, lawful provision shall be made
so that the holders of the Series A Convertible Preferred
Stock shall thereafter be entitled to receive upon conversion
of the Series A Convertible Preferred Stock, the number of
shares of stock or other securities or property of the Issuer,
or of the successor corporation resulting from such merger, to
which holders of the common stock deliverable upon conversion
of the Series A Convertible Preferred Stock would have been
entitled on such capital reorganization, merger or sale if the
Series A Convertible Preferred Stock had been converted
immediately before that capital reorganization, merger or sale
to the end that the provisions of this paragraph (b)(2)
(including adjustment of the Conversion Rate then in effect
and number of shares purchasable upon conversion of the Series
A Convertible Preferred Stock) shall be applicable after that
event as nearly equivalently as may be practicable.
(c) No Impairment. The Corporation will not, by
amendment of its Articles of Incorporation or those of ECS
Nevada or through any reorganization, recapitalization,
transfer of assets, merger, dissolution, or any other
voluntary action, avoid or seek to avoid the observance or
6
<PAGE>
performance of any of the terms to be observed or performed hereunder
by the Corporation, but will at all times in good faith assist in the
carrying out of all the provisions of this Section 5 and in the taking
of all such action as may be necessary or appropriate in order to
protect the Conversion Rights of the holders of the Series A
Convertible Preferred Stock against impairment. So long as shares of
Series A Convertible Preferred Stock are outstanding, the Corporation
may not waive or amend any term of these Articles of Amendment of the
Articles of Incorporation.
(d) Certificate as to Adjustments. Upon the occurrence of each
adjustment or readjustment of the Conversion Rate for any shares of
Series A Convertible Preferred Stock, the Corporation at its expense
shall promptly compute such adjustment or readjustment in accordance
with the terms hereof and prepare and furnish to each holder of Series
A Convertible Preferred Stock effected thereby a certificate setting
forth such adjustment or readjustment and showing in detail the facts
upon which such adjustment or readjustment is based. The Corporation
shall, upon the written request at any time of any holder of Series A
Convertible Preferred Stock, furnish or cause to be furnished to such
holder a like certificate setting forth (i) such adjustments and
readjustments, (ii) the Conversion Rate in effect at the time, and
(iii) the number of shares of Common Stock or ECS Nevada common stock
and the amount, if any, of other property which at the time would be
received upon the conversion of such holder's shares of Series A
Convertible Preferred Stock.
(e) Notices of Record Date. In the event of the establishment
by the Corporation of a record of the holders of any class of
securities for the purpose of determining the holders thereof who are
entitled to receive any dividend (other than a cash dividend) or other
distribution, the Corporation shall mail to each Holder of Series A
Preferred Stock at least twenty (20) days prior to the date specified
therein, a notice specifying the date on which any such record is to be
taken for the purpose of such dividend or distribution and the amount
and character of such dividend or distribution.
(f) Reservation of Stock Issuable Upon Conversion.
(1) The Corporation shall, and the
Corporation shall cause ECS Nevada to, at all times
reserve and keep available out of their respective
authorized but unissued shares of common stock,
solely for the purpose of effecting the conversion of
the shares of the Series A Convertible Preferred
Stock, such number of its shares of their respective
common stock as shall from time to time be sufficient
to effect the conversion of all then outstanding
shares of the Series A and Series B Convertible
7
<PAGE>
Preferred Stock; and if at any time the number of
authorized but unissued shares of their respective
common stock shall not be sufficient to effect the
conversion of all then outstanding shares of the
Series A and Series B Convertible Preferred Stock,
the Corporation will take such corporate action, and
shall cause ECS Nevada to take such corporate action,
as may, in the opinion of its counsel, be necessary
to increase its authorized but unissued shares of
their respective common stock to such number of
shares as shall be sufficient for such purpose.
(2) If at the time any holder of Series A
Convertible Preferred Stock requests conversion
pursuant to a Notice of Conversion under this Section
5, the Corporation or ECS Nevada does not have
sufficient authorized but unissued shares of Common
Stock or ECS Nevada Common Stock, as the case may be,
available to effect the conversion of the Series A
Convertible Preferred Stock which is the subject of
such Notice of Conversion (a "Conversion Default"),
then, with respect to the shares of Series A
Convertible Preferred Stock requested to be converted
but not converted, beginning on the tenth (10th) day
after the applicable date of conversion and ending on
the date of actual conversion of such unconverted
Series A Convertible Preferred Stock and issuance of
Common Stock or ECS Nevada Common Stock therefor, as
the case may be, the Dividend rate shall be increased
by two percent per 30-day period, (24% annually)
compounded and accrued daily.
(g) Notices. Except as otherwise stated herein, any notices
required by the provisions of this Section 5 to be given to the holders
of shares of Series A Convertible Preferred Stock shall be deemed given
if deposited in the United States mail, postage prepaid, and addressed
to each holder of record at its address appearing on the books of the
Corporation.
(h) Status of Converted Stock. Upon conversion of the Series A
Convertible Preferred Stock (in whole or in part) the Series A
Convertible Preferred Stock so converted shall no longer be deemed to
be outstanding and all rights with respect thereto, except only the
right of the holder of Series A Convertible Preferred Stock to receive
shares of Common Stock or ECS Nevada Common Stock, as the case may be,
upon such conversion, shall terminate, and the shares of Series A
Convertible Preferred Stock so converted or redeemed shall be canceled.
The converted shares of Series A Convertible Preferred Stock so
canceled shall return to the status of
8
<PAGE>
authorized but unissued Preferred Stock of no designated
series.
6. Voting Provisions. Except as otherwise expressly
required by the Utah Business Corporations Act or other applicable
law, and except as provided in Section 5(e) hereof, the Series A
Convertible Preferred Stock shall have no voting rights.
7. Rank. The Series A Convertible Preferred Stock shall rank (i) prior
to all of the Corporation's Common Stock, (ii) prior to any class or series of
capital stock of the Corporation hereafter created, and (iii) on a parity with
the Series A Convertible Preferred Stock, in each case as to dividends,
distributions of assets upon liquidation, dissolution, or winding up of the
Corporation, whether voluntary or involuntary.
8. Preference Rights. The Company shall not authorize or
issue any other series of Preferred Stock with dividend and/or
liquidation preferences senior to the dividend, liquidation or
other preferences of the Series A or Series B Convertible Preferred
Stock.
9. Unenforceable Provisions. If any provision of these Articles of
Amendment of the Articles of Incorporation is invalid, illegal or unenforceable,
the balance of these Articles of Amendment of the Articles of Incorporation
shall remain in effect, and if any provision is inapplicable to any person or
circumstance, it shall nevertheless remain applicable to all other persons and
circumstances.
IN WITNESS WHEREOF, the Corporation has caused these Articles of
Amendment to the Articles of Incorporation to be duly executed by its President
and attested to by its Secretary this ____ day of October, 1997.
THE HARTCOURT COMPANIES, INC.
Alan Phan, President
Frederic Cohn, Secretary
9
<PAGE>
ARTICLES OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
THE HARTCOURT COMPANIES, INC.
DESIGNATING SERIES B PREFERRED STOCK
Alan Phan and Frederic Cohn, certify that they are the President and
Secretary, respectively, of The Hartcourt Companies, Inc., a Utah corporation
(hereinafter referred to as the "Corporation" or the "Company"); that, pursuant
to the Articles of Incorporation, as amended, and Section 16-10a-602 of the Utah
Business Corporation Act, the Board of Directors of the Corporation acting
without shareholder approval, which is not required under such Section
16-10a-602 adopted the following amendment to Article IV of the Articles of
Incorporation on October __, 1997:
The following is hereby appended to the end of Article IV of the
Articles of Incorporation:
SERIES B CONVERTIBLE PREFERRED STOCK
1. Creation of Series B Convertible Preferred Stock. There is hereby
created a series of preferred stock, consisting of 2,000 shares and designated
as the Series B Convertible Preferred Stock (the "Series B Preferred Stock"),
having the voting powers, preferences, relative, participating, optional and
other special rights and the qualifications, limitations and restrictions
thereof that are set forth below.
2. Dividend Provisions. In the event the Corporation declares a
dividend payable to shareholders of Common Stock of the Corporation, the holders
of shares of Series B Convertible Preferred Stocks shall be entitled to receive,
out of any funds at the time legally available therefor, dividends (the
"Dividends") at a rate equal to the amount which such holders would be entitled
to receive, if such holders of Series B Convertible Preferred Stock had
converted their shares into Common Stock of the Company as set forth in Section
5(a)(1)(B) on the business day immediately prior to the record date for the
payment of such dividend. Each share of Series B Convertible Preferred Stock
shall rank on a parity with each other share of Series B Convertible Preferred
Stock and Series A Convertible Preferred Stock with respect to Dividends.
3. Redemption Provisions. The Series B Preferred Stock shall be subject
to redemption, at any time at the option of the Corporation, at a redemption
price equal to $1,000 per share plus accrued and unpaid dividends to the date of
redemption. Such redemption shall be effected by the Corporation on no less than
ten day's written notice to the holders of the Series B Preferred Stock, such
notice to be deemed given when delivered by person or by facsimile transmission,
provided such delivery is followed by delivery by overnight courier or personal
delivery within two business days thereof, provided, however, that such notice
and redemption will be terminated and of no force or effect in the event a
holder submits a Notice of Conversion prior to the date of redemption.
<PAGE>
4. Liquidation Provisions. In the event of any liquidation, dissolution
or winding up of the Corporation, whether voluntary or involuntary, the Series B
Preferred Stock shall be entitled to receive an amount equal to $1,000.00 per
share, plus accrued but unpaid dividends. After the full preferential
liquidation amount has been paid to, or determined and set apart for, all other
series of Preferred Stock hereafter authorized and issued, if any, the remaining
assets of the Corporation available for distribution to shareholders shall be
distributed ratably to the holders of the common stock. In the event the assets
of the Corporation available for distribution to its shareholders are
insufficient to pay the full preferential liquidation amount per share required
to be paid to the holders of the Corporation's Series B Preferred Stock, the
entire amount of assets of the Corporation available for distribution to
shareholders shall be paid up to their respective full liquidation amounts first
to the Series B Preferred Stock and the Series A Convertible Preferred Stock,
all pari passu, all of which amounts shall be distributed ratably among holders
of each such series of Preferred Stock, and the holders of common stock shall
receive nothing. A reorganization or any other consolidation or merger of the
Corporation with or into any other corporation, or any other sale of all or
substantially all of the assets of the Corporation, shall not be deemed to be a
liquidation, dissolution or winding up of the Corporation within the meaning of
this Section 4, and the Series B Preferred Stock shall be entitled only to (i)
the right provided in any agreement or plan governing the reorganization or
other consolidation, merger or sale of assets transaction, (ii) the rights
contained in the Utah General Corporation Law and (iii) the rights contained in
other Sections hereof.
5. Conversion Provisions. The holders of shares of Series
B Preferred Stock shall have conversion rights as follows (the
"Conversion Rights"):
(a) Right to Convert.
(1) Each share of Series B Preferred Stock shall be
convertible, at the option of its holder, upon 75 days notice
at any time, into either (A) a number of shares of fully-paid
and non-assessable shares of common stock of Pego (the "Pego
Common Stock") equal to .0150% of the total outstanding shares
of Pego Common Stock of Pego Systems, Inc., a California
corporation and wholly owned subsidiary of the Company
("Pego") (the "Pego Conversion Rate") or (B) a number of
shares of fully paid and non-assessable Common Stock of the
Corporation at the conversion rate (the "Conversion Rate")
equal to $1,000 divided by the Market Price. For purposes of
this Section 5(a)(1), Market Price shall be the closing bid
price of the Common Stock on the Conversion Date, as reported
by the Electronic Bulletin Board sponsored by the National
Association of Securities Dealers, the closing bid price on
the NASDAQ Small Cap Market, if the Common Stock is then
trading on the NASDAQ SmallCap
2
<PAGE>
Market or the last sale price of the Common Stock on any stock
exchange or NASDAQ National Market System, if the Common Stock
is then trading on such exchange or NASDAQ/NMS. The Pego
Conversion Rate shall be determined based on the number of
shares of Pego Common Stock then outstanding on a fully
diluted basis, after giving effect to the conversion of all
outstanding convertible securities and the exercise of all
options or warrants to purchase Pego Common Stock; provided,
however, that on and after the Public Date the Pego Conversion
Rate shall be determined based on the number of fully diluted
shares of Pego Common Stock outstanding as of the Public Date,
after giving effect to the conversion of all convertible
securities and the exercise of all options or warrants to
purchase Pego Common Stock Outstanding as of the Public Date.
For purposes of this Section 5(a)(1), the "Public Date" shall
be the earlier of (x) the date on which a registration
statement filed by Pego under the Securities Act of 1933 or
the Securities Exchange Act of 1934, or successor statutes,
has become effective, whether by acceleration or by operation
of law, or (y) the first date on which a class of the common
stock of Pego first trades on an inter-dealer quotation system
or any stock exchange.
The holder shall notify the Corporation, by facsimile
notice to the Corporation at (310) 403-1130, copy by overnight
courier at 19104 S. Norwalk Boulevard, Artesia, California
90701 of the holder's intent to convert (the "Notice of
Conversion") in the form set forth in Section 5(a)(3) hereof,
executed by the holder of the Preferred Share(s) evidencing
such holder's intention to convert these Preferred Share(s) or
a specified portion (as above provided) hereof, and
accompanied, if required by the Corporation, by proper
assignment thereof in blank. Such conversion shall be
effectuated by surrendering the Preferred Shares to be
converted.
The date on which notice of conversion shall be given
shall be the date on which the holder has delivered to the
Corporation, by facsimile or hand delivery, the Notice of
Conversion duly executed to the Corporation. The Corporation
shall cause its transfer agent or the Pego transfer agent, as
the case may be, to complete the issuance of securities within
ten (10) business days of receipt of such Notice of
Conversion, provided that the Corporation has received the
Series B Preferred Stock certificates which are the subject of
the conversion on or prior to such tenth business day.
(2) No less than 10 (or multiple thereof) shares of
Series B Preferred Stock may be converted at any one time. No
fractional shares of common stock shall be issued upon
conversion of the Series B Preferred Stock.
3
<PAGE>
In lieu of fractional shares, the Corporation shall pay cash.
(3) The Notice of Conversion shall read
substantially as follows:
The undersigned holder ( the "Holder") is
surrendering to The Hartcourt Companies, Inc., a Utah
corporation (the "Company"), one or more certificates
representing shares of Series B Convertible Preferred Stock of
the Corporation (the "Preferred Stock") in connection with the
conversion of all or a portion of the Preferred Stock into:
Check applicable box
[ ] shares of Common Stock, $.01 par value per share,
of the Corporation (the "Common Stock")
[ ] shares of Common Stock, $.001 par value per share,
of Pego (the "Pego Common Stock")
1. The Holder understands that the Preferred Stock
was issued by the Corporation pursuant to the exemption from
registration under the United States Securities Act of 1933,
as amended (the "Securities Act"), provided by Section 4(2)
thereof.
2. The Holder represents and warrants that all offers
and sales of the Common Stock or Pego Common Stock issued to
the Holder upon such conversion of the Preferred Stock shall
be made (a) pursuant to an effective registration statement
under the Securities Act, (b) in compliance with Rule 144, or
(c) pursuant to some other exemption from registration.
Number of Shares of Preferred Stock being converted:
Number of Shares to be issued:
Conversion Date:
Delivery Instructions for certificates of Common Stock or Pego
Common Stock and for new certificates representing any
remaining shares of Preferred Stock:
NAME OF HOLDER:
(Signature of Holder)
4
<PAGE>
(4) Upon receipt of the original certificates
representing the Series B Preferred Stock, the Corporation
shall issue, or cause to be issued, and deliver to the holder
the appropriate number of shares of Common Stock or Pego
Common Stock no later than ten (10) business days thereafter.
If the Corporation fails to issue such Common Stock or Pego
Common Stock within ten (10) business days following the date
of receipt of the original certificates representing the
Series B Preferred Stock, the Corporation shall promptly pay
the following payments to such holder.
5
<PAGE>
<TABLE>
<CAPTION>
Number of Business Days
After Receipt of Series B
Preferred Stock Payment
<S> <C> <C>
11 $ 500
12 1,000
13 1,500
14 2,000
15 2,500
16 3,000
17 3,500
18 4,000
19 4,500
20 5,000
20 Additional $1,000/day
</TABLE>
To the extent that the failure of the Corporation to issue the Common
Stock or Pego Common Stock pursuant to Section 5(a) is due to the unavailability
of authorized but unissued shares of Common Stock, the provisions of this
Section 5(a)(4) shall not apply but instead the provision of Section 5(f)(2)
shall apply.
The Corporation shall pay any payments incurred under this Section
5(a)(4) immediately available funds within 7 business days from the date of
issuance of the applicable Common Stock, or Pego Common Stock. Nothing herein
shall limit a holder's right to pursue actual damages for the Corporation's
failure to issue and deliver shares of Common Stock or Pego Common Stock to the
holder in accordance with the terms of these Articles of Amendment of the
Articles of Incorporation.
(b) Adjustments to Conversion Rate.
(1) Reclassification, Exchange and Substitution. If
the common stock of either the Corporation or Pego (each of
which may be referred to in this Section 5 as the "Issuer")
issuable on conversion of the Series B Preferred Stock shall
be changed into the same or a different number of shares of
any other class or classes of stock, whether by capital
reorganization, reclassification, reverse stock split or
forward stock split or stock dividend or otherwise (other than
a subdivision or combination of shares provided for above),
the holders of the Series B Preferred Stock shall, upon its
conversion, be entitled to receive, in lieu of the Issuer
common stock which the holders would have become entitled to
receive but for such change, a number of shares of such other
class or classes of stock that would have been subject to
receipt by the holders if they had exercised their rights of
conversion of the Series B Preferred Stock immediately before
that change.
(2) Reorganizations, Mergers, Consolidations or
Sale of Assets. If at any time there shall be a capital
reorganization of the Issuer's common stock (other than
6
<PAGE>
a subdivision, combination, reclassification or exchange of
shares provided for elsewhere in this Section (b) or merger of
the Issuer into another corporation, or the sale of the
Issuer's properties and assets as, or substantially as, an
entirety to any other person), then, as a part of such
reorganization, merger or sale, lawful provision shall be made
so that the holders of the Series B Preferred Stock shall
thereafter be entitled to receive upon conversion of the
Series B Preferred Stock, the number of shares of stock or
other securities or property of the Issuer, or of the
successor corporation resulting from such merger, to which
holders of the common stock deliverable upon conversion of the
Series B Preferred Stock would have been entitled on such
capital reorganization, merger or sale if the Series B
Preferred Stock had been converted immediately before that
capital reorganization, merger or sale to the end that the
provisions of this paragraph (b)(2) (including adjustment of
the Conversion Rate then in effect and number of shares
purchasable upon conversion of the Series B Preferred Stock)
shall be applicable after that event as nearly equivalently as
may be practicable.
(c) No Impairment. The Corporation will not, by amendment of
its Articles of Incorporation or those of Pego or through any
reorganization, recapitalization, transfer of assets, merger,
dissolution, or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or
performed hereunder by the Corporation, but will at all times in good
faith assist in the carrying out of all the provisions of this Section
5 and in the taking of all such action as may be necessary or
appropriate in order to protect the Conversion Rights of the holders of
the Series B Preferred Stock against impairment. So long as shares of
Series B Preferred Stock are outstanding, the Corporation may not waive
or amend any term of these Articles of Amendment of the Articles of
Incorporation.
(d) Certificate as to Adjustments. Upon the occurrence of each
adjustment or readjustment of the Conversion Rate for any shares of
Series B Preferred Stock, the Corporation at its expense shall promptly
compute such adjustment or readjustment in accordance with the terms
hereof and prepare and furnish to each holder of Series B Preferred
Stock effected thereby a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment
or readjustment is based. The Corporation shall, upon the written
request at any time of any holder of Series B Preferred Stock, furnish
or cause to be furnished to such holder a like certificate setting
forth (i) such adjustments and readjustments, (ii) the Conversion Rate
in effect at the time, and (iii) the number of shares of Common Stock
or Pego Common Stock and the amount, if any, of other property which at
the time would be received upon the conversion of such holder's shares
of Series B Preferred Stock.
7
<PAGE>
(e) Notices of Record Date. In the event of the establishment
by the Corporation of a record of the holders of any class of
securities for the purpose of determining the holders thereof who are
entitled to receive any dividend (other than a cash dividend) or other
distribution, the Corporation shall mail to each Holder of Series B
Preferred Stock at least twenty (20) days prior to the date specified
therein, a notice specifying the date on which any such record is to be
taken for the purpose of such dividend or distribution and the amount
and character of such dividend or distribution.
(f) Reservation of Stock Issuable Upon Conversion.
(1) The Corporation shall, and the
Corporation shall cause Pego to, at all times reserve
and keep available out of their respective authorized
but unissued shares of common stock, solely for the
purpose of effecting the conversion of the shares of
the Series B Preferred Stock, such number of its
shares of their respective common stock as shall from
time to time be sufficient to effect the conversion
of all then outstanding shares of the Series A
Convertible Preferred Stock and the Series B
Preferred Stock; and if at any time the number of
authorized but unissued shares of their respective
common stock shall not be sufficient to effect the
conversion of all then outstanding shares of the
Series A Convertible Preferred Stock and the Series B
Preferred Stock, the Corporation will take such
corporate action, and shall cause Pego, to take such
corporate action, as may, in the opinion of its
counsel, be necessary to increase their respective
authorized but unissued shares of common stock to
such number of shares as shall be sufficient for such
purpose.
(2) If, at the time any holder of Series B
Preferred Stock requests conversion pursuant to a
Notice of Conversion under this Section 5, the
Corporation or Pego does not have sufficient
authorized but unissued shares of Common Stock or
Pego Common Stock, as the case may be, available to
effect the conversion of the Series B Convertible
Preferred Stock which is the subject of such Notice
of Conversion (a "Conversion Default"), then, with
respect to the shares of Series B Preferred Stock
requested to be converted but not converted beginning
on the tenth (10th) day after the applicable date of
conversion and ending on the date of actual
conversion of such unconverted Series B Convertible
Preferred Stock and issuance of Common Stock or Pego
Common Stock therefor, as the case may be, the
Dividend rate shall be
8
<PAGE>
increased by two percent per 30-day period, (24%
annually) compounded and accrued daily.
(g) Notices. Except as otherwise stated herein, any notices
required by the provisions of this Section 5 to be given to the holders
of shares of Series B Preferred Stock shall be deemed given if
deposited in the United States mail, postage prepaid, and addressed to
each holder of record at its address appearing on the books of the
Corporation.
(h) Status of Converted Stock. Upon conversion of the Series B
Preferred Stock (in whole or in part) the Series B Preferred Stock so
converted shall no longer be deemed to be outstanding and all rights
with respect thereto, except only the right of the holder of Series B
Preferred Stock to receive shares of Common Stock or Pego Common Stock,
as the case may be, upon such conversion, shall terminate, and the
shares of Series B Preferred Stock so converted or redeemed shall be
canceled. The converted shares of Series B Preferred Stock so canceled
shall return to the status of authorized but unissued Preferred Stock
of no designated series.
6. Voting Provisions. Except as otherwise expressly
required by the Utah Business Corporations Act or other applicable
law, and except as provided in Section 5(3) hereof, the Series B
Preferred Stock shall have no voting rights.
7. Rank. The Series B Preferred Stock shall rank (i) prior to all of
the Corporation's Common Stock, (ii) prior to any class or series of capital
stock of the Corporation now existing or hereafter created, and (iii) on a
parity with the Series A Convertible Preferred Stock, in each case as to
dividends of assets upon liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary.
8. Preference Rights. The Corporation shall not authorize or issue any
other series of Preferred Stock with dividend and/or liquidation preferences
senior to the dividend, liquidation or other preferences of the Series A
Convertible Preferred Stock or Series B Preferred Stock.
9. Unenforceable Provisions. If any provision of these Articles of
Amendment of the Articles of Incorporation is invalid, illegal or unenforceable,
the balance of these Articles of Amendment of the Articles of Incorporation
shall remain in effect, and if any provision is inapplicable to any person or
circumstance, it shall nevertheless remain applicable to all other persons and
circumstances.
IN WITNESS WHEREOF, the Corporation has caused these Articles of
Amendment to the Articles of Incorporation to be duly executed by its President
and attested to by its Secretary this ____ day of October, 1997.
THE HARTCOURT COMPANIES, INC.
9
<PAGE>
Alan Phan, President
__________________, Secretary
10
<PAGE>
CERTIFICATE OF AMENDMENT
OF
THE ARTICLES OF INCORPORATION
OF
THE HARTCOURT COMPANIES, INC.
DESIGNATING
SERIES C PREFERRED STOCK
Alan Phan and Frederic Cohn certify that they are the president and
secretary, respectively, of the Hartcourt Companies, Inc., a Utah corporation
(hereinafter called the "Company"); that, pursuant to the Articles of
Incorporation, as amended, and Section 16-10a-602 of the Utah Business
Corporation Act, the Board of Directors of the Corporation, acting without
shareholder approval, which is not required under such Section 16-10a-602
adopted the following amendment to Article IV of the Articles of Incorporation
on September , 1997:
The following is hereby appended to the end of Article IV of the
Articles of Incorporation:
SERIES C PREFERRED STOCK
Section 1. Designation and Amount.
There is hereby created a series of preferred stock, par value
$1,000.00 per share, which shall be designated as "Series C
Preferred Stock" (the "Series C Preferred Stock") and the
number of shares constituting the Series C Preferred Stock
shall be 1,500. Such number of shares may be increased or
decreased by resolution of the Board of Directors; provided,
that no decrease shall reduce the number of shares of Series C
Preferred Stock to a number less than the number of shares
then outstanding plus the number shares reserved for issuance
upon the exercise of outstanding options, rights or warrants
or upon the conversion of any outstanding securities issued by
the Company convertible into Series C Preferred Stock.
Section 2. Rank.
The Series C Preferred Stock shall rank; (i) prior to all of
the Company's Common Stock, par value $0.001 per share
("Common Stock"); (ii) prior to any class or series of capital
stock of the Company hereafter created specifically ranking by
its terms junior to any Series C Preferred Stock of whatever
subdivision (collectively, with the Common Stock, "Junior
Securities"); (iii) on parity with any class or series of
capital stock of the Company hereafter created specifically
ranking by its terms on parity with the Series C Preferred
Stock ("Parity Securities") in each case as to distributions
of assets upon liquidation, dissolution or winding up of the
Company, whether voluntary or involuntary (all such
distributions being referred to collectively as
1
<PAGE>
"Distributions"), and (iv) junior to the Original Preferred
Stock and any other class or series of capital stock of the
Company which is specifically ranked senior to Series C
Preferred Stock ("Senior Securities").
Section 3. Dividends.
The Series C Preferred Stock will bear no dividends, and the
holders of the Series C Preferred Stock shall not be entitled
to receive dividends on the Series C Preferred Stock.
Section 4. Liquidation Preference.
There shall be no liquidation preference.
Section 5. Redemption by Company.
a. Company's Right to Redeem at its Election. At any time,
the Company shall have the right, in its sole discretion,
to redeem, from time to time, any or all of the Series C
Preferred Stock at a redemption price of $1,000.00 per
share. If the Company elects to redeem some, but not all
of the Series C Preferred Stock, the Company shall redeem
a pro-rata amount from each holder of Series C Preferred
Stock unless requested in writing by any holder not to
redeem such holder's shares.
i. Mechanics of Redemption at Company's Election. The
Company shall effect each such redemption by giving
at least 10 days prior written notice ("Notice of
Redemption At Company's Election") to the holders
of Series C Preferred Stock selected for
redemption, at the address and facsimile number of
such holder appearing in the Company's register for
the Series C Preferred Stock, which Notice of
Redemption At Company's Election shall be deemed to
have been delivered three (3) business days after
the Company's mailing (by overnight courier, or by
facsimile with a valid confirmation of
transmission) of such Notice of Redemption At
Company's Election. Such Notice of Redemption At
Company's Election shall indicate the number of
shares of holder's Series C Preferred Stock that
have been selected for redemption, the date which
such redemption is to become effective (the "Date
of Redemption At Company's Election") and the
applicable aggregate redemption price to such
holder.
ii. Payment of Redemption Price. Each holder
submitting stock being redeemed under this Section
5 shall send their certificates representing the
stock so redeemed to the Company, and the Company
shall pay the redemption price to that holder
2
<PAGE>
within ten (10) business days of the date of such
receipt of the certificates. The Company shall not be
obligated to deliver the redemption price unless the
certificates representing the Series C Preferred
Stock so redeemed are delivered to the Company, or in
the event one ore more certificates have been lost,
stolen, mutilated or destroyed, the holder has
complied with Section 5(c) below.
b. Lost or Stolen Certificates. Within three (3) business
days after receipt by the Company of evidence of the
loss, theft, destruction or mutilation of a certificate
or certificates representing the Series C Preferred
Stock, and (in the case of loss, theft or destruction) of
indemnity or security reasonably satisfactory to the
Company, and upon surrender and cancellation of the
certificate representing Series C Preferred Stock, if
mutilated, the Company shall execute and deliver new
Series C Preferred Stock certificates of like tenor and
date. Company shall not be required to deliver new
Series C Preferred Stock if the request for replacement
is made contemporaneously with the redemption of a
holder's Series C Preferred Stock.
Section 6. Holder's Right to Advance Notice of Company's
Election to Redeem.
Holder's Right to Redeem. Holders of Series C Preferred Stock
shall have the right to redeem, in the aggregate, 0.1667
shares of Series C Preferred Stock for each share of Series C
Preferred Stock owned by such holder on or after the last day
of each calendar quarter, at a redemption price equal to
$1,000.00 per whole share redeemed. In the event a holder does
not redeem the full amount of shares such holder is entitled
to redeem after each calendar quarter, such redemption right
shall be cumulative, such that the holder shall have the right
to redeem, in the aggregate, a number of shares of Series C
Preferred Stock equal to .1667 shares of Series C Preferred
Stock for each share of Series C Preferred Stock owned by such
holder plus the number of shares such holder was entitled to
redeem previously which were not redeemed either at the
holder's or the Company's election.
Section 7. Status of Redeemed Stock.
Upon redemption of the Series C Preferred Stock (in whole
or in part) the Series C Preferred Stock so redeemed
shall no longer be deemed to be outstanding and all
rights with respect thereto, except only the right of the
holder of Series C Preferred Stock to receive cash
payment of the applicable redemption price upon such
redemption, shall terminate, and the shares of Series C
Preferred Stock so redeemed shall be canceled. The
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<PAGE>
redeemed shares so canceled shall return to the status of
authorized but unissued Preferred Stock of no designated
series.
Section 8. Protective Provisions.
So long as shares of Series C Preferred Stock are outstanding,
the Company may not waive or amend any term of this
Certificate of Designation without first obtaining the
approval (by vote or written consent) of the holders of 75% of
the then outstanding Series C Preferred Stock.
Section 9. Voting Rights.
The holders of Series C Preferred Stock shall have no voting
rights except as otherwise provided by Section 8 above, and
except to the extent required under the Utah Business
Corporation Act. Holders of the Series C Preferred Stock shall
be entitled to notice of all stockholders meetings or written
consents with respect to which they would be entitled to vote,
which notice would be provided pursuant to the Company's
by-laws and applicable statutes.
Section 10. Preference Rights.
Nothing contained herein shall be construed to prevent the
Board of Directors of the Company from issuing one or more
series of Preferred Stock with dividend and/or liquidation
preferences senior to, on a parity with, or junior to the
preferences of the Series C Preferred Stock.
Section 11. Governing Law.
This Certificate of Designation will be governed by and
construed in accordance with the laws of the State of Utah,
U.S.A. without giving effect to the principles of conflicts of
laws, except for matters arising under the Securities Act of
1933, as amended, the Securities Exchange Act of 1934, as
amended, or other applicable federal law, which matters shall
be governed by and construed in accordance with such laws.
Section 12. Business Day Definition.
For purposes hereof, the term "business day" shall mean any
day on which banks are generally open for business in the
State of California, USA and excluding any Saturday and
Sunday.
Section 13. Notices.
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<PAGE>
Any notice or other communication required or permitted to be
given hereunder shall be given as provided herein or delivered
against receipt if to (i) the Company at 19104 Norwalk Blvd.,
Artesia, California, 90701, ATTN: Alan V. Phan, CEO, Telephone
No. (562) 403-1126, Telecopy No. (562) 403-1130 and (ii) the
holder of this Certificate of Designation, to such holder at
its last address as shown on the Series C Preferred Stock
Register (or to such other address as the party shall have
furnished in writing as its new address to be entered on the
Series C Preferred Stock Register (which address must include
a telecopy number) in accordance with the provisions of this
Section 13). Any notice or other communication may be made by
facsimile and delivery shall be deemed given, except as
otherwise required herein, at the time of transmission of said
facsimile, with a valid confirming transmission report. Any
notice given on a day that is not a business day shall be
effective upon the next business day.
Section 14. Waiver of any Breach to be in Writing.
Any waiver by the Company or the holder hereof of a breach of
any provision of the Certificate of Designation shall not
operate as, or be construed to be a waiver of any other breach
of such provision or of any breach of any other provision of
the Certificate of Designation. The failure of the Company or
the holder hereof to insist upon strict adherence to any term
of the Certificate of Designation on one or more occasions
shall not be considered a waiver or deprive that party of the
right thereafter to insist upon strict adherence to that term
or any other term of the Certificate of Designation. Any
waiver must be in writing.
Section 15. Unenforceable Provisions.
If any provision of this Certificate of Designation is
invalid, illegal or unenforceable, the balance of this
Certificate of Designation shall remain in effect, and if any
provision is inapplicable to any person or circumstance, it
shall nevertheless remain applicable to all other persons and
circumstances.
IN WITNESS WHEREOF, the Company has caused these Articles of Amendment
to the Articles of Incorporation to be duly executed by its president and
attested to by its secretary this day of September, 1997.
THE HARTCOURT COMPANIES, INC.
----------------------------------------
Alan V. Phan, President
5
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ATTEST:
- ----------------------------------------
Frederic Cohn, Secretary
6
<PAGE>
ARTICLES OF AMENDMENT
OF THE
ARTICLES OF INCORPORATION
OF
THE HARTCOURT COMPANIES, INC.
DESIGNATING SERIES D PREFERRED STOCK
Alan Phan and Jehu Hand certify that they are the President and
Assistant Secretary, respectively, of The Hartcourt Companies, Inc., a Utah
corporation (hereinafter referred to as the "Corporation" or the "Company");
that, pursuant to the Articles of Incorporation, as amended, and Section
16-10a-602 of the Utah Business Corporation Act, the Board of Directors of the
Corporation acting without shareholder approval, which is not required under
such Section 16-10a-602 adopted the following amendment to Article IV of the
Articles of Incorporation on October 28, 1997:
The following is hereby appended to the end of Article IV of the
Articles of Incorporation.
1. Creation of Series D Convertible Preferred Stock. There is hereby
created a series of preferred stock consisting of 10,000 shares and designated
as the Series D Convertible Preferred Stock, having the voting powers,
preferences, relative, participating, optional and other special rights and the
qualifications, limitations and restrictions thereof that are set forth below.
2. Dividend Provisions. The holders of shares of Series D Convertible
Preferred Stocks shall be entitled to receive, when and as declared by the Board
of Directors out of any funds at the time legally available therefor, dividends
at a par with holders of the common stock, $.01 par value, of the Corporation
("Common Stock") as if the Series D Convertible Preferred Stock has been
converted into Common Stock on the record date for the payment of dividend.
Dividends shall be waived with respect to any shares of Series D Convertible
Preferred Stock which are converted prior to any dividend payment record date.
Each issued share of Series D Convertible Preferred Stock shall rank on a parity
with each other issued share of Series D Convertible Preferred Stock with
respect to dividends.
3. Redemption Provisions. The Series D Convertible
Preferred Stock shall have no redemption rights.
4. Liquidation Provisions. In the event of any liquidation, dissolution
or winding up of the Corporation, whether voluntary or involuntary, the Series D
Convertible Preferred Stock shall be entitled to receive an amount equal to
$1,000.00 per share. Only after the full preferential liquidation amount has
been paid to, or determined and set apart for, the Series D Convertible
Preferred Stock and all other series of Preferred Stock heretofore or hereafter
authorized and issued, if any, the remaining assets of the Corporation available
for distribution to shareholders shall be distributed ratably to the holders of
the Common Stock. In the
1
<PAGE>
event the assets of the Corporation available for distribution to its
shareholders are insufficient to pay the full preferential liquidation amount
per share required to be paid to the holders of the Corporation's Preferred
Stock, the entire amount of assets of the Corporation available for distribution
to shareholders shall be paid up to their respective full liquidation amounts to
the holders of all classes of Preferred Stock, all of which amounts shall be
distributed among holders of each such series of Preferred Stock according to
their respective terms, and the holders of Common Stock shall receive nothing. A
reorganization or any other consolidation or merger of the Corporation with or
into any other corporation, or any other sale of all or substantially all of the
assets of the Corporation, shall not be deemed to be a liquidation, dissolution
or winding up of the Corporation within the meaning of this Section 4, and the
Series D Convertible Preferred Stock shall be entitled only to (i) the right
provided in any agreement or plan governing the reorganization or other
consolidation, merger or sale of assets transaction, (ii) the rights contained
in the Utah General Corporation Law and (iii) the rights contained in other
Sections hereof.
5. Conversion Provisions. The holders of shares of Series
D Convertible Preferred Stock shall have conversion rights as
follows (the "Conversion Rights"):
(a) Right to Convert.
(1) Each share of Series D Convertible Preferred
Stock shall be convertible, at the option of its holder, at
any time, into a number of shares of common stock of the
Company at the conversion rate (the "Conversion Rate") defined
below.
The Conversion Rate, subject to the adjustments
described below, shall be equal to $1,000 divided by the
Market Price. For purposes of this Section 5(a)(1), Market
Price shall be the closing bid price of the Common Stock on
the Conversion Date, as reported by the Electronic Bulletin
Board sponsored by the National Association of Securities
Dealers or the closing bid price on the NASDAQ Small Cap
Market, if the Common Stock is then trading on NASDAQ,
averaged over the twenty (20) trading days ending on and
including the second trading day prior to the date of
conversion. Notwithstanding the foregoing, in no event shall
the Conversion Rate be less than $1.00 nor more than $2.25, as
adjusted for any stock split or recapitalization.
The holder shall notify the Corporation, by facsimile
notice to the Corporation at (562) 403-1130, copy by overnight
courier at 19104 S. Norwalk Boulevard, Artesia, California
90701, of the holder's intent to convert (the "Notice of
Conversion") in the form set forth in Section 5(a)(2) hereof,
executed by the holder of the shares of Series D Preferred
Stock evidencing such
2
<PAGE>
holder's intention to convert such shares of Series D
Convertible Preferred Stock or a specified portion (as above
provided) thereof, and accompanied, if required by the
Company, by proper assignment thereof in blank. Such
conversion shall be effectuated by surrendering the
certificates representing the shares of Series D Convertible
Preferred Stock to be converted. The date on which notice of
conversion shall be given shall be the date on which the
holder has delivered to the Company, by facsimile or hand
delivery, of the Notice of Conversion duly executed to the
Company; provided, however, that the Conversion Date specified
in such Notice of Conversion is no less than thirty days after
the date on which the Notice of Conversion is given. The
Company shall cause its transfer agent to complete the
issuance of Common Stock within ten (10) business days of
receipt of such Notice of Conversion, provided that the
Company has received the Series D Convertible Preferred Stock
certificates which are the subject of the conversion on or
prior to such tenth business day.
(2) No less than 10 (or multiple thereof) shares of
Series D Convertible Preferred Stock may be converted at any
one time. No fractional shares of Common Stock shall be issued
upon conversion of the Series D Convertible Preferred Stock,
in lieu of fractional shares, the number of shares issuable
will be rounded to the nearest whole share. The form of Notice
of Conversion shall read substantially as follows:
The undersigned holder ( the "Holder") is
surrendering to The Hartcourt Companies, Inc., a Utah
corporation (the "Company"), one or more certificates
representing shares of Series D Convertible Preferred Stock of
the Company (the "Preferred Stock") in connection with the
conversion of all or a portion of the Preferred Stock into
shares of Common Stock, $.01 par value per share, of the
Company (the "Common Stock") as set forth below.
1. The Holder understands that the Preferred Stock
was issued by the Company pursuant to the exemption from
registration under the United States Securities Act of 1933,
as amended (the "Securities Act"), provided by Section 4(2)
thereof.
2. The Holder represents and warrants that all offers
and sales of the Common Stock issued to the Holder upon such
conversion of the Preferred Stock shall be made (a) pursuant
to an effective registration statement under the Securities
Act, (b) in compliance with Rule 144, or (c) pursuant to some
other exemption from registration.
Number of Shares of Preferred Stock being converted:
3
<PAGE>
Conversion Date:
Delivery Instructions for certificates of Common Stock and for
new certificates representing any remaining shares of
Preferred Stock:
NAME OF HOLDER:
(Signature of Holder)
(b) Adjustments to Conversion Rate.
(1) Reclassification, Exchange and Substitution. If
the Common Stock of the Corporation issuable on conversion of
the Series D Convertible Preferred Stock shall be changed into
the same or a different number of shares of any other class or
classes of stock, whether by capital reorganization,
reclassification, reverse stock split or forward stock split
or stock dividend or otherwise (other than a subdivision or
combination of shares provided for above), the holders of the
Series D Convertible Preferred Stock shall, upon its
conversion, be entitled to receive, in lieu of the Common
Stock which the holders would have become entitled to receive
but for such change, a number of shares of such other class or
classes of stock that would have been subject to receipt by
the holders if they had exercised their rights of conversion
of the Series D Convertible Preferred Stock immediately before
that change.
(2) Reorganizations, Mergers, Consolidations or Sale
of Assets. If at any time there shall be a capital
reorganization of the Common Stock (other than a subdivision,
combination, reclassification or exchange of shares provided
for elsewhere in this Section (b) or merger of the Corporation
into another corporation, or the sale of the Corporation's
properties and assets as, or substantially as, an entirety to
any other person), then, as a part of such reorganization,
merger or sale, lawful provision shall be made so that the
holders of the Series D Convertible Preferred Stock shall
thereafter be entitled to receive upon conversion of the
Series D Convertible Preferred Stock, the number of shares of
stock or other securities or property of the Corporation, or
of the successor corporation resulting from such merger, to
which holders of the Common Stock deliverable upon conversion
of the Series D Convertible Preferred Stock would have been
entitled on such capital reorgan-
4
<PAGE>
ization, merger or sale as if the Series D Convertible
Preferred Stock had been converted immediately before that
capital reorganization, merger or sale to the end that the
provisions of this paragraph (b)(2) (including adjustment of
the Conversion Rate then in effect and number of shares
purchasable upon conversion of the Series D Convertible
Preferred Stock) shall be applicable after that event as
nearly equivalently as may be practicable.
(c) No Impairment. The Corporation will not, by amendment of
its Articles of Incorporation or through any reorganization,
recapitalization, transfer of assets, merger, dissolution, or any other
voluntary action, avoid or seek to avoid the observance or performance
of any of the terms to be observed or performed hereunder by the
Corporation, but will at all times in good faith assist in the carrying
out of all the provisions of this Section 5 and in the taking of all
such action as may be necessary or appropriate in order to protect the
Conversion Rights of the holders of the Series D Convertible Preferred
Stock against impairment.
(d) Certificate as to Adjustments. Upon the occurrence of each
adjustment or readjustment of the Conversion Rate for any shares of
Series D Convertible Preferred Stock, the Corporation at its expense
shall promptly compute such adjustment or readjustment in accordance
with the terms hereof and prepare and furnish to each holder of Series
D Convertible Preferred Stock effected thereby a certificate setting
forth such adjustment or readjustment and showing in detail the facts
upon which such adjustment or readjustment is based. The Corporation
shall, upon the written request at any time of any holder of Series D
Convertible Preferred Stock, furnish or cause to be furnished to such
holder a like certificate setting forth (i) such adjustments and
readjustments, (ii) the Conversion Rate in effect at the time, and
(iii) the number of shares of Common Stock and the amount, if any, of
other property which at the time would be received upon the conversion
of such holder's shares of Series D Convertible Preferred Stock.
(e) Notices of Record Date. In the event of the establishment
by the Corporation of a record of the holders of any class of
securities for the purpose of determining the holders thereof who are
entitled to receive any dividend (other than a cash dividend) or other
distribution, the Corporation shall mail to each holder of Series D
Convertible Preferred Stock at least twenty (20) days prior to the date
specified therein, a notice specifying the date on which any such
record is to be taken for the purpose of such dividend or distribution
and the amount and character of such dividend or distribution.
(f) Reservation of Stock Issuable Upon Conversion. The
Corporation shall at all times reserve and keep available out
5
<PAGE>
of its authorized but unissued shares of Common Stock solely for the
purpose of effecting the conversion of the shares of the Series D
Convertible Preferred Stock such number of its shares of Common Stock
as shall from time to time be sufficient to effect the conversion of
all then outstanding shares of the Series D Convertible Preferred
Stock; and if at any time the number of authorized but unissued shares
of Common Stock shall not be sufficient to effect the conversion of all
then outstanding shares of the Series D Convertible Preferred Stock,
the Corporation will take such corporate action as may, in the opinion
of its counsel, be necessary to increase its authorized but unissued
shares of Common Stock to such number of shares as shall be sufficient
for such purpose.
(g) Notices. Any notices required by the provisions of this
Section 5 to be given to the holders of shares of Series D Convertible
Preferred Stock shall be deemed given if deposited in the United States
mail, postage prepaid, and addressed to each holder of record at its
address appearing on the books of the Corporation.
6. Voting Provisions. The Series D Convertible Preferred Stock shall be
entitled to vote as a class with holders of Common Stock with such number of
votes per share as the holder would be entitled to, and at the Conversion Rate,
as if the Series D Preferred Stock were converted on the record date for the
vote of holders of Common Stock.
IN WITNESS WHEREOF, the Company has caused these Articles of Amendment
to the Articles of Incorporation to be duly executed by its President and
attested to by its Assistant Secretary this 28th day of October, 1997.
THE HARTCOURT COMPANIES, INC.
Alan Phan, President
Jehu Hand, Assistant Secretary
6
<PAGE>
March 28, 1998
The Hartcourt Companies, Inc.
19104 S. Norwalk Blvd.
Artesia, California 90701
AttentionMr. Alan V. Phan
President
Gentlemen:
This letter is to confirm our understanding with respect to the engagement of
DanAllen Investment Group, Inc. (DanAllen) by The Hartcourt Companies, Inc.
(Hartcourt) on a non-exclusive basis for one year (the "Engagement Period") to
render certain financial advisory and investment banking services to Hartcourt
in connection with the raising capital for Hartcourt and other financing
transactions.
1. Services to be Rendered. In our role as non-exclusive financial
advisor, DanAllen will provide, during the
Engagement Period, the following services:
a. We will investigate companies which are possible targets fo
acquisition by Hartcourt, as directed
by Hartcourt (a "Subject Company").
b. We will review the proposed acquisition of a Subject Company
from both a strategic and valuation viewpoint and render
merger, acquisition and advisory services include the
following:
i. Make recommendations on an acquisition structure,
the terms and conditions on which an acquisition
could be proposed and the capital structure of the
entity formed to effect an acquisition, and help
develop strategies as needed to be used in the
approach to the Subject Company based on
preliminary due diligence; and
ii. Assist in preliminary due diligence required to
submit initial letters of interest in auction
situations.
c. In the event Hartcourt, in its sole and absolute discretion,
elects to pursue an acquisition or merger with any company,
DanAllen will, at Hartcourt's request (which shall be at
Hartcourt's sole and absolute discretion), render certain
financial advisory and investment banking services including
the following:
i. Assist with the due diligence and review any
proposed acquisition from both a strategic
and valuation viewpoint.
ii. Make recommendations on an acquisition structure,
the terms and conditions on which an
acquisition could be proposed and the capital
structure of the entity formed to effect an
acquisition.
iii. Help develop strategies as need to be used in the
negotiations with the management and
advisors of the Subject Company.
iv. Assist in negotiations with, preparation of
presentation materials to management, lenders,
other sources of financing and other parties
required to effect the acquisition.
v. Assist in identifying and approaching sources
of financing for the acquisition; and
vi. Use our reasonable best efforts to arrange the
financing of the acquisition, including:
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<PAGE>
(1) Identifying financing alternatives,
analyzing the structuring and timing of
the financing and assessing the terms,
conditions and pricing under which
financing could be obtained in the time
frame required to complete the
acquisition;
(2) Acting as advisor and agent in raising o
assisting in raising all financing required
to complete the acquisition; and
(3) Presenting as required a letter to the
Subject Company or its advisors
representing our level of comfort with
respect to the financing which will be
required for the acquisition.
2. Retainer. As compensation for our services, DanAllen will be paid an
advance payment of 100,000 shares
of restricted common stock ("Common stock") of Hartcourt as a deposit
against fees associated with the first
three financings completed by DanAllen for the benefit of Hartcourt.
3. DanAllen's engagement hereunder may be terminated by either Hartcourt
or DanAllen at any time with or without cause, upon thirty (30) days
written notice to the other party, provided, however, that if DanAllen
or Hartcourt so terminates this agreement, DanAllen will promptly
return any unearned fees paid pursuant to Section 2 above.
The validity and interpretation of this Agreement shall be governed by and
construed in accordance with the laws of the State of California applicable to
agreements made and to be performed therein. The benefits of this agreement
shall inure to the respective successors and assigns of the parties hereto, and
the obligations and liabilities assumed in this Agreement by the parties hereto
shall be binding upon their respective successors and assigns. This Agreement
shall be not amended, modified or waived orally.
If the foregoing correctly sets forth our understanding, please sign below and
return an executed copy to DanAllen Investment Group, 19 Rector Street, 21st
Floor, New York, NY 10005.
Sincerely,
DANALLEN INVESTMENT GROUP, INC.
/s/ Richard Bell
President
AGREED TO AND ACCEPTED
THE HARTCOURT COMPANIES, INC.
/s/ Alan V. Phan
President
<PAGE>
EMPLOYMENT AGREEMENT
This Agreement was entered on 10/31/97 by and between:
1.The Hartcourt Companies, a Utah corporation, NASDAQ BB Symbol: HRCT,
located at 19104 S.
Norwalk BI, Artesia, CA. 90701 USA, herein after referred to as
"HARTCOURT"; and
2.Mr. Alan V. Phan , an individual, US citizen, resides at 4141 Ball Road
# 156 Cypress, CA. 90630 USA,
herein after referred to as "PHAN".
WHEREAS:
Hartcourt agreed to employ Phan; and Phan accepted employment with
Hartcourt, under the following terms and conditions:
1.Term: The term of this Agreement is five (5) years, starting on January
1, 1997 through December 31, 2001. The term will be automatically
extended for an additional term of three (3) years, unless Hartcourt or
Phan gives written notice to the other party at least 90 days before
expiration of the term.
2.Position: Hartcourt shall employ Phan as the company's President and
Chief Executive Officer, to perform when and where necessary such duties
related to the overall operation of Hartcourt, and as assigned by the
Board of Directors. Phan will devote his best efforts in and to the
faithful performance of his duties to the exclusion of all other
employment.
3.Compensation:
a. In consideration of the services to be rendered by Phan
and for his duties as assigned by the
Board of Directors, Hartcourt shall pay Phan a annual
base salary as follows:
-For the year ending 12/31/1997 $175,000.
-For the year ending 12/31/1998 $200,000.
-For the year ending 12/31/1999 $225,000.
-For the year ending 12/31/2000 $250,000.
-For the year ending 12/31/2001 $250,000.
Payments will be made in equal monthly installments. In
the event Hartcourt does not have sufficient cash flow to
make above payments, Phan will accept Hartcourt's common
restricted shares for the same amount. Share price will
be calculated at 50% of market trading bid price on
January 1st of the year of the employment.
b. Phan will be entitled to reimbursement for all reasonable
expenses incurred by him in connection
with the performance of his duties, upon presentation of
expense reports per Hartcourt's usual
procedure. Such expenses shall not exceed $1,000. per
month without the authorization of the
Board.
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<PAGE>
c. Phan will be entitled to participate and receive standard
benefits as other Hartcourt employees in similar
position, and in accordance with the benefit plans or
programs set forth by the Board, now or in the future.
These plans will include a medical insurance plan.
d. An automotive allowance up to $600. per month will be
granted to Phan.
4.Termination: Hartcourt may terminate this Agreement upon the occurrence
of any of the following
events;
a. Subject to Section 5(a) below, Hartcourt may terminate
such employment at any time without
good cause upon written notice to Phan;
b. Such employment shall terminate automatically on the
death of Phan;
c. Hartcourt may terminate such employment immediately upon
written notice to Phan for good cause. In such event,
Hartcourt shall pay to Phan an amount, equal to three
months Base Salary. For purpose of this Agreement, "good
cause" shall include the following circumstances:
i. If Phan is convicted of a felony offense;
ii. If there is a repeated and demonstrable failure
on the part of Phan to perform material duties
in a competent manner, and where Phan fails to
substantially remedy the failure within a
reasonable period of time after receiving
written notice of such failure from Hartcourt
(three written notices shall be sufficient to
establish "repeated and demonstrable failure');
iii. If Phan or any member of his family makes any
personal profit at Hartcourt's expense
without prior written consent of Hartcourt;
iv. If Phan disobeys reasonable instructions given
by the Board that are not inconsistent
with his management position.
d. Phan may terminate his employment hereunder upon two
months prior written notice to
Hartcourt.
5.Payments on Termination; Change of Control:
a. Upon termination of Phan's employment for any reason,
Hartcourt shall pay to Phan, or his estate in case of his
death, any accrued unpaid Base Compensation prorated to
the effective date of termination.
b. In addition to above, in the event of termination without
good cause; or in case of Phan's death; Hartcourt shall
make severance payments equal to and in the same manner
as Phan's Base Compensation in effect at such time for
the remaining term of this Agreement;
c. In the event of termination with good cause, Hartcourt
shall make a severance payment equal to three months of
Base Compensation in effect at such time.
6.Covenant Not To Compete:
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Phan agrees that during the term of his employment, he will not,
directly or indirectly, have any ownership interest of five
percent or more in a corporation, firm, trust, association or
other entity which is in competition with Hartcourt.
7. Proprietary Information.
a. For purposes of this Agreement, "proprietary information"
shall mean any information relating to Hartcourt's
business that has not previously been publicly released
by Hartcourt; and shall include, but not limited to,
inventions, computer code, software, notes, written
concepts, drawings, designs, plans, proposals, marketing
and sales plans, financial information, customer
information, and other data, methods concepts, ideas
reasonably related to Hartcourt's business.
b. Phan agrees to regard and preserve as confidential all
proprietary information obtained; during
or prior to his employment term. Phan will not use these
information for his benefit or purpose,
nor disclose to others.
c. Phan agrees not to remove from Hartcourt's premises,
except in pursuing his employment duties or by written
consent of the Board, any document or object containing
proprietary information. Phan recognizes that all such
documents or objects, whether developed by him or others,
are the exclusive property of Hartcourt. A breach of this
provision shall be considered good cause for
8. Notices: Any notice required or permitted to be given hereunder
shall be in writing and shall be delivered
by prepaid registered or certified mail, return receipt requested.
The address for mail notices shall be
same as per first paragraph of this Agreement.
9. Governing Law; Entire Agreement:
This Agreement shall be construed according to the laws of the
State of California; and constitutes the entire understanding
between the parties, superseding and replacing all prior
understandings and agreements. This Agreement cannot be changed,
amended or terminated except by written agreement signed by both
parties.. If any of the provision of this Agreement is invalid or
unenforceable, the remainder of this Agreement shall nevertheless
remain in full force and effect.
In witness whereof, the undersigned have duly executed and
delivered this Agreement as of the date first written above.
THE HARTCOURT COMPANIES, INC.
By: /s/ Frederic Cohn
Corporate Secretary
ALAN V. PHAN
/s/ Alan V. Phan
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CAPITAL COMMERCE LTD.
2B Mansion House, 143 Main Street, Gibraltar
Telephone: 350.76173 Fax: 350.70135
On 28 July 1997, Capital Commerce, Ltd. (an Isle of Man Corporation),
does hereby enter into this agreement with The Harcourt Companies, Inc. (a Utah
Corporation), to provide free trading securities for the purchase of Pego
Industries and the creation of ECS (a Nevada Corporation. to be a wholly owned
subsidiary of Hartcourt). The free trading securities to be provided by Capital
Commerce shall be from its trading portfolio, in the amount of no less than US
$6.000,000.00 as follows:
Capital Commerce Ltd. does hereby agree to provide the following, free trading
securities from its portfolio, to be
used by HRCT as equity capital:
<TABLE>
<CAPTION>
1. Uniforms for America (NASDAQ BB: UNTIF) at the current price of
<S> <C> <C> <C>
US$ 6.00 per share 500,000 shares US $3,000,000
2. The Beverage Store (NASDAQ BB: BEVG) at the current price of
US$ 5.75 per share 260,869 shares US $1,500,000
3. Phone Time Resources, Inc. (NASDAQ BB: PHTM) at the current price of
US$ 1.10 per share 1,363,636 shares US $1,500.000
US$6,000,000
</TABLE>
In exchange for the above referenced securities Hartcourt agrees to issue a
class 'A' convertible, preferred stock, in the amount of $4,000,000.00 bearing
interest at 9% per annum, interest payable in equal monthly amounts of US$
30,000.00 per month, for a term of ten (10) years.
In exchange for the securities in the amount of US $2,000.000.00, Hartcourt
agrees to a class 'B' convertible preferred stock, bearing interest at 9% per
annum, interest payable in equal monthly installments of US $15,000 per month,
for a term of (10) years.
At any time during the 10 years term referenced herein. Hartcourt shall have the
right to call the preferred class 'A' or class 'B' securities provided to
Capital Commerce in exchange for US$4.000.000 for the class 'A' securities and
US$2,000,000 for the class 'B' shares, plus any interest accrued to that date.
Harcourt shall have the right to exchange all or any portion of the portfolio
shares herein, for any other shares of equal or greater value owned by Capital
Commerce.
All preferred shares issued by Hartcourt shall be fully assignable and
transferable on the books of the Company, and shall further be non-assessable.
At the end of the 10 year term, Capital Commerce, its assigns or nominees, may
elect to renew the convertible preferred shares, at the same terms and
conditions as contained herein.
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Special Terms of the Preferred Stock:
1. At the option of Capital Commerce. the Hartcourt class 'A' and class
'B' preferred shares shall be convertible into Hartcourt Common stock,
based upon the Hartcourt closing price per share, on the day of
conversion, on a dollar for dollar basis.
2. In the alternative, at the option of Capital Commerce. the Hartcourt
class 'A' preferred shares shall be convertible into a 30% non diluted
interest in ECS, until such time as ECS has gone public, at which
time, the dilution clause contained herein, shall have no further
force or effect.
3. At the further option of Capital Commerce, the Hartcourt class 'B'
preferred shares shall be convertible into a 30% non diluted interest
in Pego Industries, until such time as Pego has gone public, at which
time the dilution clause contained herein shall have no further force
or effect.
4. Regardless of the status of the preferred shares and the payment of
the interest thereon, the anti-dilution clause will remain in effect
until ECS and Pego commence to trade publicly, so that at no time
prior to the approval of ECS or Pego to trade publicly, shall the
interest of Capital Commerce in Pego or of ECS fall below 30%.
The parties hereto recognize and acknowledge that Mercantile Investment Trust
Ltd. has acted as the intermediary, broker, and finder, in this transaction and
that it shall be entitled to receive compensation related thereto, in the amount
of 10% of the amount of the transaction, specifically US $600,000, payable in
the form of Hartcourt Regulation 'S' stock. The exact number of Hartcourt shares
payable to Mercantile shall be based upon the closing Bid price, upon the date
of execution. Both parties hereby acknowledge the participation of Mercantile
Investment Trust Ltd., and concur that any and all finders fees due and owing to
Mercantile shall be the sole responsibility of Hartcourt.
In the event that it becomes necessary to enforce all or any part of this
transaction through the courts, it is agreed and understood that the prevailing
party will be entitled to recover reasonable attorney fees and costs.
Executed this 28th day of July, 1997
THE HARTCOURT COMPANIES CAPITAL COMMERCE, LTD.
/s/Alan Phan /s/Theresa Poole
By: Alan Phan By: Theresa Poole
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March 23, 1998
Dr. Alan V. Phan
President/CEO
Harcourt Investment (USA) Corporation
19104 South Norwalk Boulevard
Artesia, California 90701
Dear Dr. Phan:
I am attaching an installment note which sets forth the agreement you reached
with our Operating Director, Mr. Fred Ashley, on Thursday, March 19, 1998.
Harcourt Investment (USA) Corporation now owes Scripto-Tokai Corporation
$686,850.56 for various transactions with our wholly owned subsidiary, Anja
Engineering Corporation.
As a result of meeting held over the last few months, we have agreed to a
negotiated settlement of $200,000 to be paid as shown on the enclosed note.
As long as all payments are made in accordance with the enclosed note the
$200,000 plus interest shall represent the full and complete balance due from
your company. If payments are not made as agreed, Harcourt will be responsible
for all attorney's fee and collection costs in addition to the balance due.
I am sure both our companies are glad to be putting this matter behind us.
/s/ Michael G. Forys
Michael G. Forys
Senior Vice President
Accept/s/ Alan V. Phan Date March 24, 1998
Alan V. Phan,
President/CEO
Harcourt Investment (USA) Corporation
69
<PAGE>
INSTALLMENT NOTE
$200,000.00 Fontana, California, March 23, 1998
At the times and in the installments hereinafter stated, for value received,
Harcourt Investment (USA) Corporation promises to pay to the order of
Scripto-Tokai Corporation, 11591 Etiwanda Avenue, Fontana, California 92337, the
negotiated principal sum of two hundred thousand dollars and no cents, payable
as follows, to-wit:
The sum of $100,000 Dollars on the 15th day of May, 1998, and the sum of
$6,414.72 Dollars on the 10th day of each and every succeeding quarter
thereafter including interest from the date until the principal sum shall be
fully paid, at the rate of 10% percent per annum, payable quarterly. The
quarterly payments (see attached schedule) herein provided shall include the
interest, and all sums over and above the accumulated interest at time of
payment shall be applied to the discharge of the principal sum of this note.
Should the interest not be so paid, it shall become a part of the principal, and
thereafter bear like interest as the principal. Should default be made in the
payment of any installment of principal or interest when due, then the whole sum
of the remaining balance of principal and interest shall become immediately due
and payable at the option of the holder of this note. Principal and interest
payable in lawful money of the United States.
/s/ Alan V. Phan, CEO
Alan V. Phan, President, CEO
Harcourt Investment (USA) Corporation
Date:_____________________________________
70
<PAGE>
SUBSIDIARIES OF THE COMPANY
(1) Harcourt Investment (USA), Inc. a Nevada Corporation. including the
accounts of Hartcourt Pen Factory, Inc.,
a Nevada Corporation.
(2) Pego Systems, Inc., a California Corporation.
(3) Electronic Components and Systems, Inc., a Nevada Corporation.
71
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the inclusion in this Annual Report Form 10-KSB of our report
dated February 10, 1998, on our audits of the consolidated financial statements
and schedules of Hartcourt Companies, Inc. and Subsidiaries ("The Company").
Harlan & Boettger, LLP
San Diego, California
April 8, 1998
72
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1997 AND
AS OF DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000949427
<NAME> THE HARTCOURT COMPANIES, INC.
<MULTIPLIER> 1
<CURRENCY> US dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-01-1997
<PERIOD-END> Dec-31-1997
<EXCHANGE-RATE> 1
<CASH> 77,688
<SECURITIES> 5,474,966
<RECEIVABLES> 2,409,454
<ALLOWANCES> 76,477
<INVENTORY> 3,541,321
<CURRENT-ASSETS> 12,670,017
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<DEPRECIATION> 100,027
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<BONDS> 0
1,500,000
9,400,010
<COMMON> 16,442
<OTHER-SE> 27,248,563
<TOTAL-LIABILITY-AND-EQUITY> 45,120,600
<SALES> 4,723,905
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<CGS> 3,688,442
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<INCOME-PRETAX> (472,672)
<INCOME-TAX> 1,700
<INCOME-CONTINUING> (474,372)
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (474,372)
<EPS-PRIMARY> .05
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