U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
For the quarterly period ended June 30,1998
[ ] QUARTERLY REPORT PURSUANT TO SECTION 13 0R 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
Commission File Number: 001-12671
The Hartcourt Companies, Inc.
(Exact name of small business issuer as specified in its charter)
Utah 87-0400541
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2049 Century Park East, Suite 3760, Los Angeles, California
(Address of principal executive offices)
(310) 788-2634
(Issuer's telephone number)
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 restraint was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days: Yes [ X ] No [ ].
As of June 30, 1998, The Hartcourt Companies, Inc. had 18,774,596 shares of
Common Stock Outstanding.
Transitional Small Business Disclosure Format (check one ):
Yes [ ] No [ X ]
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TABLE OF CONTENTS
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
Report on Form 10-QSB
For quarter ended
June 30, 1998
Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited )
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Consolidated Balance Sheets - June 30, 1998 and December 31, 1997 3 - 4
Consolidated Statements of Operations - Quarters ended June
30, 1998 and 1997 and the six months ended
June 30, 1998 and 1997 5
Consolidated Statements of Shareholders' Equity - Six
Months ended June 30, 1998 6
Consolidated Statements of Cash Flows - Six months ended
June 30, 1998 and 1997 7
Notes to the Consolidated Financial Statements 8 - 11
Item 2. Management's Discussion and Analysis of Financial Condition
And results of Operations 12 - 14
PART II OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults upon Senior Securities 14
Item 4. Submission of Matters to Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
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Part I THE HARTCOURT COMPANIES INC. AND SUBSIDIARIES
Item 1. CONSOLIDATED BALANCE SHEETS
ASSETS June 30,
1998 December 31,
CURRENT ASSETS (Unaudited) 1997
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Cash $ 203,982 $ 77,688
Marketable Securities (Note 3) 4,951,063 5,474,966
Accounts receivable, net of allowance for doubtful accounts of
$76,477, in 1998 and 1997, respectively 2,983,200 2,332,977
Trade dollar receivable 38,144 22,670
Notes receivable, current portion 271,936 293,673
Inventory 2,621,679 3,541,321
Prepaid expenses 144,054 130,554
Prepaid consulting fees 664,770 664,770
Due from related parties 188,009 131,398
TOTAL CURRENT ASSETS 12,066,837 12,670,017
PROPERTY AND EQUIPMENT, net 3,558,718 3,568,507
INVESTMENTS 17,906,520 17,906,520
NOTES RECEIVABLE, net of current portion 1,072,805 1,058,267
OTHER ASSETS 566,820 552,289
INTANGIBLES, net 9,169,091 9,365,000
TOTAL ASSETS $ 44,340,791 $ 45,120,600
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable 1,920,788 2,824,419
Accrued expenses and other current liabilities 253,771 1,046,881
Payable to Mexican affiliate 360,549 352,942
Line of credit 856,067 200,000
Notes payable, related parties-current portion 292,904 295,000
Notes payable-current portion 112,383 205,245
Capital lease obligation-current portion 214,074 200,222
Debentures 50,000 50,000
Subscription deposits received - 15,000
TOTAL CURRENT LIABILITIES 4,060,536 5,189,709
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Item 1. THE HARTCOURT COMPANIES INC. AND SUBSIDIARIES
(cont.)
CONSOLIDATED BALANCE SHEETS
(CONTINUED)
June 30,
1998 December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY (cont.) (Unaudited) 1997
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NOTES PAYABLE, RELATED PARTIES, net of current portion 125,000 125,000
NOTES PAYABLE, net of current portion 1,302,980 1,334,327
CAPITAL LEASE OBLIGATIONS, net of current portion 496,528 612,477
TOTAL LIABILITIES 5,985,044 7,261,513
COMMITMENT AND CONTINGENCIES -
SHAREHOLDERS' EQUITY
Preferred Stock
Original preferred stock, $0.01 par value, 1,000 shares 10 10
authorized, issued and outstanding
Series A, $1,000 stated value, 4,000 shares authorized,
issued and outstanding 4,000,000 4,000,000
Series B, $1,000 stated value, 2,000 shares authorized,
issued and outstanding 2,000,000 2,000,000
Series C, $1,000 par value, 1,500 shares authorized,
issued and outstanding 1,000,000 1,500,000
Series D, $1,000 stated value, 10,000 shares authorized,
3,400 shares issued and outstanding 3,400,000 3,400,000
Series AB, $1,000 stated value, 25,000 shares authorized,
270 shares issued and outstanding 405,000 -
Class A, no par, 10,000,000 shares authorized,
none issued and outstanding - -
TOTAL PREFERRED STOCK 10,805,010 10,900,010
Common stock, $0.01 par value, 50,000,000 shares
authorized; 18,774,596 and 16,441,739 shares issued
and outstanding at June 30, 1998 and December 31, 1997 18,775 16,442
Stock subscription receivable (301,000) (26,000)
Treasury stock, at cost (24,364 shares in 1998 and 1997) (279,928) (279,928)
Additional paid-in capital 32,372,701 31,083,604
Accumulated deficit (4,259,811) (3,835,041)
TOTAL SHAREHOLDERS' EQUITY 38,355,747 37,859,087
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 44,340,791 $ 45,120,600
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Item 1. THE HARTCOURT COMPANIES INC. AND SUBSIDIARIES
(cont.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Quarter Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
REVENUES
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Product Sales $ 2,603,034 $ 267,394 $ 7,548,765 $ 271,500
Services and Labor Sales 2,966,869 - 3,124,137 -
TOTAL REVENUE 5,569,903 267,394 10,672,902 271,500
COST OF SALES 4,067,551 190,926 7,748,400 195,325
Gross profit 1,502,352 76,468 2,924,502 76,175
OPERATING EXPENSES
Selling, general and administrative 1,370,742 41,633 2,629,712 144,290
Depreciation and amortization 184,697 420 369,395 5,145
TOTAL OPERATING EXPENSES 1,555,439 42,053 2,999,107 149,435
INCOME (LOSS) FROM OPERATIONS (53,087) 34,415 (74,605) (73,260)
OTHER INCOME (EXPENSES)
Interest expense (78,071) (24,159) (140,104) (26,400)
Interest income 27,780 6,731 37,378 15,475
Miscellaneous Income 23,836 25,556 23,836 25,556
TOTAL OTHER INCOME (EXPENSE) (26,455) 8,128 (78,890) 14,631
NET INCOME (LOSS) BEFORE TAXES (79,542) 42,543 (153,495) (58,629)
Income taxes - 664 1,275 1,041
NET LOSS $ (79,542) $ 41,879 $ (154,770) $ (59,670)
BASIC AND FULLY DILUTED INCOME (LOSS)
PER SHARE $ (.01) $ .00 $ (.03) $ (.01)
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 16,997,215 12,029,029 16,997,215 12,029,029
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Item 1. THE HARTCOURT COMPANIES INC. AND SUBSIDIARIES
(cont.)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
Common
Additional Stock Total
CommonStock Preferred StockPaid in SubscriptionTreasury StockAccumulatedShareholders'
Shares Amount Shares AmountCapital ReceivableShares Amount DeficitEquity
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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
Preferred Stock Issued 270 270,000 270,000
Preferred Stock Redeemed (250) (250,000) (250,000)
Preferred Stock Dividend (135,000) (135,000)
Stock Subscription Received 25,000 25,000
Net Loss (75,228) (75,228)
Balance, March 31, 1998 16,441,739 $16,442 11,920 $10,920,010$31,083,604$(1,000)24,364$(279,928)$(4,045,269)$37,693,859
Sale of shares under
Regulation S 2,000,000 2,000 1,123,002 (300,000) 825,002
Shares issued to employees
and Board of Directors 332,857 333 166,095 166,428
Preferred Stock Redeemed (250) (250,000) (250,000)
Preferred Stock Issued 135 135,000 135,000
Preferred Stock Dividend (135,000) (135,000)
Net Loss (79,542) (79,542)
Balance, June 30, 1998 18,774,596 $18,775 11,805 $10,805,010$32,372,701$(301,000)24,364$(279,928)$(4,259,811)$38,355,747
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Item 1. THE HARTCOURT COMPANIES INC. AND SUBSIDIARIES
(cont.)
CONSOLIDATED STATEMENT OF CASH FLOW
(UNAUDITED)
Six Months Ended
June 30,
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES
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Net Loss $ (154,770) $ (59,670)
Adjustments to reconcile net loss to net cash
used in operating activities:
Stock issued for services 166,428 294,500
Write-off of bad debts - (12,463)
Accrued interest income - (7,395)
Depreciation and amortization 376,492 5,145
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable (665,697) 64,192
Inventory 919,642 182,665
Notes receivable - (219,479)
Prepaid expenses and other (13,500) (318,042)
Other Assets (14,531) 22,955
Increase (decrease) in:
Accounts payable and accrued expenses (1,577,541) (54,326)
Due from related party (56,611) (52,418)
Payable to Mexican affiliate 7,607 -
NET CASH USED IN OPERATING ACTIVITIES (1,012,481) (154,336)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (170,794) 4,400
Deposits - (500,000)
Proceeds on sale of marketable securities 523,903 -
Payments on notes receivable 7,199 -
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 360,308 (495,600)
CASH FLOWS FROM FINANCING ACTIVITIES
Sale of common stock 1,125,002 569,000
Common stock subscription receivable (275,000) 44,000
Bank overdrafts - (5,691)
Other Loans and lines of credit 656,067 100,000
Borrowing from notes - 47,776
Payments on related party payable (2,096) -
Payments on long term-debt (124,209) -
Payments on capital lease obligation (101,297) -
Redemption of preferred stock (500,000) -
NET CASH PROVIDED BY FINANCING ACTIVITIES 778,467 755,085
NET INCREASE IN CASH 126,294 105,149
CASH, BEGINNING OF PERIOD 77,688 822
CASH, END OF PERIOD $ 203,982 $ 105,971
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Item 1. THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
(cont.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Organization and Nature of Operations:
Hartcourt Investments (USA), Inc., (Hartcourt 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 operations, Hartcourt 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, Hartcourt
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,
Hartcourt Investments interest was reduced to a 52% interest in the
Xinhui JV. In September 1996, Hartcourt Investments sold its investment
in Xinhui JV to CKES, Inc. of Sunnyvale, California.
In November 1994, Stardust, Inc., Production-Recording-Promotion
(Stardust) acquired 100% of the outstanding shares of Hartcourt
Investments for 8,280,000 shares of its common stock in a transaction
accounted for as a recapitalization of Hartcourt Investments with
Hartcourt 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, Hartcourt 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 interest.
In 1995, stock dividends and 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.
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.
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 shareholders.
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.
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Item 1. THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
(cont.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Organization and Nature of Operations: (cont.)
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.
Note 2. Basis of Presentation:
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to form 10-QSB.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements and related notes included in the Company's 1997
Form 10-KSB.
In the opinion of management, the accompanying unaudited financial
statements contain all adjustments (which include only normal recurring
adjustments) necessary to present fairly the balance sheet of The
Hartcourt Companies, Inc. and Subsidiaries as of June 30,1998 and the
results of their operations and their cash flows for the six months
ended June 30, 1998 and 1997, respectively. The financial statements
are consolidated to include the accounts of The Hartcourt Companies and
its subsidiaries Hartcourt Investments, USA, including the accounts of
Hartcourt Pen, Pego Systems, Inc. and Electronic Components and
Systems, Inc. (together "the Company").
Certain 1997 amounts have been reclassified to conform to current
period presentation. These reclassifications have no effect on
previously reported net income.
The accounting policies followed by the Company are set forth in Note
A. to the Company's financial statements as stated in its report on
Form 10-KSB for the fiscal year ended December 31, 1997.
Note 3. Marketable Securities:
In July 1997, the Company entered into an agreement with Capital
Commerce, Ltd. (Capital) (an 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. Dividends are declared and paid monthly at 9% per
annum. The Company pays the dividends through the issuance of Series AB
convertible preferred stock (Note 5).
As of June 30, 1998, the Company had sold $1,048,937 worth of its
securities, and has available $4,951,063. Marketable Securities are
reported at the guaranteed value of the contract.
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Item 1. THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
(cont.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 4. Supplemental Disclosure of Non-Cash Financing Activities:
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Six Months Ended Six Months Ended
June 30, 1998 June 30, 1997
(unaudited) (unaudited)
Cash paid for interest and income taxes:
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Interest $ 140,104 $ 26,400
Taxes 1,275 -
Non-cash investing and financing activities:
Preferred stock issued for dividends $ 270,000 -
Preferred stock issued for accrued Liabilities $ 135,000 -
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Note 5. Capital Stock:
In October 1997, the Company's Articles were amended to authorize the
issuance of AB preferred stock. As amended, the Articles provide that
the total number of shares of Series AB preferred are 25,000 with a
stated value of $1,000 per share. The Series AB preferred shares may be
redeemed by the Company at any time at a redemption value equal to
$1,000 per share plus any accrued and unpaid dividends to the date of
redemption. In addition, at the option of the holder of the Series AB
preferred shares, the shares may be converted into 1,334 shares of the
Company's common stock (conversion rate). During 1998, the Company has
issued 405 shares of Series AB preferred shares.
During the first half of 1998, the Company redeemed $500,000 (500
shares) of the Company's Series C redeemable preferred stock, pursuant
to the Pego Stock Purchase Agreement, dated October 3, 1997.
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Note 6. Loss per Share:
Quarter Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
Income (Loss) from continuous
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Operations: $ (79,542) $ 41,879 $ (154,770) $ (59,670)
Less preferred stock dividends (135,000) - (270,000) -
Income (Loss) available to
common shareholders (214,542) 41,879 (424,770) (59,670)
Effects of dilutive securities - - - -
Weighted average shares outstanding 16,997,215 12,029,024 16,997,215 12,029,024
Basic and dilutive earnings per share $ (.01) $ (.00) $ (.03) $ (.00)
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During 1998 and 1997, the Company had 2,000,000 warrants outstanding,
each convertible into one share of common stock. In addition, during
1998 and 1997, the company had convertible preferred stock
outstanding, each share convertible into common stock. These
instruments were not included in the computation of diluted earnings
per share for any of the periods presented, due to their antidilutive
effects based on the net loss reported for each period.
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Item 1. THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
(cont.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 7. Material and Subsequent Events:
On July 6,1998, the Company entered into a preliminary stock purchase
agreement with Mr. Mordecai Kraselnik, officer and owner of MK
Aviation, S.A. of the Republic of Panama. The Company intends to
acquire all outstanding shares of MK Aviation, S.A. The parties are
negotiating final terms of this agreement and estimate completion of
the transaction in the fourth quarter of 1998.
On July 28, 1998, the Company elected to rescind the sale-purchase
agreement of the gold mining rights in the State of Alaska, pursuant to
the terms of the September 17, 1996 agreement. The Company has
requested that the 1,298,700 common shares issued on September 17,
1996, with respect to the sale-purchase agreement be returned
immediately.
On August 6, 1998, the Company's wholly owned subsidiary, Pego Systems,
Inc. (Pego) acquired 100% percent of the outstanding voting stock of
Pacific Pneumatic, Inc. (PPI), located in Rancho Cucamonga, California.
The purchase price of $683,000 was paid in the form of $200,000 in
cash, $30,000 of The Hartcourt Companies common shares and the issuance
or assumption of $453,000 in notes. PPI manufactures pneumatic
conveying, industrial dust collection and industrial process electrical
controls. PPI has been manufacturing and selling it components under
the trademark names "Pore Ploy, "Posit Dust Collectors and Filters" and
"Pow-Air" for over 20 years. Combined revenues and pretax earnings for
PPI and Pego will be approximately $10,000,000 and $400,000,
respectively, for the next 12 months.
Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations:
As discussed in the Company's annual report filed on Form 10-KSB,
during 1997 the Company actively implemented a plan to acquire
operating companies that are in established industries with a history
of growth. The Company successfully completed two acquisitions during
the fourth quarter of 1997. Pego Systems, Inc. was acquired October 3,
1997 and the assets and liabilities and Electronic Components and
Systems, Inc. along with the assets and liabilities of Pruzin
Technologies, Inc., a related entity, were acquired on October 27,
1997. Thus, comparing income and expenses between the second quarter
and first half of 1998 and the second quarter and first half of 1997 is
not meaningful.
Results of Operations:
The Company's revenue for the second quarter of 1998 was $5,570,000.
Domestic writing instrument operations had minimal activity as the
Company continues to liquidate the pen inventory and seeks new business
opportunities. The Company's subsidiaries Pego Systems, Inc. (Pego) and
Electronic Components and Systems, Inc. (ECS) again represented 99% of
total revenues for the quarter. Pego's revenues were $1,617,869 and
ECS's revenues were $3,943,990. Revenues for the second quarter were
below management's expectations as both Pego and ECS experienced delays
in obtaining various contract and orders that had been anticipated.
However, management does expect those contracts and orders to be
obtained and to begin production in the third quarter of this year. As
a result of these delays, the Company incurred a loss before taxes of
approximately $79,500 for the three months ended and $153,000 for the
six months ended June 30, 1998. Management believes this trend will be
reversed during the second half of the year.
Components of cost of sales for the second quarter were as follows:
Pego $1,085,000, 67% as a percent of Pego's revenue; and ECS,
$2,982,500, 76% as a percent of ECS's revenue. Consolidated cost of
sales, $4,067,500 is 73% of consolidated revenue. Consolidated cost of
sales as a percent of consolidated revenue is at management's
expectations and is consistent with the Company's first quarter
results.
Components of selling, general and administrative (SGA) expenses were
as follows: corporate- $137,800, Pego- $454,000 and ECS- $779,000. SGA
expenses as a percent of consolidated revenues (25%) were, as in the
first quarter, better than anticipated by management. The better than
expected results were attributable to on going efforts to eliminate
unprofitable operations and management's ability to control costs as
contracts and orders are pushed out to future periods.
<PAGE>
Item 2. THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
(cont.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Goodwill related to the Pego and ECS acquisition is being amortized
over 25 years. Amortization costs of $95,955 were recorded for the
second quarter of 1998. Depreciation expense of $90,326 was incurred
during the same period.
Interest expense incurred in connection with facilities mortgages,
notes and short-term lines of credit, capital lease obligations and
factoring agreement was $78,000 for the three months ended June
30,1998.
Liquidity and Capital Resources:
During the second quarter of 1998, the Company sold $1,123,000 of its
common stock for working capital needs of its consolidated operations,
the redemption (250 shares) of the Company's Series C preferred stock
and the settlement of the Anja Scripto lease. Also during the second
quarter, the Company issued approximately 333,000 restricted common
shares to employees and directors for services rendered during the
preceding year and issued 135 shares of Series AB preferred stock for
dividends earned on the Series A and Series B convertible preferred
stock. The Company contemplates selling or issuing additional common
and preferred shares over the next twelve months for any additional
working capital requirements, capital expenditures and future
acquisitions that may occur.
The Company's current ratio and working capital changed slightly from
March 31, 1998 to June 30, 1998. Current ratio at June 30,1998 was 2.9%
compared to 2.6% at March 31, 1998. Working capital was $8,006,300 at
June 30, 1998 and $7,142,703 at March 31, 1998.
The Company's operating activities used cash of approximately
$1,012,500 for the six months ended June 30, 1998. The Company had
operating income, before depreciation and amortization of approximately
$220,000. Concurrently, decreases in inventories of $920,000 offset by
changes in accounts receivable, due from related party, accounts
payable and accrued expenses used an additional $1,180,600. Included in
the decrease in accrued expenses was the payment of a $400,000 broker
commission, a non-recurring expense, which was incurred in connection
with the sale-purchase agreement of ECS, dated October 27,1997.
Cash provided by investing activities for the six months-ended June
30,1998 was approximately $360,000. The Company sold $525,000 in
marketable securities, purchased of property and equipment of $171,000
and received payments on notes receivable of $7,200.
Financing activities provided approximately $778,500 during the first
six months of 1998. The sale of the Company's common stock, as
previously mentioned, and borrowings on bank provided lines of credit
were used to redeem the Series C redeemable preferred stock and pay
down on various short and long-term liabilities.
As a result of the above activities, the company experienced an
increase in cash of $126,300 for the first six months of 1998.
Business Risks:
As discussed previously, the Company intends to acquire additional
profitable operating businesses. At this time, the Company is in
negotiations with several potential acquisition candidates and in fact
has successfully completed an acquisition on August 6, 1998. However
with respect to other acquisitions, no definitive agreements have been
reached. If any additional acquisition agreements are reached in the
near term, the Company can make no assurances that it will be able to
obtain the financing necessary to complete any of these transactions.
<PAGE>
Item 2. THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
(cont.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Competition:
The Company does not have any direct across the board competitors, but
does have competition within the industries its subsidiaries operate.
The Company believes that these markets are relatively fragmented and
highly competitive. The Company 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 in its markets.
Management of Growth:
If the Company is successful in implementing its growth strategy, the
Company believes it could undergo a period of rapid growth that could
place a significant strain on its management, financial and other
resources. The Company's ability to manage its growth will require it
to continue to improve its operational and financial systems and to
motivate and effectively manage its employees. If the Company grows it
will have to implement new financial, budgeting, management information
and internal control systems. The Company's success will depend upon
its ability to attract and retain highly skilled personnel. There can
be no assurance that the Company will be successful in attracting and
retaining key management, technical, marketing and sales personnel. Its
failure to do so would materially and adversely affect the Company's
business and results of operations.
PART II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
There have been no changes since the Company's last report in Item 3,
"Legal Proceedings" of Form 10-KSB for the fiscal year ended December
31, 1997.
Item 2. CHANGES IN SECURITIES
None
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITIES HOLDERS
None
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits - None
Reports on Form 8-K - None
<PAGE>
PART II OTHER INFORMATION
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
has caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
The Hartcourt Companies, Inc.
Date: August 14, 1998 By:
Dr. Alan V. Phan
President
