<PAGE>
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 SEPTEMBER 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 90067
(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 September 30, 1998, The Hartcourt Companies, Inc. had 19,754,381 shares of
Common Stock Outstanding.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
1
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TABLE OF CONTENTS
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
Report on Form 10-QSB
For quarter ended
September 30, 1998
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - September 30, 1998 and
December 31, 1997 3 - 4
Consolidated Statements of Operations - Quarters ended
September 30, 1998 and 1997 and the nine months ended
September 30, 1998 and 1997 5
Consolidated Statements of Shareholders' Equity - Nine
Months ended September 30, 1998 6
Consolidated Statements of Cash Flows - nine months ended
September 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 - 15
PART II OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults upon Senior Securities 15
Item 4. Submission of Matters to Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 16
</TABLE>
2
<PAGE>
PART I THE HARTCOURT COMPAMIES INC. AND SUBSIDIARIES
ITEM 1. CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 527,098 $ 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 3,606,092 2,332,977
Trade dollar receivable 21,000 22,670
Notes receivable, current portion 113,523 293,673
Inventory 3,284,980 3,541,321
Prepaid expenses 159,423 130,554
Prepaid consulting fees 664,770 664,770
Due from related parties 218,122 131,398
----------- -----------
TOTAL CURRENT ASSETS 13,546,071 12,670,017
PROPERTY AND EQUIPMENT, net 4,095,795 3,568,507
INVESTMENTS 17,906,520 17,906,520
NOTES RECEIVABLE, net of current portion 1,072,805 1,058,267
OTHER ASSETS 566,881 552,289
INTANGIBLES, net 10,467,580 9,365,000
----------- -----------
TOTAL ASSETS $47,655,652 $45,120,600
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable 2,865,050 2,824,419
Accrued expenses and other current liabilities 262,160 1,046,881
Payable to Mexican affiliate 335,041 352,942
Line of credit 2,883,834 200,000
Notes payable, related parties-current portion 337,799 295,000
Notes payable-current portion 530,155 205,245
Capital lease obligation-current portion 152,430 200,222
Debentures 50,000 50,000
Subscription deposits received - 15,000
----------- -----------
TOTAL CURRENT LIABILITIES 7,416,469 5,189,709
</TABLE>
3
<PAGE>
ITEM 1. THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
(CONT.) CONSOLIDATED BALANCE SHEETS
(CONTINUED)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ -----------
(Unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY (CONT.)
NOTES PAYABLE, RELATED PARTIES, net of current portion - 125,000
NOTES PAYABLE, net of current portion 1,291,578 1,334,327
CAPITAL LEASE OBLIGATIONS, net of current portion 659,350 612,477
----------- -----------
TOTAL LIABILITIES 9,367,397 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 - 1,500,000
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,
405 shares issued and outstanding 405,000 -
Class A, no par, 10,000,000 shares authorized,
none issued and outstanding - -
----------- -----------
TOTAL PREFERRED STOCK 9,805,010 10,900,010
Common stock, $0.01 par value, 50,000,000 shares
authorized; 19,754,381 and 16,441,739 shares issued
and outstanding at September 30, 1998 and December 31, 1997 19,755 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 33,233,036 31,083,604
Accumulated deficit (4,188,618) (3,835,041)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 38,288,255 37,859,087
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $47,655,652 $45,120,600
=========== ===========
</TABLE>
4
<PAGE>
ITEM 1. THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
(CONT.) CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Quarter ended Nine months ended
September 30 September 30
1998 1997 1998 1997
----------------------- -------------------------
<S> <C> <C> <C> <C>
REVENUES
Product Sales $5,165,548 $ 45,206 $ 12,714,313 $ 316,706
Services and Labor Sales 1,743,499 - 4,867,636 -
---------- ---------- ------------ ----------
TOTAL REVENUE 6,909,047 45,206 17,581,949 316,706
COST OF SALES 4,842,185 18,402 12,590,585 213,727
---------- ---------- ------------ ----------
Gross profit 2,066,862 26,804 4,991,364 102,979
OPERATING EXPENSES
Selling, general and administrative 1,744,477 127,115 4,374,189 271,405
Depreciation and amortization 168,280 5,647 537,675 10,792
---------- ---------- ------------ ----------
TOTAL OPERATING EXPENSES 1,912,757 132,762 4,911,864 282,197
---------- ---------- ------------ ----------
INCOME (LOSS) FROM OPERATIONS 154,105 (105,958) 79,500 (179,218)
OTHER INCOME (EXPENSES)
Interest expense (100,089) 4,095 (240,193) (22,305)
Interest income 4,500 6,410 36,306 21,885
Miscellaneous Income 12,740 - 42,148 25,556
---------- ---------- ------------ ----------
TOTAL OTHER INCOME (EXPENSE) (82,849) 10,505 (161,739) 25,136
---------- ---------- ------------ ----------
NET INCOME (LOSS) BEFORE TAXES 71,256 (95,453) (82,239) (154,082)
Income taxes 63 1,402 1,338 2,443
---------- ---------- ------------ ----------
NET LOSS $ 71,193 $ (96,855) $ (83,577) $ (156,525)
========== ========== ============ ==========
BASIC AND FULLY DILUTED INCOME (LOSS)
PER SHARE $ .004 $ (0.008) $ (.005) $ (.013)
WEIGHTED AVERAGE NUMBER OF SHARE
OUTSTANDING 19,056,990 11,654,153 17,683,807 11,654,153
</TABLE>
5
<PAGE>
ITEM 1. THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
(CONT.) CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Common
Additional Stock
Common Stock Preferred Paid Subscription Treasury Stock
Shares Amount Shares Amount Capital Receivable Shares Amount
-------------------- ------------------- ----------- ------------ --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1997 16,441,739 $16,442 11,900 $10,900,010 $31,083,604 $ (26,000) 24,364 $(279,928)
Preferred Stock Issued 270 270,000
Preferred Stock Redeemed (250) (250,000)
Preferred Stock Dividend
Stock Subscription Received 25,000
Net Loss
---------- ------- ------ ----------- ----------- --------- ------ ---------
BALANCE, MARCH 31, 1998 16,441,739 $16,442 11,920 $10,920,010 $31,083,604 $ (1,000) 24,364 $(279,928)
Sale of shares under
Regulation S 2,000,000 2,000 1,123,002 (300,000)
Shares issued to employees
and Board of Directors 332,857 333 166,095
Preferred Stock Redeemed (250) (250,000)
Preferred Stock Issued 135 135,000
Preferred Stock Dividend
Net Loss
---------- ------- ------ ----------- ----------- --------- ------ ---------
BALANCE, JUNE 30, 1998 18,774,596 $18,775 11,805 $10,805,010 $32,372,701 $(301,000) 24,364 $(279,928)
Shares issued to employees
and Board of Directors 45,000 45 30,029
Shares issued for purchase
of Pacific Pneumatics 9,796 10 14,990
Shares issued for purchase
Of Elan Manufacturing 724,989 725 615,516
Preferred Stock Redeemed
for cash (800) (800,000)
Preferred Stock exchanged
for common 200,000 200 (200) (200,000) 199,800
Net Income
---------- ------- ------ ----------- ----------- --------- ------ ---------
BALANCE, SEPT. 30, 1998 19,754,381 $19,755 10,805 $ 9,805,010 $33,233,036 $(301,000) 24,364 $(279,928)
<CAPTION>
Total
Accumulated Shareholders'
Deficit Equity
----------- -------------
<S> <C> <C>
BALANCE, DECEMBER 31, 1997 $(3,835,041) $37,859,087
Preferred Stock Issued 270,000
Preferred Stock Redeemed (250,000)
Preferred Stock Dividend (135,000) (135,000)
Stock Subscription Received 25,000
Net Loss (75,228) (75,228)
----------- -----------
BALANCE, MARCH 31, 1998 $(4,045,269) $37,693,859
Sale of shares under
Regulation S 825,002
Shares issued to employees
and Board of Directors 166,428
Preferred Stock Redeemed (250,000)
Preferred Stock Issued 135,000
Preferred Stock Dividend (135,000) (135,000)
Net Loss (79,542) (79,542)
----------- -----------
BALANCE, JUNE 30, 1998 $(4,259,811) $38,355,747
Shares issued to employees
and Board of Directors 30,074
Shares issued for purchase
of Pacific Pneumatics 15,000
Shares issued for purchase
Of Elan Manufacturing 616,241
Preferred Stock Redeemed
for cash (800,000)
Preferred Stock exchanged
for common
Net Income 71,193 71,193
----------- -----------
BALANCE, SEPT. 30, 1998 $(4,188,618) $38,288,255
</TABLE>
6
<PAGE>
ITEM 1. THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
(CONT.) CONSOLIDATED STATEMENT OF CASH FLOW
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended
September 30,
1998 1997
-----------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (83,577) $(156,525)
Adjustments to reconcile net loss to net cash
used in operating activities:
Stock issued for services 195,502 294,500
Write-off of bad debts - (12,463)
Accrued interest income - (10,883)
Depreciation and amortization 571,650 10,792
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable (1,271,445) 64,900
Inventory 256,341 182,833
Notes receivable 165,612 (214,822)
Prepaid expenses and other (28,869) (328,736)
Other Assets (14,592) (46,776)
Increase (decrease) in:
Accounts payable and accrued expenses (626,449) (15,402)
Due from related party (86,721) (42,629)
Payable to Mexican affiliate (17,901) -
Other liabilities (110,202) 125,034
----------- ---------
NET CASH USED IN OPERATING ACTIVITES (1,050,651) (150,177)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (805,076) -
Deposits - (500,000)
Proceeds on sale of marketable securities 523,903 -
Payments on acquisitions 200,000 -
Sale of equipment - 4,400
----------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (81,173) (495,600)
CASH FLOWS FROM FINANCING ACTIVITIES
Sale of common stock 1,125,002 569,000
Common stock subscription receivable (275,000) 179,000
Bank overdrafts - (5,691)
Other Loans and lines of credit 1,483,834 47,436
Payments on related party payable (2,096) -
Issuance of Long Term Debt 1,200,000 -
Payments on long term-debt (249,209) -
Payments on capital lease obligation (201,297) -
Redemption of preferred stock (1,500,000) -
----------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,581,234 789,745
----------- ---------
NET INCREASE IN CASH 449,410 143,968
CASH, BEGINNING OF PERIOD 77,688 822
----------- ---------
CASH, END OF PERIOD $ 527,098 $ 144,790
=========== =========
</TABLE>
7
<PAGE>
ITEM 1. THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
(CONT.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. 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 operations, 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,
Harcourt Investments 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.
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 Harcourt 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 Harcourt 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.
8
<PAGE>
ITEM 1. THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
(CONT.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Organization and Nature of Operations (cont.):
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.
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.
On August 6, 1998, Pego acquired 100% percent of the outstanding common
stock of Pacific Pneumatics, Inc. (PPI), located in Rancho Cucamonga,
California. The purchase price of $215,000 was paid in the form of
$200,000 in cash and $15,000 of The Hartcourt Companies common shares.
Under the acquisition agreement Pego caused PPI to prepay $35,000 of
its notes payable to a selling shareholder. 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.
On August 24, 1998, the Company and ECS executed an agreement and plan
of merger with Elan Manufacturing, Inc. (Elan). Elan is a contract
manufacturer of electronic components similar to ECS, located in the
Silicon Valley. Under the agreement, Elan will be merged into and with
the Company, thereby ceasing Elan's existence. By September 1, 1998,
substantially all of the requirements of the agreement were
accomplished, and the Company began operating Elan as a division of the
Company. On September 1, 1998, the Company advanced significant sums in
order that Elan could continue its operations and complete in-process
sales.
The agreement called for a purchase value of $616,240.63, for which the
Company would issue common shares to the three selling shareholders
based on the average selling price for the Company's shares for the ten
days prior to the acquisition. However, minor items necessary to close
the transaction were not completed as of the September 1, 1998
scheduled closing date, including the refusal by a lender to Elan to
allow ECS to assume a promissory note in the amount of $266,964.04.
Therefore, a first amended agreement was entered on September 23, 1998
whereby the parties agreed that the number of the Company's common
shares to be issued to the three selling shareholders would be based
upon a price of $.85 per share. The Company issued 724,989 shares of
the Company's common stock, currently held in escrow. The Company and
ECS have guaranteed to the three selling
9
<PAGE>
ITEM 1. THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
(CONT.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
shareholders that the value of such shares shall be no less than $.85
per share on September 1, 1999. If the value of the shares does not
equal $.85 per share on September 1, 1999, the Company and ECS shall
make up any shortfall by issuing additional free trading shares or cash
to the selling shareholders.
Management of the Company and ECS, as well as the selling shareholders
of Elan, are working diligently to complete the remaining items, and
the parties, for all intents and purposes, have agreed that the closing
date will be effective as of September 1, 1998 and have documented the
same.
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 SEPTEMBER 30,1998 and
the results of their operations and their cash flows for the NINE
months ended SEPTEMBER 30, 1998 and 1997, respectively. The financial
statements are consolidated to include the accounts of The Hartcourt
Companies and its subsidiaries Harcourt 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 September 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. The Company has been
unsuccessful in selling additional amounts of these securities and has
demanded that Capital provide additional free trading shares under the
guarantee (Note 7). Pending a response from Capital on the demand made,
the Company's Board has elected to delay payment of the 3rd quarter
dividend on the Series A and B Preferred Stock.
10
<PAGE>
ITEM 1. THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
(CONT.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4. SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
------------------- -------------------
(unaudited) (unaudited)
<S> <C> <C>
Cash paid for interest and income taxes:
Interest $240,193 $22,305
Taxes 1,338 2,443
Non-cash investing and financing activities:
Preferred stock issued for dividends $270,000 -
Preferred stock issued for accrued
Liabilities $135,000 -
</TABLE>
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, as dividends on its
Series A and B Preferred Stock and payment of accrued liabilities (Note
3 and 7).
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. On August
18, 1998, the Company redeemed the remaining 1,000 shares of its Series
C Redeemable Preferred stock, valued at $1 million, ahead of schedule.
In the redemption, the Company made an $800,000 cash payment and issued
200,000 of its restricted common shares to the selling shareholders of
Pego.
NOTE 6. INCOME (LOSS) PER SHARE:
<TABLE>
<CAPTION>
Quarter Ended Quarter Ended Nine Months Ended Nine Months Ended
September 30,1998 Sepember 30,1997 SeptembeR 30,1998 Sepember 30,1997
------------------ ----------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Income (Loss) from continuous
Operation $ 71,193 $ (96,855) $ (83,577) $ (156,525)
Less preferred stock dividends (135,000) - (270,000) -
----------- ----------- ----------- -----------
Income (Loss) available to
common shareholders (63,807) (96,855) (353,577) (156,525)
Effects of dilutive securities - - - -
Weighted average shares outstanding 19,056,990 11,654,153 17,683,807 11,654,153
Basic and dilutive earnings per share $ 0.004 $ (0.008) $ (0.005) $ (.013)
</TABLE>
11
<PAGE>
ITEM 1. THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
(CONT.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
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. Due to the decline
in the market value of the Company's Common Stock in the third quarter,
both parties have agreed to postpone the negotiations as well as the
preliminary stock purchase agreement.
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. To date, the Company has received no response to its
demands and filed a lawsuit on October 7, 1998 to obtain return of the
shares.
On August 18, 1998, the Company redeemed 1,000 shares of its Series C
Redeemable Preferred stock, valued at $1 million, ahead of schedule. In
the redemption, the Company made an $800,000 cash payment and issued
200,000 of its restricted common shares.
During most of 1998, the Company had been attempting to raise cash by
the sale of the marketable securities received from Capital Commerce,
Ltd.("Capital") in exchange for the Series A and B preferred stock. Due
to declining market values and other factors, to date the Company has
only been successful in selling securities for cash in the amount of
$1,048,937. The Company on October 7, 1998 demanded that Capital
perform under its guarantee and provide the Company either cash or
additional free trading marketable securities to reach the $6 million
minimum cash availability under the agreement. The Company's Board of
Directors elected not to declare a dividend for the third quarter until
this matter is resolved. The Company has not received a response to
date from Capital.
On October 21, 1988, Mr. James Pruzin, the selling shareholder and
president of Electronic Components and Systems, Inc. (ECS), formally
requested a rescission of the October 28, 1997 acquisition whereby the
Company, through a wholly owned subsidiary, acquired ECS and Pruzin
Technologies, Inc. (Pruzin). Mr. Pruzin has alleged that he is
authorized to request rescission based on an alleged breach of the
acquisition agreement by the Company. The Company denies any breach of
the acquisition agreement and believes that the request for recission
was defective and invalid. Mr. Pruzin had offered to return all shares
he received in the initial transaction and to execute a note for the
cash received in the initial transaction.
The Company initially rejected Mr. Pruzin's proposition, but on
November 10, 1988 entered into a memorandum of understanding whereby
Mr. Pruzin could reacquire ECS from the Company by returning all
Hartcourt Common and Preferred Stock received, payment to Hartcourt of
$1,850,000 during 1999, negotiating the return of Hartcourt Common
Shares issued in the Elan transaction and a $400,000 fully amortized 5
year note with monthly payments beginning in 2000. Mr. Pruzin has until
November 30, 1998 to meet the first requirements of the agreement.
12
<PAGE>
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 THIRD QUARTER and
first nine months of 1998 and the third quarter and first first nine of
1997 is not meaningful.
RESULTS OF OPERATIONS:
The Company's revenue for the THIRD QUARTER of 1998 was $6,914,000.
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 over
99% of total revenues for the quarter. Pego's revenues were $1,748,000
and ECS's revenues were $5,162,000. Revenues for the THIRD QUARTER were
at management's expectations as both Pego and ECS rebounded from delays
experienced in the first half in obtaining various anticipated contract
and orders. While, management does expect those contracts and orders to
continue indications are that revenues for the FOURTH QUARTER of this
year will be below that experienced in the third quarter. As a result
of meeting the expectations for the third quarter, the Company earned
$71,000 for the three months ended September 30, 1998, but lost $97,000
for the nine months ended September 30, 1998.
Components of cost of sales for the THIRD QUARTER were as follows: Pego
$1,171,000, 67% as a percent of Pego's revenue; and ECS, $3,672,500,
71% as a percent of ECS's revenue. Consolidated cost of sales,
$4,067,500 is 70% 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 half results.
Components of selling, general and administrative (SGA) expenses were
as follows: corporate- $155,000, Pego- $515,000 and ECS-$1,242,000. SGA
expenses as a percent of consolidated revenues (25%) were, as in the
first half, 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.
Goodwill related to the Pego and ECS acquisition is being amortized
over 25 years. Amortization costs of $95,000 were recorded for the
THIRD QUARTER of 1998. Depreciation expense of $73,000 was incurred
during the same period.
Interest expense incurred for facilities mortgages, notes and short-
term lines of credit, capital lease obligations and factoring agreement
was $100,000 for the three months ended September 30,1998.
LIQUIDITY AND CAPITAL RESOURCES:
During the THIRD QUARTER of 1998, Pego borrowed $1,200,000 under a term
loan which was used by the Company to redeem the Series C preferred
stock and for the cash portion of the acquisition of Pacific
Pneumatics. Also during the THIRD QUARTER, the Company issued
approximately 45,000 restricted common shares to employees and
directors for services rendered during the preceding year; issued
734,785 common shares for acquisitions and 200,000 common shares along
with cash described above to redeem the Series C 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.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
(CONT.) RESULTS OF OPERATIONS:
LIQUIDITY AND CAPITAL RESOURCES: CONT.
The Company's current ratio and working capital decreased from June 30,
1998 to September 30, 1998, due to debt incurred to redeem the
preferred stock as well as acquisitions. The current ratio at September
30,1998 was 1.8% compared to 2.9% at June 30, 1998. Working capital was
$6,130,000 at September 30, 1998 and $8,006,300 at June 30, 1998.
The Company's operating activities used cash of approximately
$1,051,000 for the nine months ended September 30, 1998. The Company
had operating income, before depreciation and amortization of
approximately $617,000. Concurrently, decreases in inventories of
$256,000 offset by changes in accounts receivable, due from related
party, accounts payable and accrued expenses used an additional
$1,732,000. 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 used by investing activities for the nine months-ended September
30,1998 was approximately $81,000. The Company sold $525,000 in
marketable securities, purchased of property and equipment of $805,000
and paid cash of $200,000 for acquisitions.
Financing activities provided approximately $1,581,500 during the first
nine 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 $449,410 for the first nine 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
successfully completed 2 acquisitions during the 3rd quarter of 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.
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.
14
<PAGE>
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS:
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
On September 3, 1998, American Equities filed suit against the Company
for breach of contract. The Company denies that it has breached any
contract with American Equities. The Company has filed a cross-
complaint for fraud and non-performance against American Equities and
additional cross-defendants. The Company and its legal counsel are of
the belief that it will prevail under the counter claim. The American
Equities consulting agreement has been previously noted in Note R of
the financial statements of the Company's Form 10k for the year ended
December 31, 1997.
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. To date, the Company has received no response to its
demands and filed a lawsuit on October 7, 1998 to obtain return of the
shares.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITIES HOLDERS
At the annual meeting of shareholders held September 16, 1998, the
security holders elected Mr. Michael Caruana and Mr. James Pruzin to
the Board of Directors, approved the appointment of Harlan & Boettger,
LLP as the Company's independent accountants for the year ended
December 31, 1998 and authorized the Board of Directors to change the
domicile of the Company from Utah to Nevada.
ITEM 5. OTHER INFORMATION
None
15
<PAGE>
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - EX-27 Financial Data Schedule
(b) Reports on Form 8-K - None
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: November 16, 1998 By: /s/ Alan V. Phan
-----------------
Dr. Alan V. Phan
President
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 527,098
<SECURITIES> 4,951,063
<RECEIVABLES> 3,682,569
<ALLOWANCES> 76,477
<INVENTORY> 3,284,980
<CURRENT-ASSETS> 13,546,071
<PP&E> 4,473,610
<DEPRECIATION> 377,815
<TOTAL-ASSETS> 47,655,652
<CURRENT-LIABILITIES> 7,416,469
<BONDS> 0
0
9,805,010
<COMMON> 19,755
<OTHER-SE> 28,463,490
<TOTAL-LIABILITY-AND-EQUITY> 47,655,652
<SALES> 17,581,949
<TOTAL-REVENUES> 17,581,949
<CGS> 12,590,585
<TOTAL-COSTS> 17,502,449
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 240,193
<INCOME-PRETAX> (82,239)
<INCOME-TAX> 1,338
<INCOME-CONTINUING> (83,577)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (83,577)
<EPS-PRIMARY> (.005)<F1>
<EPS-DILUTED> (.005)<F1>
<FN>
<F1>Options and warrants outstanding as of September 30, 1998 are antidilutive
for purposes of calculating basic and diluted earnings per share and are,
therefore ignored.
</FN>
</TABLE>
