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, 1999
[ ] 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
(State or other jurisdiction of incorporation or organization)
87-0400541
(IRS Employer Identification No.)
1196 East Willow Street, Long Beach, California 91730
(Address of principal executive offices)
(562) 426-9796
(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, 1999, The Hartcourt Companies, Inc. had 19,635,817 shares of
Common Stock Outstanding.
Transitional Small Business Disclosure Format (check one ): Yes [ ] No [ X ]
[HARTCORT\10QSB:JUNE3099]-1
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TABLE OF CONTENTS
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
Report on Form 10-QSB
For the Quarter Ended
June 30, 1999
Page
PART 1 FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - June 30, 1999 and
December 31, 1998 .....................................3 - 4
Consolidated Statements of Operations - Quarters
Ended June 30, 1999 and 1998 and the Six Months
Ended June 30, 1999 and 1998 ..........................5
Consolidated Statements of Shareholders' Equity
- Six Months Ended June 30, 1999 .....................6
Consolidated Statements of Cash Flows - Six Months
Ended June 30, 1999 and 1998 ..........................7
Notes to the Consolidated Financial Statements .........8-12
Item 2. Management's Discussion and Analysis of Financial
Condition and results of Operations 13-15
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.......................15
Signatures.............................................16
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<TABLE>
<CAPTION>
Part I THE HARTCOURT COMPANIES INC. AND SUBSIDIARIES
Item 1. CONSOLIDATED BALANCE SHEETS
June 30,
1999 December 31,
(Unaudited) 1998
---------------------- ---------------------
<S> <C> <C>
CURRENT ASSETS
Cash $ - $ 384,453
Accounts receivable, net of allowance for doubtful
accounts of $76,477 in 1998 29,770 3,152,635
Trade dollar receivable 22,808 22,670
Notes receivable, current portion 101,523 101,523
Inventory - 2,613,560
Prepaid expenses 39,855 113,068
Due from related parties 158,222 175,907
---------------------- ---------------------
TOTAL CURRENT ASSETS 352,178 6,563,816
PROPERTY AND EQUIPMENT, NET - 4,262,120
INVESTMENTS 5,000,000 11,030,000
OTHER ASSETS 2,000 18,423
INTANGIBLES - 5,198,033
---------------------- ---------------------
TOTAL ASSETS $ 5,354,178 $ 27,072,392
====================== ======================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable 117,796 2,745,796
Accrued expenses and other current liabilities 39,380 478,356
Payable to Mexican affiliate - 483,572
Line of credit - 1,502,609
Notes payable, related parties - current portion - 145,000
Notes payable - current portion - 1,631,199
Capital lease obligation - current portion - 290,204
Debentures 100,000 50,000
Advances from Officer - 124,206
---------------------- ---------------------
TOTAL CURRENT LIABILITIES 257,176 7,450,942
</TABLE>
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<TABLE>
<CAPTION>
Item 1. THE HARTCOURT COMPANIES INC. AND SUBSIDIARIES
(cont.) CONSOLIDATED BALANCE SHEETS
(CONTINUED)
June 30,
1999 December 31,
(Unaudited) 1998
------------------- ------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY (cont.)
NOTES PAYABLE, net of current portion - 1,739,512
CAPITAL LEASE OBLIGATIONS, net of current portion - 780,760
------------------- ------------------
TOTAL LIABILITIES 257,176 9,971,214
COMMITMENTS AND CONTINGENCIES - -
SHAREHOLDERS' EQUITY
Preferred Stock
Original preferred stock, $0.01 par value, 1,000 shares
authorized, issued and outstanding - 10
Series A, $1,000 stated value, 4,000 shares authorized,
issued and outstanding at December 31, 1998 - 4,000,000
Series B, $1,000 stated value, 2,000 shares authorized,
issued and outstanding at December 31, 1998 - 2,000,000
Series D, $1,000 stated value, 10,000 shares authorized,
issued and outstanding at December 31, 1998 - 3,400,000
Series AB, $100 stated value, 25,000 shares authorized,
4,050 shares issued and outstanding at December 31, 1998 - 405,000
Class A, no par value, 10,000,,000 shares authorized,
none issued and outstanding - -
------------------- ------------------
TOTAL PREFERRED STOCK - 9,805,010
------------------- ------------------
Common stock, $0.01 par value, 50,000,000 shares authorized; 19,700,181
shares issued and outstanding at June 30, 1999 and 19,954,382 shares
issued and outstanding at
December 31, 1998 19,636 19,955
Stock subscription receivable - (301,000)
Treasury stock, at cost (24,364 shares in 1999 and 1998) (279,928) (279,928)
Additional paid-in capital 31,421,906 33,257,835
Accumulated deficit (26,064,612) (25,400,694)
------------------- -------------------
TOTAL SHAREHOLDERS' EQUITY 5,097,002 17,101,178
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 5,354,178 $ 27,072,392
=================== ===================
</TABLE>
[HARTCORT\10QSB:JUNE3099]-1
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<TABLE>
<CAPTION>
Item 1. THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
(cont.) CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------------ -------------------------------------
1999 1998 1999 1998
---------------------- ------------------- ------------------ ------------------
<S> <C> <C> <C> <C>
REVENUES
Product Sales $ - $ 2,603,034 $ - $ 7,548,765
Services and Labor Sales - 2,966,869 - 3,124,137
---------------------- ------------------- ------------------ ------------------
TOTAL REVENUE - 5,569,903 - 10,672,902
COST OF SALES - 4,067,551 - 7,748,400
---------------------- ------------------- ------------------ ------------------
Gross Profit - 1,502,352 - 2,924,502
OPERATING EXPENSES
Selling, general and administrative 413,385 1,370,742 655,160 2,629,712
Depreciation and amortization - 184,697 - 369,395
---------------------- ------------------- ------------------ ------------------
TOTAL OPERATING EXPENSES 413,385 1,555,439 655,160 2,999,107
---------------------- ------------------- ------------------ ------------------
INCOME (LOSS) FROM OPERATIONS (413,385) (53,087) (655,160) (74,605)
EQUITY IN LOSS OF UNCONSOLIDATED
SUBSIDIARIES - - (28,298) -
OTHER INCOME (EXPENSES)
Interest expense - (78,071) - (140,104)
Interest income - 27,780 20,095 37,378
Miscellaneous income - 23,836 - 23,836
---------------------- ------------------- ------------------ ------------------
TOTAL OTHER INCOME (EXPENS - (26,455) 20,095 (78,890)
---------------------- ------------------- ------------------ -------------------
NET INCOME (LOSS) BEFORE TAXES (413,385) (79,542) (663,363) (153,495)
Income taxes 1,355 - 555 1,275
---------------------- ------------------- ------------------ ------------------
NET LOSS $ (414,740) $ (79,542) $ (663,918) $ (154,770)
====================== =================== ================== ===================
BASIC AND FULLY DILUTED INCOME
(LOSS) PER SHARE $ (.02) $ (.01) $ (.03) $ (.03)
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 19,640,025 16,997,215 19,306,537 16,997,215
</TABLE>
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<TABLE>
<CAPTION>
Item 1 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
(cont.) CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(UNAUDITED)
Common Stock Preferred Stock Additional
------------------------ ------------------------- Paid
Shares Amount Shares Amount Capital
---------- ------------ -------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1998 19,954,382 $ 19,955 14,450 $ 9,805,010 $ 33,257,835
Shares issued to investors 197,000 197 - - 24,863
Shares redeemed in connection with sale
sale of 30% interest in ECS to J. Pruzin (2,000,000) (2,000) (3,400) (3,400,000) (1,998,000)
Shares issued (redeemed) in
connection with litigation settlement (1,000,000) (1,000) (10,050) (6,405,000) 100,000
Stock subscription rescinded - - - - -
Shares issued for Services 305,000 305 - - 75,945
Shares issued to employees and directors 205,000 205 - - 51,045
Distribution of Enova to Shareholders - - (1,000) (10) (399,378)
Net Loss - - - - -
--------------- ------------- ----------- --------------- ----------------
Balance, March 31, 1999 17,661,382 $ 17,662 - $ - $ 31,112,310
Shares issued to investors 103,000 103 - - 12,772
Shares issued to Alan Phan in lieu of cash
per employment contract for 1998
services 1,706,485 1,706 - - 198,294
Shares issued for Services 50,000 50 - - 12,450
Shares issued to employees and directors 114,950 115 86,080
Net loss - - - - -
--------------- ------------- ----------- --------------- ----------------
Balance, June 30, 1999 19,635,817 $ 19,636 - $ - $ 31,421,906
=============== ============= =========== =============== ================
</TABLE>
[HARTCORT\10QSB:JUNE3099]-1
6(a)
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<TABLE>
<CAPTION>
Item 1 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
(cont.) CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(UNAUDITED)
Common
Stock Treasury Stock Total
Subscription ---------------------- Accumulated Shareholders'
Receivable Shares Amount Deficit Equity
--------------- ------ -------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1998 $ (301,000) 24,364 $ (279,928) $ (25,400,694) $ 17,101,178
Shares issued to investors - - - - 25,060
Shares redeemed in connection with sale
sale of 30% interest in ECS to J. Pruzin - - - - (5,400,000)
Shares issued (redeemed) in
connection with litigation settlement - - - - (6,306,000)
Stock subscription rescinded 301,000 - - - 301,000
Shares issued for Services - - - - 76,250
Shares issued to employees and directors - - - - 51,250
Distribution of Enova to Shareholders - - - - (399,388)
Net Loss - - - (249,178) (249,178)
--------------- ------------- -------------- --------------- -----------------
Balance, March 31, 1999 0 24,364 $ (279,928) $ (25,649,872) $ 5,200,172
Shares issued to investors - - - - 12,875
Shares issued to Alan Phan in lieu of cash
per employment contract for 1998
services - - - - 200,000
Shares issued for Services - - - - 12,500
Shares issued to employees and directors - - - - 86,195
Net loss - - - (414,740) 0
--------------- ------------- -------------- --------------- -----------------
Balance, June 30, 1999 $ - 24,364 $ (279,928) $ (26,064,612) $ 5,097,002
=============== ============= ============== =============== =================
</TABLE>
[HARTCORT\10QSB:JUNE3099]-1
6(b)
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<TABLE>
<CAPTION>
Item 1. THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
(cont.) CONSOLIDATED STATEMENT OF CASH FLOW
(UNAUDITED)
Six Months ended
June 30,
----------------------------------------
1999 1998
------------------ --------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (663,918) $ (154,770)
Adjustments to reconcile net loss to net cash used in
operating activities:
Stock issued for services 88,750 166,428
Depreciation and amortization 376,492
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable - (665,697)
Inventory 13,083 919,642
Prepaid expenses and other assets 28,500 (28,031)
Increase (decrease) in:
Accounts payable and accrued expenses 8,233 (1,577,541)
Due from related party (15,700) (56,611)
Payable to Mexican affiliate - 7,607
------------------ --------------------
NET CASH USED IN OPERATING ACTIVITIES (617,302) (1,012,481)
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of 30% of ECS 5,400,000 -
Change in Investments 1,135,607 -
Distribution of Subsidiary Ownership to shareholders (399,388) -
Purchase of (sale) of property and equipment - (170,794)
Proceeds on sale of marketable securities - 523,903
Payments on notes receivable - 7,199
------------------ --------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 6,136,219 360,308
CASH FLOWS FROM FINANCING ACTIVITIES
Sale of common stock 37,935 1,125,002
Common stock issued to directors and officers 337,445 -
Common stock subscription receivable - (275,000)
Other loans and lines of credit 50,000 656,067
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 (6,405,000) 500,000)
------------------ --------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (5,903,370) 778,467
------------------ --------------------
NET INCREASE (DECREASE) IN CASH (384,453) 126,294
CASH, BEGINNING OF PERIOD 384,453 77,688
------------------ --------------------
CASH, END OF PERIOD $ - $ 203,982
================== =====================
</TABLE>
[HARTCORT\10QSB:JUNE3099]-1
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<PAGE>
Item 1. (cont.)
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
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.
[HARTCORT\10QSB:JUNE3099]-1
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<PAGE>
Item 1. (cont.)
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
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' cables and electronic components are manufactured and
assembled at the Mexico facility. ECS also has smaller manufacturing facilities
in Fremont, California, Chandler, Arizona and a distribution facility in
Nogales, Arizona.
In March, 1999, the Company restructured certain assets and successfully settled
certain litigation matters, as well as certain claims and disputes. The
following is a summary of the restructuring and settlements reached:
1) During 1998, the Company had been unsuccessful in its attempts to raise
required working capital and acquisition cash through the sale of
marketable securities provided by Capital Commerce in exchange for the
Series A & B Preferred Stock. As part of the overall settlement, Capital
Commerce returned all of the outstanding Series A and B Preferred Stock,
plus the AB Preferred Stock issued by the Company as dividends, the Company
returned to Capital Commerce all unsold marketable securities, and as
consideration for the marketable securities sold, the Company issued
1,900,000 shares of common stock, plus a 7.35% interest in ECS to the
authorized agent of Capital Commerce.
2) In July, 1998, the Company served notice of the sellers of certain mineral
rights leases in Alaska goldmines that it intended to rescind the contract
as certain required appraisals had not been provided as required. The
company originally paid 1,298,700 shares of the common stock for these
rights. Upon return of 1,298,700 shares the companies relinquished all
rights to the leases and rescinded the transaction.
[HARTCORT\10QSB:JUNE3099]-1
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<PAGE>
Item 1. (cont.)
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3) On October 21, 1998, 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, which the company denied . However, on November
10,1998 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.
Subsequently, Mr. Pruzin was unable to meet the terms of the repurchase
agreement and entered into new negotiations with the Company. As a result
of these negotiations, in exchange for his return of 2,000,000 common
shares of the company and 3,400 Series D Preferred Shares, the Company sold
Mr. Pruzin a 30% interest in ECS.
4) On September 3, 1998, American Equities filed suit against the Company for
breach of contract. The Company denied that it had breached any contract
with American Equities and filed a cross- complaint for fraud and
non-performance against American Equities and additional cross-defendants.
As settlement of these matters, the parties agreed that all fees paid to
American Equities were earned and to provide American Equities with a
27.65% interest in ECS and no payments were due to either party.
Additionally, American Equities agreed to provide working capital for ECS.
5) The Company had a subscription receivable for 600,000 common shares sold by
an investment banker and not paid for. In the settlements, the Company
received 600,000 shares back and canceled both the subscription receivable
and common shares.
6) On March 15, 1999, the Company entered into an Exchange Agreement pursuant
to which the Company agreed to assign its rights under the Purchase and
Sale Agreement dated August 8, 1996 and any and all of its interest in the
Peony Gardens development located in a suburb of Bejing City, China for
investment securities valued at $10 million. Due to restrictions on the
ability to trade the investment securities received, the Company has
recorded an impairment of $5,000,000 as of March 31, 1999 and December 31,
1998.
7) Effective February 1, 1999, pursuant to a Share Purchase Agreement, the
Company acquired one (1) share of common stock of Enova Holdings Inc., a
Nevada corporation ("Enova") representing 100% of the total issued and
outstanding capital stock of Enova, making Enova a wholly-owned subsidiary.
8) Effective March 1, 1999, the Company and Enova executed an Exchange
Agreement (the "Enova Agreement") whereby the Company exchanged all of its
ownership in two wholly-owned subsidiaries, Pego Systems Inc. ("Pego") and
Electronic and Component Systems Inc. ("ECS"), collectively, the
"subsidiaries", for 5,213,594 additional shares of common stock of Enova.
[HARTCORT\10QSB:JUNE3099]-1
10
<PAGE>
Item 1. (cont.)
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
9) On March 24, 1999, the Company entered into a Distribution Agreement
pursuant to which the Company distributed to all shareholders of record on
March 31, 1999 all of the 5,213,595 shares of common stock of Enova and to
file, within a reasonable period of time following such distribution, a
Registration Statement on Form 10-SB to cause the distributed shares of
Enova to be registered under the Securities Exchange Act of 1934.
As a result of the Share Purchase Agreement, the Enova Agreement and the
Distribution Agreement, each shareholder of record of the Company on March
31, 1999 will receive one (1) share of Enova for every four (4) shares
owned of the Company. Following the distribution of the Enova shares both
the Company and Enova will operate as separate companies.
On June 28, 1999, in connection with curing a covenant violation with a bank
loan, the Company infused additional equity capital into Pego Systems, Inc.
("Pego") a former subsidiary. Pego is a wholly owned subsidiary of Enova
Holdings, Inc. which was distributed to shareholders effective March 31, 1999.
In exchange for $1 million market value (carrying value $500,000), the Company
received 17,000 shares of Pego common stock, representing 34% of the outstanding
common shares of Pego. In addition, the Company has the right to acquire another
17,000 shares of Pego common stock if Pego is in default on its bank loan. The
investment in Pego is carried as an investment on the balance sheet at June 30,
1999.
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 1998 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 sheets of The Hartcourt Companies, Inc.
and Subsidiaries as of June 30, 1999 and December 31, 1998 and the results of
their operations and their cash flows for the six months ended June 30, 1999 and
1998, respectively. The financial statements for the 1998 periods 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"). The financial statements for the 1999 periods are consolidated to
include the accounts of The Hartcourt Companies and its subsidiaries Harcourt
Investments, USA, including the accounts of Hartcourt Pen, (together "the
Company") excluding, Pego Systems, Inc. and Electronic Components and Systems,
Inc. which were contributed to Enova Holdings, Inc. and distributed to
shareholders effective March 31, 1999.
Certain 1998 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, 1998.
[HARTCORT\10QSB:JUNE3099]-1
11
<PAGE>
Item 1. (cont.)
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
Note 3. Supplemental Disclosure of Non-Cash Financing Activities:
Quarter Ended Quarter Ended
June 30, 1999 June 30, 1998
(Unaudited) (Unaudited)
-------------------- -------------------
<S> <C> <C>
Cash paid (received) for interest and income taxes:
Interest $ - $ 78,071
Taxes 1,355 -
Non-cash investing and financing activities:
Preferred stock issued for dividends $ - $ 270,000
Preferred stock issued for accrued
liabilities - 135,000
</TABLE>
<TABLE>
<CAPTION>
Note 4. Loss per Share :
Quarter Quarter Six Months Six Months
Ended Ended Ended Ended
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1999
--------------------- -------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Income (Loss) from continuous
operations: $ (414,740) $ (79,542) $ (663,918) $ (154,770)
Less preferred stock dividends - (135,000) - (270,000)
--------------------- -------------------- ------------------- -------------------
Income (Loss) available to
common shareholders (414,740) (214,542) (663,918) (424,770)
Effects of dilutive securities - - - -
Weighted average shares
outstanding 19,640,025 16,997,215 19,306,537 16,997,215
Basic and dilutive earnings per
share $ (.02) $ (.01) $ (.03) $ (.00)
</TABLE>
Note 4. Loss per share: (continued)
During 1999and 1998, the Company had 2,000,000 warrants outstanding, each
convertible into one share of common stock. In addition, during 1999 and 1998,
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.
[HARTCORT\10QSB:JUNE3099]-1
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 1998
the Company continued its previously implemented plan to acquire operating
companies that were in established industries with a history of growth. However,
as a result of continued losses, particularly at the Company' Electronic
Components and Systems, Inc. subsidiary the recorded significant impairments to
its goodwill in the 4th quarter of 1999. In the 1st quarter of 1998, as more
fully described in Part I, Item 1, Note 1 to Notes to Consolidated Financial
Statements, the Company settled certain matters of litigation and entered into
certain restructuring transactions. In connection with the restructuring, the
Company formed a new subsidiary, Enova Holdings, Inc.("Enova") and contributed
it's remaining investment in its two operating subsidiaries Electronic
Components and Systems, Inc. and Pego Systems, Inc. to Enova. Effective March
31, 1999, the Company contributed its investment in Enova to its shareholders.
As a result, Hartcourt effectively became a shell corporation with no operations
and its principal assets being the investment securities received in exchange
for its investment in the Peony Gardens condominium project. Accordingly, the
operations presented reflect the Company's equity in earnings / loss of Enova
and its subsidiaries through the date of distribution.
Results of Operations:
As result of the restructuring, the Company recorded no revenue for the first
six months of 1999, while the Company=s revenue for the first six months of 1998
was $10,672,902. The equity in earnings / loss for the first six months of 1999
was a loss of $28,000 comprised of earnings at Pego of $117,000 and a loss at
ECS of $145,000 through March 31, 1999.
Corporate selling, general and administrative (SGA) expenses were $655,160
attributed to the costs of operating the holding Company, seeking new business
opportunities and associated with the restructuring.
Liquidity and Capital Resources:
During the first half of 1999, the company raised $87,935 through the sale of
common stock and debentures compared to the first half of 1998, where the
Company sold approximately $1,125,002 of its equity securities. These proceeds
were used for working capital needs. The current ratio at June 30, 1999 was 1.4
compared to .9 at December 31, 1998. Working capital was $95,002 at June 30,1999
and ($887,126) at December 31, 1998.
The Company's operating activities used cash of approximately $617,000 for the
six months ended June 30, 1999. The Company had an operating loss, before
depreciation and amortization of approximately $664,000
Cash provided by investing activities for the six months-ended June 30,1999 was
approximately $6.1 million which was offset by cash used in financing activities
of $5.9 million. The transactions herein resulted substantially as a result of
the litigation settlement and the corporate restructuring more fully described
in Part I, Item 1, Note 1.
As a result of the above activities, the company experienced a decrease in cash
of $384,000 for the first six months of 1999.
[HARTCORT\10QSB:JUNE3099]-1
13
<PAGE>
Item 2. (cont.)
Management's Discussion and Analysis of Financial Condition and Results of
Operations: (Continued)
Business Risks:
As discussed previously, the Company is substantially a shell but intends to
seek out and acquire profitable operating businesses. However, no definitive
agreements have been reached. If any 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 the any transaction.
Competition:
Since the Company has no current operations, it does not have any direct across
the board competitors, but may have competition in the future within the
industries for which it may acquire 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.
Recently, management has been focusing its efforts on pursuing the corporate
objective of becoming an Internet-related company with investments in China and
Asia through mergers and acquisitions. To this end, the Company is in the
process of finalizing and securing financing for three separate ventures. Each
transaction is subject to the Company's ability to obtain funding for the
transaction. There can be no assurances that the Company will be successful in
obtaining the funding for one or all of the transactions..
In the first transaction, the Company has agreed to purchase 35% of UAC Online
Stock Trading Ltd ("UAC") for $2.5 million. UAC is a company providing on-line
trade execution for stock brokerage firms in China via an intranet service
called CHINAPAC which is owned by China Telecom. UAC intends to use the cash
received from the Company to complete the testing and installation of its
systems into all 98 offices of Hua Xia Securities in China. Current plans are
for all 98 offices of Hoa Xia Securities to be operational within 6 months.
In the next tranaction, the Company has agreed to a joint venture with IPC
Technology International Ltd. ("IPC") to provide Internet Connections and
Services on a nation-wide basis in China. In the agreement, the Company with
provide the joint venture with $5 million of equity funding, in exchange for a
35% ownership of the joint venture, and arrange for $45 million of debt
financing for the joint venture to build the required backbone and operational
infrastructure . IPC will contribute to the joint venture the national ISP
license and an agreement with China Telecom.
[HARTCORT\10QSB:JUNE3099]-1
14
<PAGE>
Item 2. (cont.)
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
Management of Growth: (cont.)
In the third transaction, the Company has agreed to purchase 58.5% of Financial
Telecom Ltd. ("FTL") for $3 million in cash and stock. FTL is a provider of
real-time quotes for Hong Kong listed companies and has been in business 14
years. Quotes and related data is transmitted via computer terminals, cable
boxes, custom-designed PDA and digital pagers.
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. As
the Company has no current operations, there is no potential impact as a result
of the Year 2000.
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, 1998.
Item 2. Changes in Securities
Not applicable
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
(a) Exhibits - None
(b) Form 8-K - None
[HARTCORT\10QSB:JUNE3099]-1
15
<PAGE>
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 16, 1999 By /s/ Jon L. Lawver
----------------------------------
Jon L. Lawver
Secretary and
Chief Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 154,101
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 352,178
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 5,354,178
<CURRENT-LIABILITIES> 257,176
<BONDS> 0
0
10
<COMMON> 19,636
<OTHER-SE> 5,182,500
<TOTAL-LIABILITY-AND-EQUITY> 5,354,178
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 655,160
<OTHER-EXPENSES> (20,095)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (663,363)
<INCOME-TAX> 555
<INCOME-CONTINUING> (663,918)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (663,918)
<EPS-BASIC> (.03)
<EPS-DILUTED> (.03)
<FN>
Options and warrants outstanding as of June 30,1999 are antidilutive for
purposes of calculating basic and diluted earnings per share and are, therefore
ignored.
</FN>
</TABLE>
