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, 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
(Issuers 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, 1999, The Hartcourt Companies, Inc. had 21,099,460
shares of Common Stock Outstanding.
Transitional Small Business Disclosure Format (check one ): Yes [ ] No [ X ]
[HARTCORT\10QSBSEP3099]-1
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<PAGE>
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 - September 30, 1999 and
December 31, 1998...........................................3 - 4
Consolidated Statements of Operations - Quarters Ended
September 30, 1999 and 1998 and the Nine Months Ended
September 30, 1999 and 1998.....................................5
Consolidated Statements of Shareholders Equity - Nine Months
Ended September 30, 1999........................................6
Consolidated Statements of Cash Flows - Nine Months Ended
September 30, 1999 and 1998.....................................7
Notes to the Consolidated Financial Statements.............8 - 12
Item 2. Managements 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
[HARTCORT\10QSBSEP3099]-1
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<PAGE>
Part I THE HARTCOURT COMPANIES INC. AND SUBSIDIARIES
Item 1. CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
1999 December 31,
(Unaudited) 1998
<S> <C> <C>
CURRENT ASSETS
Cash $ 1,578 $ 384,453
Accounts receivable, net of allowance for doubtful
accounts of $76,477 in 1998 46,770 3,152,635
Trade dollar receivable 22,808 22,670
Notes receivable, current portion 96,523 101,523
Inventory - 2,613,560
Prepaid expenses 24,855 113,068
Due from related parties 158,222 175,907
TOTAL CURRENT ASSETS 350,756 6,563,816
PROPERTY AND EQUIPMENT, NET - 4,262,120
INVESTMENTS 5,050,000 11,030,000
OTHER ASSETS 502,000 18,423
INTANGIBLES - 5,198,033
TOTAL ASSETS $ 5,902,756 $ 27,072,392
LIABILITIES AND SHAREHOLDERS EQUITY
CURRENT LIABILITIES
Accounts payable 144,819 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 65,000 145,000
Notes payable - current portion - 1,631,199
Capital lease obligation - current portion - 290,204
Debentures - 50,000
Advances from Officer - 124,206
TOTAL CURRENT LIABILITIES 249,199 7,450,942
</TABLE>
[HARTCORT\10QSBSEP3099]-1
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<PAGE>
Item 1. THE HARTCOURT COMPANIES INC. AND SUBSIDIARIES
(cont.) CONSOLIDATED BALANCE SHEETS
(CONTINUED)
<TABLE>
<CAPTION>
September 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 249,199 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
TOTAL PREFERRED STOCK - 9,805,010
Common stock, $0.01 par value, 50,000,000 shares
authorized; 21,099,460 shares issued and outstanding at
September 30, 1999 and 19,954,382 shares issued and
outstanding at December 31, 1998 21,100 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 32,300,707 33,257,835
Accumulated deficit (26,388,322) (25,400,694)
TOTAL SHAREHOLDERS EQUITY 5,653,557 17,101,178
TOTAL LIABILITIES AND SHAREHOLDERS
EQUITY $ 5,902,756 $ 27,072,392
</TABLE>
[HARTCORT\10QSBSEP3099]-1
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<PAGE>
Item 1. THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
(cont.) CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
REVENUES
Product Sales $ - $ 5,165,548 $ - $ 12,714,313
Services and Labor Sales - 1,743,499 - 4,867,636
TOTAL REVENUE - 6,909,047 - 17,581,949
COST OF SALES - 4,842,175 - 12,590,585
Gross Profit - 2,066,862 - 4,991,364
OPERATING EXPENSES
Selling, general and administrative 304,710 1,744,477 959,870 4,374,189
Depreciation and amortization - 168,280 - 537,675
TOTAL OPERATING EXPENSES 304,710 1,912,757 959,870 4,911,864
INCOME (LOSS) FROM OPERATIONS (304,710) 154,105 (959,870) 79,500
EQUITY IN LOSS OF UNCONSOLIDATED
SUBSIDIARIES - - (28,298) -
OTHER INCOME (EXPENSES)
Interest expense (19,000) (100,089) (19,000) (240,193)
Interest income - 4,500 20,095 36,306
Miscellaneous income - 12,740 - 42,148
TOTAL OTHER INCOME (EXPENSE) (19,000) (82,849) 1,095 (161,739)
NET INCOME (LOSS) BEFORE TAXES (323,710) 71,256 (987,023) (82,239)
Income taxes - 63 555 1,338
NET LOSS $ (323,710) $ 71,193 $ (987,628) $ (83,577)
BASIC AND FULLY DILUTED INCOME
(LOSS) PER SHARE $ (.02) $ .004 $ (.05) $ (.005)
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 19,956,279 19,056,990 19,523,118 17,683,807
</TABLE>
[HARTCORT\10QSBSEP3099]-1
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<PAGE>
Item 1 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
(cont.) CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
FOR THE NINE MONTHS ENDED September 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Common
Common Stock Preferred Stock Stock Treasury Stock Total
Additional Subscription Accumulated Shareholders
Paid Receivable Deficit Equity
Capital
Shares Amount Shares Amount Shares Amount
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 19,954,382 $19,955 14,450 $9,805,010 $33,257,835 $(301,000) 24,364 $(279,928)$(25,400,694) $17,101,178
Shares issued to investors 197,000 197 - - 24,863 - - - - 25,060
Shares redeemed in
connection with sale of
30% interest in ECS to
J. Pruzin (2,000,000) (2,000) (3,400)(3,400,000) (1,998,000) - - - - (5,400,000)
Shares issued (redeemed) in
connection with litigation
settlement (1,000,000) (1,000)(10,050)(6,405,000) 100,000 - - - - (6,306,000)
Stock subscription rescinded - - - - - 301,000 - - - 301,000
Shares issued for Services 305,000 305 - - 75,945 - - - - 76,250
Shares issued to employees
and directors 205,000 205 - - 51,045 - - - - 51,250
Distribution of Enova to
Shareholders - - (1,000) (10) (399,378) - - - - (399,388)
Net loss for period - - - - - - - - (249,178) (249,178)
Balance, March 31, 1999 17,661,382 $17,662 - $ - $31,112,310 $ 0 24,364 $(279,928)$(25,649,872) $5,200,172
Shares issued to investors 103,000 103 - - 12,772 - - - - 12,875
Shares issued to Alan Phan
in lieu of cash per
employment contract for
1998 services 1,706,485 1,706 - - 198,294 - - - - 200,000
Shares issued for Services 50,000 50 - - 12,450 - - - - 12,500
Shares issued to employees
and directors 114,950 115 - - 86,080 - - - - 86,195
Net loss for period - - - - - - - - (414,740) (414,740)
Balance, June 30, 1999 19,635,817 $19,636 - $ - $31,421,906 $ - 24,364 $(279,928)$(26,064,612) $5,097,002
</TABLE>
6
<PAGE>
Item 1 THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
(cont.) CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
FOR THE NINE MONTHS ENDED September 30, 1999
(UNAUDITED) (Continued)
<TABLE>
<CAPTION>
Common
Common Stock Preferred Stock Stock Treasury Stock Total
Additional Subscription Accumulated Shareholders
Paid Receivable Deficit Equity
Capital
Shares Amount Shares Amount Shares Amount
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1999 19,635,817 $19,636 - $ - $31,421,906 $ - 24,364 $(279,928)$(26,064,612) $5,097,002
Shares issued to investors 1,000,000 1,000 - - 499,000 - - - - 500,000
Shares issued to retire
debt 140,000 140 - - 53,860 - - - - 54,000
Shares issued upon exercise
of warrants 68,000 68 - - 16,932 - - - - 17,000
Shares issued for Services 212,143 212 - - 253,809 - - - - 254,021
Shares issued to employees
and directors 43,500 44 - - 55,200 - - - - 55,244
Net loss for period - - - - - - - - (323,710) (323,710)
Balance, September 30, 1999 21,099,460 $21,100 - $ - $32,300,707 $ - 24,364 $(279,928)$(26,388,322) $5,653,557
</TABLE>
7
<PAGE>
Item 1. THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
(cont.) CONSOLIDATED STATEMENT OF CASH FLOW
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months ended
September 30,
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (987,628) $ (83,577)
Adjustments to reconcile net loss to net cash used in
operating activities:
Stock issued for services 342,771 195,502
Depreciation and amortization - 571,650
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable (17,000) (1,271,445)
Inventory 13,083 256,341
Other assets and liabilities 17,500 11,949
Increase (decrease) in:
Accounts payable and accrued expenses 35,256 (626,449)
Due from related party (15,700) (86,721)
Payable to Mexican affiliate - (17,901)
NET CASH USED IN OPERATING ACTIVITIES (611,718) (1,050,651)
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of 30% of ECS 5,400,000 -
Change in Investments 1,085,607 -
Distribution of Subsidiary Ownership to shareholders (399,388) -
Increase in other Assets (500,000) -
Purchase of (sale) of property and equipment - (805,076)
Proceeds on sale of marketable securities - 523,903
Payments on acquisitions - 200,000
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 5,586,219 (81,173)
CASH FLOWS FROM FINANCING ACTIVITIES
Sale of common stock, exercise of warrants 554,935 1,125,002
Common stock issued to directors and officers 392,689 -
Common stock issued in settlement of debt 100,000 -
Common stock subscription receivable - (275,000)
Other loans and lines of credit - 1,481,738
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 (6,405,000) (1,500,000)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (5,357,376) 1,581,234
NET INCREASE (DECREASE) IN CASH (382,875) 449,410
CASH, BEGINNING OF PERIOD 384,453 77,688
CASH, END OF PERIOD $ 1,578 $ 527,098
</TABLE>
8
<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. Stardusts 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\10QSBSEP3099]-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 manufacturers 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 Pegos 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
Companys 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\10QSBSEP3099]-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\10QSBSEP3099]-1
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<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.
On October 4, 1999, the Company completed the purchase of a 58.5% interest
in Financial Telecom Ltd.(FTL) of Hong Kong for $3 million in cash, notes and
stock. FTL is an information service provider specializing in transmitting
real-time financial data and news via a network of fixed-line and wireless
systems, including new-generation high-speed FLEX wireless PDA for mobile users.
FTL hass been in business for 14 years. The transaction closed with the Company
making a cash payment of $500,000, issuing a note for $1,000,000 and 1,500,000
shares of its common stock.
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 September 30, 1999 and December 31, 1998
and the results of their operations and their cash flows for the nine months
ended September 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.
[HARTCORT\10QSBSEP3099]-1
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<PAGE>
Item 1. (cont.)
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 2. Basis of Presentation:(continued)
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 Companys financial statements as stated in its report on Form 10-KSB for the
fiscal year ended December 31, 1998.
Note 3. Supplemental Disclosure of Non-Cash Financing Activities:
<TABLE>
<CAPTION>
Quarter Ended Quarter Ended
September 30, 1999 September 30, 1998
(Unaudited) (Unaudited)
Cash paid (received) for interest and income taxes:
<S> <C> <C>
Interest $ 19,000 $ 100,089
Taxes - 63
</TABLE>
Note 4. Loss per Share :
<TABLE>
<CAPTION>
Quarter Quarter Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Income (Loss) from continuous
operations available to
common shareholders: $ (323,710) $ 71,193 $ (987,628) $ (83,577)
Effects of dilutive securities - - - -
Weighted average shares
outstanding 19,956,279 19,056,990 19,523,118 17,683,807
Basic and dilutive earnings per
share $ (.02) $ .00 $ (.05) $ (.00)
</TABLE>
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\10QSBSEP3099]-1
13
<PAGE>
Part I
Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations:
As discussed in the Companys 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 Companys 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 nine months of 1999, while the Companys revenue for the first nine months
of 1998 was $17,582,000. The equity in earnings / loss for the first nine 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 $960,000
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 nine months of 1999, the company raised $555,000 through
the sale of common stock and debentures compared to the 1998 period, where the
Company sold approximately $1,125,002 of its equity securities. These proceeds
were used for working capital needs. The current ratio at September 30, 1999 was
1.4 compared to .9 at December 31, 1998. Working capital was $102,000 at
September 30,1999 and ($887,126) at December 31, 1998.
The Companys operating activities used cash of approximately $611,000 for
the nine months ended September 30, 1999. The Company had an operating loss,
before depreciation and amortization of approximately $988,000
Cash provided by investing activities for the nine months ended September
30,1999 was approximately $5.6 million which was offset by cash used in
financing activities of $5.4 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 $383,000 for the first nine months of 1999.
[HARTCORT\10QSBSEP3099]-1
14
<PAGE>
Item 2. (cont.)
Managements Discussion and Analysis of Financial Condition and Results of
Operations: (Continued)
Business Risks:
As discussed previously, the Company is substantially a shell but is in the
final stages of completing investments in internet related businesses in China
and the Asian markets and intends to seek out and acquireor invest in additional
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 Companys
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 four separate ventures.
Each transaction is subject to the Companys 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 originally 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. The
Company originally loaned UAC $50,000 pending the initial funding of the joint
venture. In September, the Company and UAC agreed to convert the loan into an
option to purchase an additional 15% interest in the joint venture.
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
[HARTCORT\10QSBSEP3099]-1
15
<PAGE>
ISP license and an agreement with China Telecom. Negotiations with IPC are
continuing.
In the third transaction, the Company agreed to purchase 58.5% of Financial
Telecom Ltd.(FTL) of Hong Kong for $3 million in cash and stock. FTL is an
information service provider specializing in transmitting real-time financial
data and news via a network of fixed-line and wireless systems, including
new-generation high-speed FLEX wireless PDA for mobile users. FTL hass been in
business for 14 years. The transaction closed on October 4, 1999, with the
Company making a cash payment of $500,000, issuing a note for $1,000,000 and
1,500,000 shares of its common stock.
In the last transaction, in October the Company signed a joint venture
agreement with Innostar HiTech Enterprises of China to establish a nationwide
Internet Service Provider and IP Phone Service in China. In the agreement the
Company will hold a 35% interest in the Joint Venture.
Item 2. (cont.)
Managements Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
Management of Growth: (cont.)
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 Companys
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 Companys 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
[HARTCORT\10QSBSEP3099]-1
16
<PAGE>
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) Form 8-K - None
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 22 1999 By: /s/ Alan V. Phan
Dr. Alan V. Phan
President
[HARTCORT\10QSBSEP3099]-1
17
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,578
<SECURITIES> 0
<RECEIVABLES> 67,578
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 350,756
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 5,902,756
<CURRENT-LIABILITIES> 249,199
<BONDS> 0
0
0
<COMMON> 21,100
<OTHER-SE> 5,632,457
<TOTAL-LIABILITY-AND-EQUITY> 5,902,756
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 958,870
<OTHER-EXPENSES> 28,298
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,095)
<INCOME-PRETAX> (987,023)
<INCOME-TAX> 555
<INCOME-CONTINUING> (987,628)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (987,628)
<EPS-BASIC> (.05)
<EPS-DILUTED> (.05)
<FN>
<F1> Options and warrants outstanding as of September 30, 1999 are antidilutive
for purposes of calculating basic and diluted earnings per share and are,
therefore ignored.
</FN>
</TABLE>
