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: March 31, 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.)
2049 Century Park East, 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 March 31, 1999, The Hartcourt Companies, Inc. had 17,661,382 shares of
Common Stock Outstanding.
Transitional Small Business Disclosure Format (check one ):
Yes [ ] No [ X ]
[HARTCORT\10QSB:033199]
<PAGE>
TABLE OF CONTENTS
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
Report on Form 10-QSB
For quarter ended
March 31, 1999
Page
PART 1 FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited )
Consolidated Balance Sheets - March 31, 1999
and December 31, 1998 ..........................................3 - 4
Consolidated Statements of Operations - Three months ended
March 31, 1999 and 1998 ........................................5
Consolidated Statements of Shareholders' Equity
- Three Months ended March 31, 1999 ............................6
Consolidated Statements of Cash Flows - Three months ended
March 31, 1999 and 1998 ........................................7
Notes to the Consolidated Financial Statements .................8 - 11
Item 2. Management's Discussion and Analysis of Financial
Condition And results of Operations ..................13
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\10QSB:033199]
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financials Statements (Unaudited)
<TABLE>
<CAPTION>
THE HARTCOURT COMPAMIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31,
1999 December 31,
(Unaudited) 1998
---------------------- ----------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 5,779 $ 384,453
Accounts receivable, net of allowance for doubtful
accounts of $76,477, in 1998 29,770 3,152,635
Trade dollar receivable
Notes receivable, current portion 22,808 22,670
Inventory 101,523 101,523
Prepaid expenses 8,355 113,068
Due from related parties 153,522 175,907
----------------------- ----------------------
TOTAL CURRENT ASSETS 381,757 12,670,017
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 $ 5,383,757 $ 27,072,392
======================= =====================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable 40,635 2,745,796
Accrued expenses and other current liabilities 32,950 478,356
Payable to Mexican affiliate - 483,572
Line of credit - 1,502,609
Notes payable, related parties-current portion - 145,000
Notes payable-current portion 10,000 1,631,199
Capital lease obligation-current portion - 290,204
Debentures 100,000 50,000
Advances From Officer - 124,206
----------------------- ---------------------
TOTAL CURRENT LIABILITIES 183,585 7,450,942
</TABLE>
<PAGE>
Item 1. (cont.)
<TABLE>
<CAPTION>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(CONTINUED)
March 31,
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 183,585 9,971,214
COMMITMENT AND CONTINGENCIES -
SHAREHOLDERS' EQUITY
Preferred Stock
Original preferred stock, $0.01 par value, 1,000
shares authorized, issued and outstanding 10 10
Series A, $1,000 stated value, 4,000 shares
authorized, issued and outstanding 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,
3,400 shares 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, 10,000,000 shares authorized, none issued
and outstanding - -
--------------------- ---------------------
TOTAL PREFERRED STOCK 10 9,805,010
Common stock, $0.01 par value, 50,000,000 shares authorized; 17,661,382
shares issued and outstanding at March 31, 1999 and 19,954,382 shares
issued and
outstanding at December 31, 1998 17,662 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 31,112 300 33,257,835
Accumulated deficit (25,649,872) (25,400,694)
--------------------- ----------------------
TOTAL SHAREHOLDERS' EQUITY 5,200,172 17,101,178
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 5,383,757 $ 27,072,392
===================== ======================
</TABLE>
[HARTCORT\10QSB:033199]
<PAGE>
Item 1. (cont.)
<TABLE>
<CAPTION>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
March 31,
1999 1998
------------------------ ----------------------
<S> <C> <C>
REVENUES
Product Sales $ - $ 5,102,999
------------------------ ----------------------
TOTAL REVENUE - 5,102,999
COST OF SALES - 3,746,447
------------------------ ----------------------
Gross profit - 1,356,552
OPERATING EXPENSES
Selling, general and administrative 241,775 1,189,788
Depreciation and amortization - 188,282
------------------------ ----------------------
TOTAL OPERATING EXPENSES 241,775 1,378,070
------------------------ ----------------------
LOSS FROM OPERATIONS (241,775) (21,518)
EQUITY IN EARNINGS(LOSS) OF
UNCONSOLIDATED (28,298) -
SUBSIDIARIES
OTHER INCOME (EXPENSES)
Interest expense - (62,023)
Interest and other income 20,095 9,588
------------------------ ----------------------
TOTAL OTHER INCOME (EXPENSE) (20,095) (52,435)
------------------------ -----------------------
NET LOSS BEFORE INCOME TAXES
Income taxes (249,978) (73,953)
(800) 1,275
------------------------ ----------------------
NET LOSS $ (249,178) $ (75,228)
======================== =======================
BASIC AND FULLY DILUTED LOSS PER SHARE $ (.01) $ (.01)
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 19,073,049 16,417,375
</TABLE>
[HARTCORT\10QSB:033199]
<PAGE>
Item 1. (cont.)
<TABLE>
<CAPTION>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(UNAUDITED)
Common Stock Preferred Stock Common Treasury Stock
-------------------- ---------------- Additional Stock --------------------
Paid Subscription
Shares Amount Shares Amount Capital Receivable Shares Amount
---------- ------- ------ ---------- ----------- ------------ ------ ----------
<S> <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)
Shares Issued to Investors 197,000 197 24,863
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)
Shares Issued (Redeemed)
in connection with
litigation settlement (1,000,000) (1,000) (10,050) (6,405,000) 100,000
Stock Subscription
Rescinded 301,000
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 (399,388)
Net Loss
----------- --------- -------- ---------- ------------ ----------- ------- ----------
Balance, March 31, 1999 17,661,382 17,662 1,000 $ 10 $31,112,300 $ - 24,364 $(279,928)
</TABLE>
[HARTCORT\10QSB:033199]
<PAGE>
<TABLE>
<CAPTION>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(UNAUDITED)
Total
Accumulated Shareholders'
Deficit Equity
------------- -----------
<S> <C> <C>
Balance, December 31, 1998 $(25,400,694) $17,101,178
Shares Issued to Investors 25,060
Shares Redeemed in
connection with 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
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 $(25,649,872) $ 5,200,172
</TABLE>
[HARTCORT\10QSB:033199]
<PAGE>
Item 1. (cont.)
<TABLE>
<CAPTION>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOW
(UNAUDITED)
Three Months Ended
March 31,
1998 1997
--------------------- --------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (249,178) $ (75,228)
Adjustments to reconcile net loss to net cash used in
operating activities: - -
Stock issued for services - 188,282
Depreciation and amortization
Changes in operating assets and liabilities: - (159,974)
Accounts receivable 13,083 581,360
Inventory (71,137) (321,863)
Accounts payable, accrued expenses and other (11,000) (34,811)
Due from related party - 15,766
--------------------- -------------------
Payable to Mexican affiliate
NET CASH PROVIDED BY (USED IN) OPERATING (318,232) (193,532)
ACTIVITIES
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of 30% of ECS 5,400,000 -
Change in Investments 1,135,607 523,903
Distribution of Subsidiary Ownership to shareholders (399,388) -
Purchase of property and equipment - (100,637)
Payments on notes receivable - 5,382
--------------------- -------------------
NET CASH PROVIDED BY (USED IN) INVESTING 6,136,219 428,648
ACTIVITIES
CASH FLOWS FROM FINANCING ACTIVITIES
Sale of common stock 25,060 -
Common stock issued to directors, officers and others 127,500 -
Common stock subscriptions received - 55,000
Sale of Debentures 50,000 -
Payments on related party payable - (2,096)
Payments on long term-debt - (22,935)
Payments on capital lease obligation - (49,966)
Payments on line of credit and notes payable - (200,000)
Redemption of preferred stock (6,405,000) (250,000)
--------------------- --------------------
NET CASH (USED IN) PROVIDED BY FINANCING (6,202,440) (514,997)
--------------------- --------------------
ACTIVITIES
NET INCREASE (DECREASE) IN CASH (378,679) 107,183
CASH, BEGINNING OF PERIOD 384,453 77,688
CASH, END OF PERIOD $ 5,779 $ 184,871
===================== ===================
</TABLE>
<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:033199]
<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's 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:033199]
<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 cancelled 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.
[HARTCORT\10QSB:033199]
<PAGE>
Item 1. (cont.)
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
9) On March 24, 1999, the Company entered into a Distribution Agreement
pursuant to which the Company agreed to distribute 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.
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 March 31,1999 and December 31, 1998 and
the results of their operations and their cash flows for the three months ended
March 31, 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:033199]
<PAGE>
Item 1. (cont.)
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 3. Supplemental Disclosure of Non-Cash Financing Activities:
<TABLE>
<CAPTION>
Quarter Ended Quarter Ended
March 31, 1999 March 31, 1998
-------------- --------------
(unaudited) (unaudited)
<S> <C> <C>
Cash paid (received) for interest and income taxes:
Interest $ - $ 62,023
Taxes (800) -
Non-cash investing and financing activities:
Preferred stock issued for Preferred stock
issued for accrued Liabilities - $135,000
Note 4. Loss per Share :
Quarter Ended Quarter Ended
March 31,1998 March 31,1997
-------------- -------------
Income (Loss) from continuous
Operations: $(249,178) $(75,228)
Less preferred stock dividends - (135,000)
-------------- -------------
Income (Loss) available to
common shareholders (249,178) (210,228)
Effects of dilutive securities - -
Weighted average shares outstanding 19,073,049 16,417,375
Basic and dilutive earnings per share $ (.01) $ (.01)
</TABLE>
During 1999 and 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:033199]
<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's Electronic Components and Systems, Inc.
subsidiary the recorded significant impairments to its goodwill in the
4th quarter of 1998. 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 three months of 1999, while the Company's revenue for the
first three months of 1998 was $5,103,000. The equity in earnings /
loss for the first three 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.
Corporate selling, general and administrative (SGA) expenses were
$242,000 attributed to primarily to the costs associated with the
restructuring.
Liquidity and Capital Resources:
During the first quarter of 1999, the company raised $75,000 through
the sale of common stock and debentures compared to the first quarter
of 1998, where the Company sold approximately $525,000 of its
marketable securities. These proceeds were used for working capital
needs. The current ratio at March 31, 1999 was 2.1 compared to 1.7 at
December 31, 1998. Working capital was $7,142,703 at March 31, 1998
and $7,480,308 at December 31, 1997.
The Company's operating activities used cash of approximately $318,000
for the three months ended March 31, 1999. The Company had an
operating loss, before depreciation and amortization of approximately
$249,000
[HARTCORT\10QSB:033199]
<PAGE>
Item 2. (cont.)
Management's Discussion and Analysis of Financial Condition and
Results of Operations:
Liquidity and Capital Resources: cont.
Cash provided by investing activities for the three months-ended March
31,1999 was approximately $6.1 million which was offset by cash used
in financing activities of $6.2 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 three months of 1999.
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.
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.
[HARTCORT\10QSB:033199]
<PAGE>
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) Reports on Form 8-K - During the first quarter, the Company filed
a Form 8-K reporting the events specified in Part I, Item 1,
Note 1.
[HARTCORT\10QSB:033199]
<PAGE>
SIGNATURES
Inccordance 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: May 17, 1999 By: /s/ Dr. Alan V. Phan
---------------------------------
Dr. Alan V. Phan, President
Options and warrants outstanding as of March 31,1999 are antidilutive for
purposes of calculating basic and diluted earnings per share and are, therefore
ignored.
[HARTCORT\10QSB:033199]
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