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, 2000
[ ] 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.)
9800 Sepulveda Blvd., Suite 818, Los
Angeles California 90045 (Address
of principal executive offices)
(310) 410-7290
(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, 2000, The Hartcourt Companies, Inc. had 27,562,584 shares of
Common Stock Outstanding.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [ X ]
<PAGE>
TABLE OF CONTENTS
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
Report on Form 10-QSB
For quarter ended
March 31, 2000
Page
PART 1 FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at March 31, 2000
(Unaudited) and December 31, 1999 .....................
Consolidated Statements of Operations for the
Three months ended March 31, 2000 and 1999
(Unaudited) ...........................................
Consolidated Statements of Shareholder' Equity for
the Three Months ended March 31, 2000 (Unaudited) .....
Consolidated Statements of Cash Flows for the
Three months ended March 31, 2000 and 1999
(Unaudited) ...........................................
Notes to the Consolidated Financial Statements ........
Item 2. Management's Discussion and Analysis of Financial
Condition And results of Operations ...................
PART II OTHER INFORMATION
Item 1. Legal Proceedings .....................................
Item 2. Changes in Securities .................................
Item 3. Defaults upon Senior Securities .......................
Item 4. Submission of Matters to Vote of Security Holders .....
Item 5. Other Information .....................................
Item 6. Exhibits and Reports on Form 8-K ......................
Signatures ......................................................
F-2
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Part I
Item 1
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
-------------- ----------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,366,654 $ 331,057
Accounts receivable 62,732 37,626
Inventory 132,527 127,091
Notes receivable 228,800 228,800
Prepaid expenses and other 81,431 129,114
Due from related parties 1,422,641 108,222
-------------- ----------------
Total current assets 3,294,785 961,910
-------------- ----------------
Property and equipment, net 817,209 815,085
Investments 5,512,993 5,554,644
Intangibles, net 2,149,468 2,206,033
-------------- ----------------
Total assets $ 11,774,455 $ 9,537,672
-------------- ----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 119,676 $ 152,709
Deferred revenue 89,572 78,477
Notes payable - current portion 547,088 649,998
Accrued expenses and other current liabilities 734,404 4,073,504
Payables to related parties 2,444,246 2,457,497
-------------- ---------------
Total current liabilities 3,934,986 7,412,185
Notes payable, net of current portion 597,375 608,184
-------------- ---------------
Total liabilities 4,532,361 8,020,369
-------------- ---------------
Commitments and Contingencies
Minority Interest 592,332 661,634
</TABLE>
F-3
<PAGE>
<TABLE>
March 31, December 31,
2000 1999
-------------- ----------------
(Unaudited)
<S> <C> <C>
Shareholders' Equity
Preferred Stock:
Original preferred stock, $0.01 par value, 1,000
authorized, issued and outstanding 10 10
Common stock, $0.001 par value, 50,000,000 shares
authorized; 27,562,584 shares and 23,832,152 shares issued
and outstanding at March 31, 2000 and December 31, 1999 27,563 23,833
Stock subscription receivable (1,000,000) -
Treasury stock, at cost (1,778,916 and 1,524,364
shares at March 31, 2000 and December 31, 1999) (1,918,634) (1,680,928)
Additional paid-in capital 47,595,067 38,895,860
Accumulated deficit (38,054,244) (36,383,106)
-------------- ----------------
Total shareholders' equity 6,649,762 855,669
-------------- ----------------
Total liabilities and shareholders' equity $ 11,774,455 $ 9,537,672
-------------- ----------------
</TABLE>
F-4
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
Three Months Ended December 31,
---------------------------------------
2000 1999
----------------- -----------------
<S> <C> <C>
Net sales $ 348,228 $ -
Cost of sales 116,541 -
----------------- -----------------
Gross profit 231,687 -
----------------- -----------------
Operating expenses
Selling, general and administrative 1,804,237 241,775
Depreciation and amortization 105,228 -
----------------- -----------------
Total operating expenses 1,909,465 241,775
----------------- -----------------
Loss from operations (1,677,778) (241,775)
Other income (expense):
Equity in earnings of affiliate (41,651) -
Interest expense (38,249) -
Interest income 8,231 20,095
Other expense 9,007 (27,498)
----------------- -----------------
Total other (expense) (62,662) (7,403)
----------------- -----------------
Loss before minority interest 1,740,440 249,978
Loss in subsidiary attributed to minority interest 69,302 -
----------------- -----------------
Net loss $ 1,671,138 $ 249,178
----------------- -----------------
Basic and fully diluted loss per common share $ (.06)$ (.01)
----------------- -----------------
Weighted average number of shares outstanding 26,330,688 19,073,049
----------------- -----------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2000
Common
Common Stock Preferred Stock Additional Stock
------------------------- ------------------------- Paid-In Subscriptions
Description Shares Amount Shares Amount Capital Receivable
- ---------------------------------------- ----------- ----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1999 23,832,152 $ 23,833 1,000 $ 10 $ 38,895,860 $ -
Issuance of warrants for consulting
services 20,000 20 - - 22,180 -
Shares issued to investors 227,445 227 - - 3,529,719 -
Sale of shares under Regulation S 300,000 300 - - 1,199,700 (1,000,000)
Shares issued upon exercise of warrants 1,373,075 1,373 - - 74,379 -
Issuance of warrants for brokerage
services - - - - 203,545 -
Shares issued to directors for services 2,424 2 - - 35,998 -
Shares issued to directors in lieu of
compensation 1,552,773 1,552 - - 3,393,235 -
Shares issued in connection with FTL
acquisition 254,552 255 - - 237,451 -
Shares issued for services 163 1 - - 3,000 -
Net loss - - - - - -
----------- ----------- ----------- ----------- ----------- ------------
Balance - March 31, 2000 27,562,584 $ 27,563 1,000 $ 10 $ 47,595,067 $ (1,000,000 )
----------- ----------- ----------- ----------- ----------- ------------
</TABLE>
F-6
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2000
Treasury Stock Total
---------------------- Accumulated Shareholders'
Description Shares Amount Deficit Equity
- ---------------------------------------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Balance - December 31, 1999 1,524,364 $ (1,680,92)$ (36,383,106)$ 855,669
Issuance of warrants for consulting
services - - - 22,200
Shares issued to investors - - - 3,529,946
Sale of shares under Regulation S - - - 200,000
Shares issued upon exercise of warrants - - - 75,752
Issuance of warrants for brokerage
services - - - 203,545
Shares issued to directors for services - - - 36,000
Shares issued to directors in lieu of
compensation - - - 3,394,787
Shares issued in connection with FTL
acquisition 254,552 (237,706) - -
Shares issued for services - - - 3,001
Net loss - - (1,671,138) (1,671,138)
--------- --------- ----------- -----------
Balance - March 31, 2000 1,778,916 $ (1,918,63)$ (38,054,244)$ 6,649,762
--------- --------- ----------- -----------
</TABLE>
F-6a
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Increase (Decrease) in Cash
Three Months Ended March 31,
---------------------------------------
2000 1999
----------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,671,138) $ (249,178)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 105,228 -
Minority interest in loss of subsidiaries (27,651) -
Stock issued for services 4,646,480 -
Changes in operating assets and liabilities:
Accounts receivable (25,106) 18,862
Inventory (5,436) (71,137)
Prepaid expenses and other 50,037 -
Accounts payable (33,034) (11,000)
Accrued expenses and other current liabilities (3,339,100) -
Deferred revenue 11,094 -
----------------- -----------------
Net cash used by operating activities (288,626) (312,453)
----------------- -----------------
Cash flows from investing activities:
Proceeds from sale of 35% of ESC - 5,400,000
Proceeds on sale of marketable securities - 1,135,607
Distribution of subsidiaries ownership to shareholders - (399,388)
Purchase of property and equipment (50,747) -
----------------- -----------------
Net cash provided by (used in) investing activities (50,747) 6,136,219
----------------- -----------------
Cash flows from financing activities:
Proceeds from issuance of common stock 2,743,000 152,560
Proceeds on exercise of options and warrants 75,750 50,000
Redemption of preferred stock - (6,405,000)
Payments to related parties (1,316,811) -
Payments on note payable (113,718) -
Payments on loans from shareholders (13,251) -
----------------- -----------------
Net cash provided by (used in) financing activities 1,374,970 (6,202,440)
Net increase (decrease) in cash 1,035,597 (378,674)
Cash and cash equivalents, beginning of period 331,057 384,453
----------------- -----------------
Cash and cash equivalents, end of period $ 1,366,654 $ 5,779
----------------- -----------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Item 1
Note 1. Organization and Nature of Operations:
Stardust, Inc.-Production-recording-Promotion ("Stardust"), a corporation
organized under the laws of the State of Utah in September 1983, acquired all of
the outstanding shares of Hartcourt Investments, a Nevada corporation, pursuant
to an Agreement and Plan of Reorganization dated November 5, 1994. At the time
of this acquisition, Stardust was a "shell" corporation with no assets,
businesses or operations. Subsequent to the acquisition of Hartcourt
Investments, Stardust changed its name to "The Hartcourt Companies, Inc."
Hartcourt Pen was organized under the laws of the State of Nevada in October
1993, to engage in the sale of writing instruments. Hartcourt Pen entered into
an Agreement and Plan of Reorganization dated December 1, 1994 with Hartcourt
Investments, pursuant to which Hartcourt Investments acquired all of the
outstanding shares of Hartcourt Pen. Through January 1999, Hartcourt's
operations relating to writing instruments involved the assembly and
distribution of writing instruments. In January 1999, Hartcourt discontinued the
operations of Hartcourt Investments and Hartcourt Pen, and disposed of all its
pen related assets in the United States.
In August 1996, Hartcourt entered into a Purchase and Sale Agreement with
NuOasis International, Inc. ("NuOasis"), a corporation incorporated under the
laws of the Commonwealth of 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, China. The purchase price consists of a Convertible
Secured Promissory Note granted to NuOasis, in the principal amount of
$12,000,000, a security interest in the property and the greater of 10,000,000
shares of Hartcourt's common stock, or that number of shares of Hartcourt's
common stock having a market value equal to $10,000,000 immediately preceding
the closing date. On August 8, 1996, an Addendum to the Purchase and Sale
Agreement was agreed to by Hartcourt and NuOasis, by which Hartcourt's
obligation to issue stock to NuOasis was reduced to 4,000,000 shares (valued at
$10,000,000) of its common stock. On March 15, 1999, Hartcourt entered into an
Exchange Agreement with Dragon King Investment Services Inc. ("Dragon King")
pursuant to which Hartcourt agreed to assign its rights under the Purchase and
Sale Agreement dated August 8, 1996 of its interest in the Peony Gardens
development for investment securities valued at $10 million. Due to restrictions
on the ability to trade the investment securities received, Hartcourt recorded
an impairment of $5,000,000 as of December 31, 1998.
In September 1996, Hartcourt entered into a Sales Agreement with Mandarin
Overseas Investment Co., Ltd. ("Mandarin"), an unaffiliated Turks and Caicos
chartered company located in Hong Kong, for its undivided 50% interest in
thirty-four State of Alaska mineral lease gold lode claims, known as Lodestar
claims numbered 35-68, consisting of 160 acres each, all located in the
Melozitna mining district near Tanana, Alaska, approximately 300 air-kilometers
west of the City of Fairbanks, Alaska. Hartcourt paid $3,000,000 in shares of
its common stock to Mandarin for its undivided 50% interest in the mineral lease
gold lode claims, The number of shares were determined by the average price per
share over a 10 day period for the 10 days prior to the execution of this
agreement. In September 1996, Hartcourt entered into a Sales Agreement with
Promed International Ltd. ("Promed"), an unaffiliated Turks and Caicos chartered
company with offices in the British crown colony of Gibraltar, for the purchase
of their undivided 50% interest in thirty-four State of Alaska mineral lease
gold lode claims, known as Lodestar claims numbered 1-34, consisting of 160
acres each, all located in the Melozitna mining district near Tanana, Alaska,
approximately 300 air-kilometers west of the City of Fairbanks, Alaska.
Hartcourt paid $3,000,000 in shares of its common stock to Promed for its
undivided 50% interest in the mineral lease gold lode claims, all shares were
issued pursuant to Regulation "S." The number of shares were determined by the
average price per share over a 10 day period for the 10 days prior to the
F-8
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
execution of this agreement. In July 1998, Hartcourt filed notice upon Mandarin
and Promed requesting rescission of the purchase of the Alaska gold mine mineral
leases as the sellers failed to provide Hartcourt with the required geological
evaluations. On March 8, 1999 Hartcourt entered into a rescission agreement with
the sellers, returning the claims and receiving back 1,298,700 shares of
Hartcourt common stock.
In December 1996, Hartcourt entered into a Consulting Agreement with American
Equities, LLC ("American Equities"), a California Limited Liability Company.
Hartcourt intended to acquire, manage and develop a real estate portfolio
through the year 2001. On September 3, 1998, American Equities filed suit
against Hartcourt for breach of contract. Hartcourt 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 on March 8, 1999, the parties agreed that all fees
paid to American Equities were earned and to provide American Equities with a
27.65% interest in Electronics Components and Systems, Inc. (ECS). Also,
American Equities agreed to pay back 1,075 the Series AB preferred stock
dividend issued by Hartcourt in 1998 and 1,000,000 shares of Hartcourt common
stock. Accordingly, all expenses relating to settlement were recorded in the
year ended December 31, 1998. Additionally, American Equities agreed to provide
working capital for operations of ECS.
On October 3, 1997, Hartcourt purchased all of the outstanding shares of Pego
Systems, Inc. (Pego) and Pego became a wholly owned subsidiary of Hartcourt.
Pego, a manufacturer's representative organization for air and gas handling
equipment, offers a full line of value added services including distribution,
service and manufacturing of custom process equipment packages. The acquisition
was accounted for using the purchase method of accounting. In connection with
the purchase, Hartcourt paid $500,000 in cash, issued 450,000 shares of
restricted common stock, 1,500 shares of Series C redeemable preferred stock,
and entered into a non-compete agreement with Pego's majority shareholder and
director. The total value of this transaction was approximately $2,300,000.
On October 28, 1997, Hartcourt through a wholly owned subsidiary, acquired ECS
and Pruzin Technologies, Inc. ("Pruzin"), an Arizona corporation, a related
entity of ECS. ECS specializes in high technology contract manufacturing and
assembly of printed circuit boards, phone and cable wires. ECS has three
manufacturing facilities, and contracts with a maquiladora in the free trade
zone in Sonora, Mexico. The acquisition was structured as a tax-free
reorganization and was accounted for using the purchase method of accounting. In
connection with the acquisition, Hartcourt paid $250,000 in cash, issued a note
payable for $250,000, issued 3,400 shares of Series D convertible preferred
stock and 2,500,000 shares of its common stock. The total value of the
transaction was approximately $9,500,000.
Effective February 1, 1999, pursuant to a Share Purchase Agreement, Hartcourt
acquired one (1) share of common stock of Enova Holdings Inc. ("Enova"), a
Nevada corporation representing 100% of the total issued and outstanding capital
stock of Enova, making Enova a wholly-owned subsidiary. Effective March 1, 1999,
Hartcourt and Enova executed an Exchange Agreement (the "Enova Agreement")
whereby Hartcourt exchanged all of its ownership in two wholly owned
subsidiaries, Pego and ECS, for 5,213,594 additional shares of common stock of
Enova. On March 24, 1999, Hartcourt entered into a Distribution Agreement
pursuant to which Hartcourt agreed to distribute to all shareholders of record
on March 31, 1999, 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. Enova's Registration
Statement on Form 10-SB was filed under the Securities Exchange Act of 1934 on
January 24, 2000.
As a result of the Share Purchase Agreement, the Enova Agreement and the
Distribution Agreement, each shareholder of record of Hartcourt on March 31,
1999 received one (1) share of Enova for every four (4) shares owned of
Hartcourt. Following the distribution of the Enova shares, both Hartcourt and
Enova continue to operate as separate companies.
F-9
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On August 17, 1999, Hartcourt entered into a stock purchase agreement with FTL,
a Hong Kong corporation, to purchase 4,964,990 shares of common stock,
representing 58.53% of the total common stock outstanding. FTL is a financial
data bank providing real-time stock quotes and financial information of Hong
Kong listed companies as well as information on other international stock
exchanges in the U.S. and Europe to institutional and retail investors. The
purchase price was agreed to be HK $4.713 (US$ 0.604) per share for a total of
HK$23.4 million or US$3.0 million, payable 50% in cash and the remaining balance
in Hartcourt common shares. The acquisition was completed on October 4, 1999
with Hartcourt making total cash payments of $801,860, recorded a payable for
$797,140 and issued 1,500,000 shares of its common stock. The stock purchase
agreement required a post closing adjustment for any deficiency to be paid to
FTL in the event the final closing net worth as of the closing date shall be
more than $5,000 over and above the net worth reported in calculating the
purchase price. As a result of the post closing adjustment, the purchase price
was revised to HK$25,563,8421 or US$3,277,412. At December 31, 1999, Hartcourt
recorded the increase in purchase price as a result of the post closing
adjustment, as a note payable to FTL of $138,706 and a payable for the issuance
of 148,512 shares of common stock of Hartcourt. On January 18, 2000, Hartcourt
issued 254,552 additional shares of common stock to FTL in settlement of the
post closing adjustment. As of May 10, 2000, Hartcourt has paid $750,000 towards
its amounts payable to FTL.
On March 27, 2000, FTL entered into a Memorandum of Understanding with NiceVoice
Investment Holdings Limited (NiceVoice) to form a joint venture for the purpose
of establishing and operating a financial paging service network in Hong Kong on
the FLEX transmission protocol on a PDA receiver device. Subject to verification
of total costs to be incurred in erection of FLEX transmission network, design
of financial information broadcast system, sourcing, testing and tuning of PDA
receiver devices, etc. and signing of formal joint venture agreement, FTL will
invest cash by phases to the amount not to exceed HK$4,000,000 (approximately
US$512,800) in exchange for a total ownership of 51% in the joint venture. The
transaction is currently under management review and a definitive joint venture
agreement is expected to be finalized by May 31, 2000.
On June 20, 1999, Hartcourt entered into an agreement with Beijing UAC Stock
Trading Online Co., Ltd. ("UAC Trading") to form a joint venture company under
the laws of China. The name of the joint venture company is Beijing UAC Stock
Exchange Online Co. Ltd. ("UAC"). UAC operates the first and only nationwide
online securities trading network, UAC 162 Network, connecting investors with
their stock brokerage offices via China Pac. China Pac is the nationwide packet
switched network in China owned by China Telecom since 1991. UAC 162 Network
consists of proprietary server software and user interface, servers, gateways
and other communication hardware. Under the terms of the agreement, for a 35%
interest in UAC, Hartcourt agreed to invest $1,000,000 in UAC, pay $1,700,000 to
the owners of UAC Trading and transfer 1,000,000 common shares of Hartcourt to
UAC. 200,000 of these common shares will be transferred to UAC Trading for an
existing loan of $200,000 and 800,000 common shares have not been issued and
upon their issuance, will be recorded as a loan from Hartcourt to UAC. On August
9, 1999, Hartcourt and UAC Trading agreed to convert the Hartcourt loan of
$200,000 into an option to purchase an additional 15% interest in UAC from UAC
Trading. On May 1, 2000 Hartcourt exercised its option to convert the loan to
UAC for into an additional 15% interest in UAC making Hartcourt's total
investment interest in UAC to 50%.
On December 30, 1996, Hartcourt and American Equities entered into a Warrant
Agreement, whereby Hartcourt agreed to issue and sell to American Equities, for
the price of $100, a warrant to purchase up to 2,000,000 shares of its common
stock, $.01 par value, in connection with the consulting services provided to
Hartcourt. American Equities shall have the right to purchase at any time and
from time to time prior to December 30, 2002, up to the number of fully paid and
non-assessable shares of warrants stock, upon payment of specific exercise price
or apply the cashless exercise clause specified in the Agreement. On September
9, 1999, pursuant to Cashless Exercise clause in the Warrant Agreement, American
Equity exercised its cashless exercise right and converted 800,000 warrants into
621,674 Hartcourt's common shares without payment of any consideration. On
December 14, 1999, American Equities files a complaint against Hartcourt
F-10
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
alleging breach of Warrant Agreement, claiming damages of $30,000,000. The case
concerned dispute over whether shares issued under the Warrant Agreement would
be issued as restricted shares or free trading shares. An agreement has been
reached and the litigation was settled on March 20, 2000. American Equities was
allowed to further exercise its cashless exercise right and converted the
remaining 1,200,000 warrants into 1,070,075 free trading common shares of
Hartcourt without any payment of consideration.
On October 21, 1998, Mr. James Pruzin, the selling shareholder and president of
ECS, formally requested a rescission of the October 28, 1997 acquisition
whereby, Hartcourt through a wholly owned subsidiary acquired ECS and Pruzin.
Mr. Pruzin alleged that he was authorized to request rescission of the original
transaction based on an alleged breach of the acquisition agreement by Hartcourt
which Hartcourt denied. On November 10,1998, Hartcourt and Mr. Pruzin entered
into a memorandum of understanding whereby Mr. Pruzin could reacquire ECS and
Pruzin from Hartcourt by returning all of the Hartcourt's common and preferred
shares originally issued to Mr. Pruzin, making payment to Hartcourt of
$1,850,000 during 1999, negotiating the return of Hartcourt common shares issued
in the Elan transaction, and issued to Hartcourt a promissory note for $400,000
amortized over five years with monthly payments beginning in 2000. Subsequently,
Mr. Pruzin was unable to meet the terms of the memorandum of understanding and
entered into new negotiations with Hartcourt. Mr. Pruzin and Hartcourt reached
an agreement whereby Mr. Pruzin agreed to return to Hartcourt 2,000,000 common
shares of Hartcourt representing 80% of the amount originally issued, and 3,400
shares of Series D preferred stock. Hartcourt agreed to assign to Mr. Pruzin a
30% ownership interest in ECS, and has a right to purchase 500,000 shares of
Hartcourt common stock held by Mr. Pruzin at $1 per share. Additionally, as part
of the agreement, the payment terms for the promissory note and advances were
changed to thirty-six monthly payments of $7,083 with no interest until paid in
full.
On December 23, 1999, Hartcourt entered into an agreement with GoCall Inc.
("GoCall"), a Delaware corporation, to form a strategic alliance for the common
interest of the respective corporations, including but not limited to the
development of GoCall's Internet related development-stage businesses and
software. GoCall agreed to give Hartcourt 1,000,000 shares of its convertible
preferred stock (par value @ $5.00). Each share of convertible preferred stock
is convertible into 10 shares of common stock (restricted under Rule 144 for 12
months). In return, Hartcourt agreed to give GoCall all of the marketable
securities received from Dragon King which are carried at $5,000,000 plus
192,000 shares of common stock of ECS. Hartcourt withheld 192,000 shares of
common stock of ECS, valued at $196,358 at the date of closing on December 29,
1999 and this was recorded as payable to GoCall at December 31, 1999. The GoCall
convertible preferred stock has subsequently been valued at $2,500,000.
Accordingly, Hartcourt has recorded an impairment of $2,696,358 against the
marketable securities for the year ended December 31, 1999. Hartcourt has the
option to appoint three out of the five directors of GoCall. As of May 10, 2000,
Hartcourt has not given possession of 192,000 shares of common stock of ECS to
GoCall. In addition, Hartcourt has not appointed any directors to the GoCall
Board and has not exercised any control on GoCall's operations.
F-11
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Recent Events
No assurance can be given that Term Sheet and Heads of Agreements will result in
actual agreements.
Beijing Innostar Hi-Tech Enterprises, Ltd. ("Innostar") - On October 20, 1999,
Hartcourt signed a Joint Venture Agreement with Innostar to establish a wireless
nationwide Internet service provider network and IP phone services in China via
a Chinese satellite. The total amount of investment in the joint venture company
will be $24.0 million of which $14.0 million will be contributed by Innostar for
65% ownership interest and $10.0 million by Hartcourt for 35% ownership
interest. The profits and losses of the joint venture company will be
distributed in accordance with their ownership interest ratios. The duration of
the Joint Venture Agreement is fifteen (15) years. The date of official
establishment of the joint venture company shall be the date the business
license is issued. The license is expected to be granted by June 2000.
eSAT, Inc. ("eSAT") - On November 29, 1999, Hartcourt signed a Term Sheet with
eSAT to create a strategic alliance through the exchange of their common shares
to establish a wireless Internet service provider and IP phone network in China.
In a private placement, Hartcourt will purchase 2,000,000 restricted common
shares of eSAT. eSAT will also grant Hartcourt an option to purchase an
additional 2,000,000 restricted common shares of eSAT at the exercise price of
$4.00 per share subject to customary anti-dilution provisions and exercisable
for a three year period. Fully exercised, it will represent 20% ownership in
eSAT. In exchange, Hartcourt will issue 1,000,000 of its restricted common
shares to eSAT. All the shares and options will be placed in an escrow with a
mutually agreed agent. The operation was expected to start in late April 2000.
If by April 30, 2000, eSAT was not able to obtain a satisfactory exclusive
supply contract with the Innostar Joint Venture, either party may void the
agreement, and the escrow agent will be instructed to return the shares and
options to the respective parties. The parties did not open the escrow as of May
10, 2000 and have extended the agreement through the end of June 2000.
Beijing Shangdi Net Technologies Center Co., Ltd. ("Shangdi") - On December 18,
1999, Sinobull signed a Term Sheet Agreement with Shangdi to form a new
corporation in Beijing. Sinobull shall have 40% interest and Shangdi shall have
60% interest in the new corporation. The terms of agreement required Sinobull to
invest $2,670,000 in the new corporation payable as follows: $200,000 payable in
cash by UAC on behalf of Sinobull within three days from the date of execution
of this Term Sheet Agreement, $1,470,000 in cash payable within 15 days from the
closing of the transaction, and $1,000,000 in cash payable, within 60 days from
the close of the transaction. The agreement required the new corporation to
maintain $2,000,000 as equity and the remaining $670,000 could be withdrawn as
payment to Shangdi's existing shareholders. Shangdi will invest the following
assets to the new corporation: the web and trading center under development,
33.84% shares of Hua Xia Info (a Chinese corporation specialized in financial
information and data provider, free and clear), 51% shares of Orient Future
Financial Information Corporation (a Chinese Corporation going to be registered
in Shanghai), and all tangible and intangible assets except cash.
On April 12, 2000, Sinobull signed a Term Sheet Agreement with Shandi revising
the terms of the Term Sheet Agreement signed on December 18, 1999. The terms of
the revised agreement required Sinobull to pay Shandi US$670,000 being the
consideration for all tangible and intangible assets in relation to computer
network information services excluding cash and debts, and 33.84% shares of Hua
Xia Information Company Limited; US$1,000,000 to a newly formed company Sinobull
Network Inc., a corporation registered in Beijing, for its working capital
needs; 140,000 restricted common shares of Hartcourt to Shandi and 60,000
restricted common shares of Hartcourt to Sinobull Network, Inc. In exchange,
Shandi agreed to transfer without any pledge and debt, all tangible and
intangible assets in relation to computer network information services to
Sinobull Network, Inc.; transfer to Hartcourt 40% of the ownership interest in
Tian Di Hu Lian Technologies, Ltd, a BVI corporation, holding the interest for
the shareholders of Shandi. After the above transfers, Shandi shall be entitled
to own 18% of total shares of Sinobull. As of May 10, 2000, Sinobull has paid
cash consideration of $1,000,000 towards the purchase of Shandi.
F-12
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
StreamingAsia.Com Ltd. ("StreamingAsia") - On April 14, 2000, Hartcourt
announced that Sinobull signed a Subscription and Shareholders' Agreement
("Agreement") relating to StreamingAsia, whereby Sinobull agreed to subscribe
all of the issued and outstanding fully paid shares of StreamingAsia for
HK$7,000,000 (approximately US$897,500). The terms of payment included
HK$500,000 (approximately US$64,100) payable in cashier's check upon signing of
the Agreement; at the option of Sinobull, HK$1,500,000 (approximately
US$192,300) payable in cash or Sinobull delivering such number of shares of
Hartcourt equivalent in value to HK$1,500,000 within 14 days after signing the
Agreement; HK$500,000 (approximately US$64,100) payable in cash within 30 days
from the date of the Agreement; HK$1,000,000 (approximately US$128,200) payable
in cash within 60 days from the date of the Agreement; HK$1,000,000 payable in
cash within 90 days of the date of the Agreement; and HK$2,500,000
(approximately US$320,500) within 120 days from the date of the Agreement.
Sinobull will appoint two members to the Board of Directors of StreamingAsia.
Together with the existing two directors, the new board shall consist of four
directors. Sinobull has completed the acquisition of StreamingAsia and as of May
10, 2000, Sinobull paid cash consideration of HK$1,500,000 towards the purchase
of StreamingAsia.
Shanghai Guo Mao Science & Technology Co. Ltd. ("Guo Mao") - On December 1,
1999, Sinobull signed a Term Sheet Agreement with Guo Mao. Guo Mao agreed to
issue new shares for a total proceeds of $1,000,000 that is subject to
negotiation, will represent 30% to 50% of the expanded capital of Guo Mao.
Sinobull agreed to subscribe for all the new shares issued by Guo Mao. Subject
to approval of the Share Purchase Agreement and the Joint Venture Agreement by
the relevant government authorities, payment by Sinobull for the new shares
shall be as follows: $100,000 in cash upon signing of the Share Purchase
Agreement, $100,000 in cash within 30 days after signing of the Share Purchase
Agreement, $100,000 in cash within 60 days after signing of the Share Purchase
Agreement, $100,000 in cash within 90 days, $100,000 in cash within 120 days
after signing of the Share Purchase Agreement, and $500,000 within 14 days after
the signing of the Share Purchase Agreement in shares of Hartcourt based on the
average closing price in the last 7 trading days before payment, or in shares of
Sinobull based on valuation to be agreed by both parties. Sinobull.com will
appoint not more than five directors to the board of Guo Mao. Together with the
existing five directors, the new board shall consist of not more than ten
directors. Although the transaction is expected to close by May 31, 2000,
Hartcourt has already assigned its ownership interest in Guo Mao to Sinobull.
Swartz Private Equity, LLC ("Swartz") - Swartz is an investment entity focused
on equity investments in Internet and other high technology companies. On
November 3, 1999, Hartcourt signed an Investment Agreement with Swartz. Swartz
agreed to purchase from Hartcourt, from time to time, shares of Hartcourt's
common stock, as part of an offering of common stock by Hartcourt to Swartz, for
a maximum aggregate offering amount of $25,000,000. These fundings will be used
to satisfy Hartcourt's working capital requirements for the year 2000 and
complete acquisitions of Internet related operations. On January 5, 2000,
Hartcourt and Swartz agreed to increase the equity line funding to $35,000,000
due to the planned acquisition of a Linux Internet operations in China. On
February 28, 2000 Hartcourt filed a form SB-2 Registration document with SEC to
register additional common shares for issuance to Swartz. Once approved by SEC,
Swartz has the obligation to purchase these shares at the market price less 10
percent discount during the next 24 months. The Registration document is
currently under review by the SEC.
eMPACT Solutions, Inc. ("eMPACT") - On February 9, 2000, Hartcourt entered into
a Stock Purchase Agreement Term Sheet to purchase 30% of the authorized and
outstanding shares of eMPACT's new shares of common stock. The purchase price
was agreed to be $2,000,000, payable $1,000,000 in cash at the date of closing,
and the remainder $1,000,000 in cash within ninety days of closing. In the event
that eMPACT shall fail to meet the revenues projections for the fiscal year
2000, Hartcourt shall receive an additional one percent of the shares of eMPACT
for every percent that revenue does not meet the projections for revenue to a
maximum of an additional twenty percent. On April 10, 2000, Hartcourt paid a
consideration of $300,000 towards the purchase of eMPACT. The transaction is
expected to close in June 2000.
F-13
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Shenzhen China Cable Integrated Network Co. Ltd. ("SCIC") - On February 25,
2000, Hartcourt signed a Letter of Intent with Shenzhen Sinlan Investment Co.,
Ltd. to jointly invest in SCIC. No terms have been reached and a definitive
agreement to form a joint venture company is expected to be signed by May 31,
2000. SCIC operates an exclusive television and cable network in the capital
city of Chengdu. SCIC is planning an expansion program to add subscribers and to
modernize the existing system and make it a showcase cable system with
interconnecting data transmission via a network of satellite and cable
transmission.
On April 8, 2000, Hartcourt entered into Heads of Agreement ("Agreement") with
DF Ltd., Loughborough Ltd., and Express Internet Investment Ltd. (collectively,
"the Management") and an unnamed investor to form a joint venture company for
the commercial exploitation of the Publication Rights of the internet and
production of the content of the website in respect of the laws of China. Per
the terms of the Agreement, both Hartcourt and the unnamed investor's obligation
are to invest US$2,000,000 each, in the joint venture company for 25% ownership
interest and will share the responsibility in providing funding, finance and
technological support. The obligation of Hartcourt and unnamed investor to
provide funding as working capital for the joint venture company is subject to
the conditions precedent that the joint venture company shall have entered into
an agreement with the relevant parties in China for the commercial exploitation
of the Publication Rights on the Internet and the website. Each of the investors
shall within 14 days of entering into such agreement by the joint venture
company, pay a sum of US$1,000,000, making a US$2,000,000 being the 1st Tranche
of the working capital; within three (3) months thereafter pay another sum of
US$1,000,000, making a US$2,000,000 being the 2nd Tranche of the working capital
for the remaining portion of their investment. Production of the website shall
commence upon the payment in full of the 1st Tranche by the investors to the
joint venture company and the appropriate production costs being made available
to the parties responsible for production. The joint venture company is
currently negotiating agreements with the relevant parties in China and has not
been granted approval for the commercial exploitation of the Publication Rights
on the Internet and the website. Therefore, as of May 10, 2000, Hartcourt has no
payment obligations under this Agreement.
On April 19, 2000, Hartcourt entered into a Fee Agreement for Introduction
Services ("Agreement") with Tang Wai Leong and Thomas Kwok, (collectively
referred to as "Introducers") whereby the Introducers will use their best
efforts to search for, identify and make known to Hartcourt Internet-related
businesses and opportunities for potential acquisition by Hartcourt. In
addition, Introducer will seek out sources of funding and search for suitable
candidates for employment by Hartcourt in its Chinese operations. Hartcourt
agrees to satisfy Introducer's time and expense incurred, up to and including
the first acquisition by Hartcourt of an opportunity introduced or arranged by
Introducer, by granting to Introducer options to purchase up to 2,500,000 shares
of Hartcourt common stock at a price of five dollars fifty cents ($5.50) per
share. The option is non-transferable and will expire unless exercised on or
before the third anniversary of the date of Agreement. Upon consummation of the
introduction by the Introducer and Hartcourt completing the acquisition,
Hartcourt agreed to register with the Securities and Exchange Commission under a
Form S-8 such shares granted under the option agreement, and shall cause such
registration statement to remain effective at all times while Introducer holds
the options.
The Introducer has introduced to Hartcourt a potential acquisition opportunity
and Hartcourt signed the necessary documents to consummate the purchase of an
entity on April 27, 2000. On May 8, 2000, in accordance with terms of the
Agreement, Hartcourt filed a Form S-8 to register with the Securities and
Exchange Commission the options granted to the Introducer under the Agreement.
F-14
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On April 27, 2000, Hartcourt signed a Stock Purchase Agreement Term Sheet with a
third party to form a new entity of which Hartcourt desires to purchase
fifty-one percent (51%) of the outstanding shares of the capital stock and the
third party agrees to retain the remaining forty-nine percent (49%) of the
outstanding shares. The third party being the sole owner all of rights, title
and interest in an operating company desires to contribute fifty-one percent
(51%) of its share to the new entity. The transaction is to close no later than
45 days following the execution of this Agreement during which time all due
diligence shall be completed, which includes evaluation of the third party and
the operating company by Morgan Stanley, a legal opinion of counsel as to the
acceptability of the proposed structure of Hartcourt's acquisition of fifty-one
percent (51%) of new entity, financial reviews, et al. The purchase price shall
be not less than US$50,000,000 in cash and not exceeding US$76,000,000
(including US$50,000,000 in cash together with marketable shares of upto
US$26,000,000 in value). The terms of the Agreement required: a) Hartcourt to
deposit $10,000,000 in an escrow account no later than April 28, 2000 upon
complete execution of the Agreement; b) upon completion of all of its due
diligence, including evaluation by Morgan Stanley and confirmation by legal
counsel as to acceptable structure, Hartcourt shall deposit such additional
funds as shall be determined as required in conformity with the value
established by Morgan Stanley. On April 28, 2000, Hartcourt entered into an
agreement with another third party who opened the escrow and deposited
$10,000,000 on behalf of Hartcourt. Hartcourt is currently performing its due
diligence and expects to complete the transaction.
Sinobull.Com Inc. ("Sinobull") - On May 1, 2000, Hartcourt and Sinobull entered
into an Exchange Agreement and agreed to exchange shares of interests Hartcourt
has in certain related businesses for Sinobull common stock. The terms of
Agreement required Sinobull to exchange forty-eight (48%) percent of its common
stock (par value @ $1.00) for all of Hartcourt's ownership interests in the
following companies: a) 58.53% of Financial Telecom Limited; 50% of Beijing UAC
Stock Exchange Online Co Ltd.; c) 40% of Shandi; d) 50% of StreamingAsia; and e)
50% of GuoMao. The Agreement required Sinobull to form an eleven (11) member
Board of Directors group with Hartcourt to appoint six (6) members and Sinobull
to appoint five (5) members. The transaction closed on May 1, 2000 and as a
result of this restructure, Sinobull became an investment holding company.
Hartcourt is currently reviewing the structure of operations of Sinobull under
the laws of China and Hong Kong and proposes to finalize the structure by the
end of June 2000.
Hartcourt's partners in the above mentioned joint ventures are expecting
Hartcourt to provide two key elements in these joint ventures: Internet
technology and investment capital. Hartcourt management, which has recently
hired individuals with extensive experience and expertise in relevant industry
sectors, intends to provide Internet technology by merging with or acquiring
companies already active in these businesses. On the financial side, Hartcourt
plans to raise substantial funds necessary to carry out the plans of its venture
partners by selling its own common shares to selected investors/partners and
bringing in partners whose contributions to each joint venture will include the
necessary cash contributions.
F-15
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 2. Basis of Presentation:
The accompanying unaudited consolidated 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 1999 Form 10-KSB.
In the opinion of management, the accompanying unaudited consolidated 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, 2000 and the results of their
operations and their cash flows for the three months ended March 31, 2000 and
1999. The financial statements for the three months ended March 31, 2000 are
consolidated to include the accounts of The Hartcourt Companies and its 58.53%
owned subsidiary Financial Telecom Limited, and its 35% owned equity investment
in Beijing UAC Stock Exchange Online Co. Ltd. The financial statements for the
three months period ended March 31, 1999 include only the accounts of The
Hartcourt Companies, Inc. The operations of Hartcourt Pen and Hartcourt
Investments were discontinued in January 1999 and Hartcourt's investment in Pego
Systems, Inc. and Electronic Components and Systems, Inc. was spun-off to Enova
effective March 1, 1999 and distributed as stock dividend.
The results of operations for the three months ended March 31, 2000 are not
necessarily indicative of the results to be expected for the entire year.
Certain 1999 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, 1999.
F-16
<PAGE>
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
March 31, 2000 March 31, 1999
(Unaudited) (Unaudited)
------------------------- --------------------------
<S> <C> <C>
Cash received for:
Taxes $ - $ 800
Non-cash operating and financing activities:
Issuance of warrants for services 203,545 -
Shares issued for services 1,012,147 -
Shares issued to directors for services 3,430,788 -
Note 4. Loss per Share:
Quarter Ended Quarter Ended
March 31, 2000 March 31, 1999
------------------------- ---------------------------
Net loss $ 1,671,138 $ 249,178
Effects of dilutive securities
------------------------- ---------------------------
Weighted average shares outstanding 26,330,688 19,073,049
------------------------- ---------------------------
Basic and dilutive earnings per share $ (0.06) $ (.01)
</TABLE>
At March 31, 2000 and 1999, the Company had 463,530 and 2,000,000 warrants
outstanding, each convertible into one share of common stock. These instruments
were not included in the computation of diluted earnings per share for any of
the periods presented, due to their anti-dilutive effects based on the net loss
reported for each period.
F-17
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENTS'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(UNAUDITED)
Item II
Part 1
Currently, Hartcourt is involved in Internet joint ventures in Asia to
facilitate the expansion of China's first commercial e-trade financial network
and wireless Internet Service Provider services. Hartcourt has set as its goal
to create the premiere financial portal in the Chinese market by building a
network of Internet companies in partnership with young Chinese enterprenuers as
well as government owned entities. Its mission is to become one of the leading
Internet companies in Asia. With a a vision to create the premier financial
portal and financial information technology service provider in Asia, Sinobull
was incorporated in the BVI in November 1999 as an investment holding company to
consolidate various related businesses acquired by Hartcourt during the period
from August 1999 to December 1999. For the purposes of presenting these
businesses under a unified and strong brandname, a restructuring exercise is
currently underway to consolidate these businesses under Sinobull. Upon
completion of the restructuring exercise, Sinobull will operate a premier
financial portal on the Chinese Internet with a comprehensive Web site and
supporting utilities that will be capable of executing securities transactions
on-line in a timely and efficient manner while providing real-time quotes,
research, charts and other collateral information regarding stocks, bonds,
currencies and other markets in China and other Asian markets.
Hartcourt's future business, including expansion of its current limited
operations and acquisition plans requires additional equity and/or debt
financing, which may not be available in a timely manner on commercially
reasonable terms, or at all. Harcourt's primary objective is to acquire
established operating companies with histories of growth and profitability, in
order to diversify and create a multi-dimensional Internet service related
company.
During 1999, Hartcourt 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, Hartcourt recorded
significant impairments to its goodwill in 1998. In March, 1999, Hartcourt
entered into a series of agreements and transactions that in the aggregate were
designed to streamline and restructure the company while dissolving the entities
comprising of inactive assets and settle outstanding litigation. As a result of
such restructuring, Hartcourt discontinued the operations of Hartcourt Pen and
Hartcourt Investments and had a spin-off of Hartcourt's investment in Pego
(100%) and ECS (35%).
Hartcourt effectively became an entity with no operations.
Results of Operations:
The operations of Hartcourt for the three months ended March 31, 2000 primarily
consisted of operations of FTL and Hartcourt's 35% investment interest in UAC.
Operations of Hartcourt Pen and Hartcourt Investments were discontinued at the
beginning of 1999, and operations of Pego and ECS were disposed off as a result
of spin-off to Enova and the subsequent distribution of Enova as a stock
dividend to Hartcourt shareholders.
Net sales and cost of sales: The Company recorded net sales of $348,228 for the
first three months ended March 31, 2000 compared to zero for the same period in
1999. Net sales consisted of the sale of financial pagers and the related
Internet and telephone services. Cost of sales amounted to $116,541 for the
three months ended March 31, 2000 compared to zero for the same period in 1999.
Hartcourt did not have any ongoing operations during the first quarter of 1999.
F-18
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENTS'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(UNAUDITED)
Corporate selling, general and administrative (SGA) expenses were $1,804,237 for
the three months ended March 31, 2000 compared to $241,775 for the three months
ended March 31, 1999. The increase is primarily attributed to additional
consulting and legal costs associated with the restructuring of Hartcourt's
business, and expenses incurred in brokerage fees in connection with the
issuance of warrants raising working capital.
Liquidity and Capital Resources:
Hartcourt's principal capital requirements during the year 2000 are to fund the
acquisitions of growth oriented Internet related operating companies in China
and Asia. During the three months ended March 31, 2000, Hartcourt raised
necessary funds to carry out its plans of acquisitions by selling its own common
shares to selected investors and bringing in business partners whose
contributions included the necessary cash.
As shown in the accompanying financial statements, Hartcourt incurred net losses
of $1,671,138 and $249,178 for the three months ended March 31, 2000 and 1999,
respectively. Additionally, Hartcourt's current liabilities exceeded its current
assets by $640,201 at March 31, 2000. These factors, as well as negative cash
flows from operations, Hartcourt's inability to meet debt obligations and the
need to raise additional funds to accomplish its objectives, create substantial
doubt about Hartcourt's ability to continue as a going concern.
Hartcourt has taken certain restructuring steps, which in the management's
opinion will provide the necessary capital to continue its operations. These
steps included: 1) the settlement of certain matters of litigation and disputes;
2) exchange of its interests in Peony Gardens for investment securities which
were subsequently exchanged for the investment in GoCall Inc.; 3) completed a
private placement with PYR Management, LLC and received $2,743,000 on January
27, 2000; 4) signed a Investment Agreement with Swartz Private Equity, LLC,
which agreed to purchase from time to time, up to $35,000,000 Hartcourt shares
of common stock. The Investment Agreement with Swartz is still subject to the
approval of SEC; 5) raised cash through the issuance of its common shares upon
exercise of an equal number of warrants.
Operating activities. During the three months ended March 31, 2000, the Company
had a net loss of $1,671,138. Net cash used by operating activities decreased to
$288,626 during the three months ended March 31, 2000 compared to $312,453
during the same period in 1999. This is primarily due to the fact that Hartcourt
issued its common shares instead to pay for its consulting, legal and brokerage
costs.
Investing activities. Net cash used in investing activities during the three
months ended March 31, 2000 was primarily due to purchase of property and
equipment for $50,747.
Financing activities. Net cash provided by financing activities during the three
months ended March 31, 2000 was primarily due to proceeds from issuance of
common shares and exercise of options and warrants amounting to $2,818,750
offset by advances to related parties of $1,316,811 and payments on notes
payable of $113,718.
As a result of the above activities, the company experienced a net increase in
cash of $1,035,597 for the three months ended March 31, 2000. The ability of
Hartcourt to continue as a going concern is still dependent on its success in
fulfilling its plan of restructuring as outlined above.
F-19
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
OTHER INFORMATION
(UNAUDITED)
Part II
Item 1. LEGAL PROCEEDINGS
Charles E. Hogue vs. Hartcourt, Circuit Court of the Ninth Judicial Circuit,
Orange County, Florida Case No. CIO-2190
The litigation concerns a claim filed on April 8, 2000 against Hartcourt for
breach of contract for alleged fees due to Charles Hogue ("plaintiff") for
introductory services. Such fee was set as a percentage of the transaction
contemplated and a check of $40,500 for payment in full thereof was tendered to
the plaintiff which the plaintiff refused claiming sums far in excess of those
agreed to. Hartcourt's legal counsel has interposed a motion to dismiss the suit
which is pending before the court and is confident of success in disposition of
this matter.
ComericaBank of California ("Comerica") vs. Enova. Et al. Superior Court of
California, County of Los Angeles, California. Case No. BC 221594.
This litigation concerns Hartcourt's alleged obligation as an alleged guarantor
of another entity's ("Pego") alleged obligation on a promissory note that is
asserted to be in non-financial default. The plaintiff in that matter may be the
subject of a cross-complaint by Hartcourt, which will depend on the evidence
disclosed by documents Harcourt has demanded be produced. The complaint alleges
that Harcourt executed a guarantee of obligation of Pego (approximately
$925,000) which obligation went into non-financial default. Pego expects to be
able to settle with plaintiff and such settlement will eliminate Hartcourt's
liability. The prospects for the success of those settlement negotiations, as
well as the approximately range or amount of any potential loss by Hartcourt,
are uncertain at this time.
The Company is party to various claims and legal proceedings arising out of the
normal course of its business. These claims and legal proceedings relate to
contractual rights and obligations, employment matters, and claims of product
liability. While there can be no assurance that an adverse determination of any
such matters could not have a material adverse impact in any future period,
management does not believe, based upon information known to it, that the final
resolution of any of these matters will have a material adverse effect upon the
Company's consolidated financial position and annual results of operations and
cash flows.
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
F-20
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
OTHER INFORMATION
(UNAUDITED)
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
27 Financial Data Schedule
b) Reports on Form 8-K
o On February 4, 2000, Hartcourt completed a private placement
of 227,445 Units and a class II Warrants to PYR Management
LLC for $3,000,000 pursuant to a regulation D Subscription
Agreement, File No. 524390. Incorporated herein by
reference.
o On February 8, 2000, Appointment of BDO International as
Hartcourt's independent Certified Public Accountants, File
No. 530104. Incorporated herein by reference.
F-21
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has
caused this report signed on its behalf by the undersigned, thereunto duly
authorized.
The Hartcourt Companies, Inc.
Date: May 15, 2000 By: /s/ Dr. Alan V. Phan
----------------------------------
Dr. Alan V. Phan
President & CEO
F-22
<PAGE>
EXHIBIT INDEX
27 Financial Data Schedule
F-23
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 1,366,654
<SECURITIES> 0
<RECEIVABLES> 868,307
<ALLOWANCES> 576,775
<INVENTORY> 132,527
<CURRENT-ASSETS> 3,294,785
<PP&E> 3,696,832
<DEPRECIATION> 2,879,623
<TOTAL-ASSETS> 11,774,455
<CURRENT-LIABILITIES> 3,934,986
<BONDS> 0
0
10
<COMMON> 27,563
<OTHER-SE> 6,649,762
<TOTAL-LIABILITY-AND-EQUITY> 11,774,455
<SALES> 348,228
<TOTAL-REVENUES> 348,228
<CGS> 116,541
<TOTAL-COSTS> 1,909,465
<OTHER-EXPENSES> 7,662,461
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 38,249
<INCOME-PRETAX> (1,740,440)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,671,138)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,671,138)
<EPS-BASIC> (0.06)
<EPS-DILUTED> (0.06)
<FN>
THIN SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED
FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-KSB.
</FN>
</TABLE>
