U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 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 June 30, 2000, The Hartcourt Companies, Inc. had 28,443,608 shares of
Common Stock Outstanding.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [ X ]
F-1
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Report on Form 10-QSB
For quarter ended
June 30, 2000
Page
PART 1 FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at June 30, 2000
(Unaudited) and December 31, 1999 F-3
Consolidated Statements of Operations
for the Three Months and Six Months ended
June 30, 2000 and 1999 (Unaudited) F-4
Consolidated Statements of Shareholders' Equity
for the Six Months ended June 30, 2000 (Unaudited) F-5
Consolidated Statements of Cash Flows for the
Six Months ended June 30, 2000 and 1999 (Unaudited) F-7
Notes to the Consolidated Financial Statements F-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations F-21
PART II OTHER INFORMATION
Item 1. Legal Proceedings F-24
Item 2. Changes in Securities F-25
Item 3. Defaults upon Senior Securities F-25
Item 4. Submission of Matters to Vote of Security Holders F-25
Item 5. Other Information F-25
Item 6. Exhibits and Reports on Form 8-K F-25
Signatures F-26
F-2
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Part I Item 1 June 30, December 31,
2000 1999
--------------- ----------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 569,403 $ 331,057
Accounts receivable, net 58,674 37,626
Inventory 137,143 127,091
Notes receivable 228,800 228,800
Prepaid expenses and other 79,024 129,114
Due from related parties 173,206 108,222
----------- ----------------
Total current assets 1,246,250 961,910
----------- ----------------
Property and equipment, net 791,711 815,085
Investments and advances 7,948,166 5,554,644
Intangibles, net 2,092,903 2,206,033
----------- ----------------
Total assets $ 12,079,030 $ 9,537,672
=========== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 457,350 $ 152,709
Deferred revenue 88,549 78,477
Notes payable, current portion 163,804 649,998
Accrued expenses and other current liabilities 879,642 4,073,504
Payables to related parties 1,998,296 2,457,497
----------- ----------------
Total current liabilities 3,587,641 7,412,185
Notes payable, net of current portion 588,349 608,184
----------- ----------------
Total liabilities 4,175,990 8,020,369
----------- ----------------
Contingencies
Minority interest 489,364 661,634
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, 100,000,000
shares authorized; 30,222,524 shares and
23,832,152 shares issued and outstanding
at June 30, 2000 and December 31, 1999 30,223 23,833
Stock subscription receivable (13,220,000 ) -
Treasury stock, at cost (1,778,916 shares
and 1,524,364 shares at June 30, 2000
and December 31, 1999) (1,918,634 ) (1,680,928 )
Additional paid-in capital 61,456,693 38,895,860
Accumulated deficit (38,934,616 ) (36,383,106 )
----------- ----------------
Total shareholders' equity 7,413,676 855,669
----------- ----------------
Total liabilities and shareholders' equity $ 12,079,030 $ 9,537,672
=========== ================
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<S> <C> <C> <C> <C>
Three Months Six Months
Ended June 30, Ended June 30,
---------------------- ------------------------
2000 1999 2000 1999
----------- ----------- ----------- ----------
Net sales $ 342,213 $ - $ 690,441 $ -
Cost of sales 115,531 - 232,072 -
---------- ---------- ---------- ----------
Gross profit 226,682 - 458,369 -
---------- ---------- ---------- ----------
Operating expenses:
Selling, general and administrative 1,091,997 413,385 2,896,234 655,160
Depreciation and amortization 102,258 - 207,486 -
---------- ---------- ---------- ----------
Total operating expenses 1,194,255 413,385 3,103,720 655,160
---------- ---------- ---------- ----------
Loss from operations (967,573) (413,385) (2,645,351) (655,160)
Other income (expense):
Equity in earnings (loss) of 8,734 - (32,918) (28,298)
affiliate
Interest expense (43,705) - (81,954) -
Interest income 13,724 - 21,955 20,095
Other 5,480 - 14,488 -
---------- ---------- ---------- ----------
Total other income (expense) (15,767) - (78,429) (8,203)
---------- ---------- ---------- ----------
Loss from continuing operations (983,340) (413,385) (2,723,780) (663,363)
before minority interest
Less: loss in subsidiary 102,968 - 172,270 -
attributed to minority interest ---------- ---------- ---------- ----------
Loss before income taxes (880,372) (413,385) (2,551,510) (663,363)
Income taxes - (1,355) - (555)
---------- ---------- ---------- ----------
Net loss $ (880,372) $ (414,740) $(2,551,510) $ (663,918)
========== ========== ========== ==========
Basic and fully diluted loss per $ (0.03) $ (0.02) $ (0.09) $ (0.03)
common share ========== ========== ========== ==========
Weighted average number of shares 27,940,081 19,640,025 27,134,267 19,306,537
outstanding ========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
JUNE 30, 2000 (UNAUDITED)
<TABLE>
<S> <C> <C> <C> <C> <C>
Additional
Common Stock Preferred Stock Paid-In
------------------------- -------------------------
Description Shares Amount Shares Amount Capital
---------------------------------------- ----------- ----------- ----------- ----------- -----------
Balance - December 31, 1999 23,832,152 $ 23,833 1,000 $ 10 $ 38,895,860
Issuance of shares for consulting 20,000 20 - - 22,180
services
Shares issued to investors 227,445 227 - - 3,529,719
Sale of shares under Regulation S 300,000 300 - - 1,199,700
Shares issued upon exercise of warrants 1,477,075 1,477 - - 100,395
Issuance of warrants for brokerage - - - - 203,545
services
Shares issued to directors in lieu of 1,610,460 1,610 - - 3,508,344
Compensation and for services
Shares issued in connection with FTL 254,552 255 - - 237,451
acquisition
Common stock subscriptions received - - - - -
Shares issued for services 840 1 - - 11,999
Shares issued upon exercise of options 2,500,000 2,500 - - 13,747,500
Net loss - - - - -
----------- ----------- ----------- ----------- -----------
Balance - June 30, 2000 30,222,524 $ 30,223 1,000 $ 10 $ 61,456,693
=========== =========== =========== =========== ===========
</TABLE>
F-5
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Common
Stock Total
Subscriptions Treasury Stock Accumulated Shareholders'
------------------------
Description Receivable Shares Amount Deficit Equity
---------------------------------------- -------------- ---------- ------------ ------------- -------------
Balance - December 31, 1999 $ - 1,524,364 $(1,680,928) $(36,383,106) $ 855,669
Issuance of shares for consulting services - - - - 22,200
Shares issued to investors - - - - 3,529,946
Sale of shares under Regulation S (1,000,000) - - - 200,000
Shares issued upon exercise of warrants - - - - 101,872
Issuance of warrants for brokerage - - - - 203,545
services
Shares issued to directors in lieu of - - - - 3,509,954
Compensation and for services
Shares issued in connection with FTL - 254,552 (237,706) - -
acquisition
Common stock subscriptions received 1,000,000 - - - 1,000,000
Shares issued for services - - - - 12,000
Shares issued upon exercise of options (13,220,000) - - - 530,000
Net loss - - - (2,551,510) (2,551,510)
------------ ---------- ---------- ----------- -----------
Balance - June 30, 2000 $ (13,220,000) 1,778,916 $(1,918,634) $(38,934,616) $ 7,413,676
============ ========== ========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Increase (Decrease) in Cash
Six Months Ended June 30,
--------------------------------
2000 1999
--------------- ---------------
Cash flows from operating activities:
Net loss $(2,551,510) $ (663,918)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 207,486 -
Changes in minority interest (172,270) -
Equity in loss of affiliate 32,918 -
Stock issued for services 1,024,695 88,750
Changes in operating assets and liabilities:
Accounts receivable (21,048) -
Inventory (10,052) 13,083
Prepaid expenses and other 50,090 28,500
Accounts payable 304,640 -
Accrued expenses and other current liabilities 316,091 8,233
Net changes in due to (from) related parties (64,984) (15,700)
Deferred revenue 10,072 -
---------- -----------
Net cash used by operating activities (873,872) (541,052)
---------- -----------
Cash flows from investing activities:
Proceeds from sale of 35% of ECS - 5,400,000
Proceeds on sale of marketable securities - 1,135,607
Advances to Sino Bull for investment purposes (2,126,440) -
Advance towards eMPACT investment (300,000) -
Distribution of subsidiaries ownership to shareholders - (399,388)
Purchase of property and equipment (70,982) -
---------- -----------
Net cash provided by (used in) investing activities (2,497,422) 6,136,219
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock 3,273,000 -
Proceeds on sale of common stock - 37,935
Proceeds on sale of common stock issued to
directors and officers - 337,445
Proceeds on loans and lines of credit 88,853 50,000
Proceeds on exercise of options and warrants 1,301,870 -
Redemption of preferred stock - (6,405,000)
Payments to related parties (449,808) -
Payments on note payable (594,882) -
Payments on loans from shareholders (9,393) -
----------- -----------
Net cash provided by (used in) financing activities 3,609,640 (5,979,620)
Net increase (decrease) in cash 238,346 (384,453)
Cash and cash equivalents, beginning of period 331,057 384,453
----------- -----------
Cash and cash equivalents, end of period $ 569,403 $ -
=========== ===========
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 (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, business
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
F-8
<PAGE>
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
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 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 ECS.
On October 3, 1997, Hartcourt purchased all of the outstanding shares of
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.
F-9
<PAGE>
On August 24, 1998, Harcourt and ECS executed an agreement and plan of
merger with Elan Manufacturing, Inc. ("Elan"), a contract manufacturer of
electronic components similar to ECS, located in the Silicon Valley, California.
Under the terms of the agreement, Elan was merged into and with ECS, thereby
ceasing Elan's existence. The merger was effective September 1, 1998, and the
purchase price of $616,240 was paid by Hartcourt issuing 724,990 of its common
shares to the three selling shareholders based on a value of $0.85 per share.
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.
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.
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
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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 to FTL. 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$25,563,842 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
issue 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. The 1,754,552 shares of common stock issued to
FTL are reflected as treasury shares in the accompanying financial statements
since FTL is a subsidiary of Hartcourt. As of August 10, 2000, Hartcourt has
fully settled its amounts payable to FTL for the acquisition of FTL's shares.
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 of a total of 51% ownership
in the joint venture. The transaction is currently under management review and a
definitive joint venture agreement is expected to be finalized by August 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 are
still to be issued and will be recorded as a loan from Hartcourt to UAC upon
issuance. 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. Hartcourt exercised its option to convert the loan to
UAC for an additional 15% interest in UAC making Hartcourt's total investment
interest in UAC to 50%. The transaction is to be effective by August 31, 2000.
On December 30, 1996, Hartcourt and American Equities entered into a
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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 filed a complaint against
Hartcourt 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 was 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.
In November 1999, Sino Bull Group ("Group") was formed with the intention
to consolidate various related businesses acquired or expected to be acquired by
Hartcourt or Sino Bull.com Inc. For the purposes of presenting these businesses
under a unified structure and strong brand name, a restructuring of the Group
will result in consolidating these businesses under Sino Bull.com. Inc, the
holding company of the Group that was incorporated in British Virgin Islands.
The mission of the Group is to become the premier e-commerce network service
provider (providing financial information and related technology services) to
investors and financial institutions in Greater China. Hartcourt intends to
transfer its ownership interests in UAC and FTL into Sino Bull.com Inc. during
calendar year 2000 in exchange for certain equity interest in Sino Bull.com Inc.
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. 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 $5.0 million 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 August 10, 2000, Hartcourt has not appointed any
directors to the GoCall Board and has not exercised any control on GoCall's
operations.
Recent Events
No assurance can be given that Term Sheets and Heads of Agreements will
result in actual agreements or that the terms of the agreements will not be
significantly changed, or that any of the financing needs to consummate the
agreements discussed below will be successfully completed.
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<PAGE>
Hartcourt's partners in the joint ventures discussed below 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. If Hartcourt is not able to raise the necessary
funds indicated in the agreements, the agreements will need to be modified or
cancelled.
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. As of August 10, 2000 Hartcourt is waiting for the approval
and grant of the business license. Hartcourt will need to raise the funds needed
to complete this transaction.
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 and have
mutually agreed to terminate the agreement immediately.
Beijing Shangdi Net Technologies Center Co., Ltd. ("Shangdi") - On December
18, 1999, Sino Bull signed a Term Sheet Agreement with Shangdi to form a new
corporation in Beijing. Sino Bull shall have 40% interest and Shangdi shall have
60% interest in the new corporation. On April 12, 2000, Sino Bull signed a Term
Sheet Agreement with Shangdi revising the terms of the Term Sheet Agreement
signed on December 18, 1999. The terms of the revised agreement required Sino
Bull to pay Shangdi US$670,000 being the consideration of all tangible and
intangible assets in relation to Shangdi's computer network information services
excluding cash and debts and 33.84% shares of Hua Xia Information Company
Limited; invest 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 Shangdi and 60,000 restricted common
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<PAGE>
shares of Hartcourt to Sinobull Network, Inc. In exchange, Shangdi 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 Shangdi. After the above transfers, Shangdi shall be entitled to own 18% of
total shares of Sino Bull. As of August 10, 2000, Sino Bull has paid cash
consideration of $1,000,000 towards the purchase of Shangdi. The $1,000,000 was
advanced by Hartcourt to Sino Bull. These transactions have not been consummated
as of August 10, 2000.
StreamingAsia.Com Ltd. ("StreamingAsia") - On April 14, 2000, Hartcourt
announced that Sino Bull signed a Subscription and Shareholders' Agreement
("Agreement") relating to StreamingAsia, whereby Sino Bull 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 Sino Bull, HK$1,500,000 (approximately
US$192,300) payable in cash or Sino Bull delivering such number of shares of
Hartcourt 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 (approximately US$128,200) payable in cash
within 90 days of the date of the Agreement; and HK$2,500,000 (approximately
US$320,600) within 120 days from the date of the Agreement. Sino Bull 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. As of
August 10, 2000, Sino Bull has completed the acquisition of StreamingAsia and
paid the cash consideration of $897,500. The $897,500 was advanced by Hartcourt
to Sino Bull.
Shanghai Guo Mao Science & Technology Co. Ltd. ("Guo Mao") - On December 1,
1999, Sino Bull signed a Term Sheet Agreement with Guo Mao whereby Guo Mao
agreed to issue new shares for a total proceeds of $1,000,000 which will
represent 50% of the expanded capital of Guo Mao. Sino Bull agreed to subscribe
for all the new shares issued by Guo Mao. On May 16, 2000, Sino Bull and Hopeful
Internet Technologies Limited ("Hopeful") entered into an agreement whereby
Hopeful, an investment holding company incorporated in the British Virgin
Islands, will acquire through its wholly-owned subsidiary Shanghai Sinobull
Financial Information Company Limited, all of the operating assets and business
of Guo Mao. To finance this acquisition, Hopeful will issue new shares to Sino
Bull equal to 40% of the expanded capital of Hopeful for a total consideration
of $1,000,000. The terms of payment by Sino Bull for the purchase of new shares
will be: $200,000 in cash upon signing of the agreement; $150,000 in cash within
30 days of signing of the agreement; $150,000 in cash within 60 days of signing
of the agreement; and $500,000 within 30 days after signing of the agreement in
shares of Hartcourt based on the average closing price in the last 7 trading
days before payment, or in shares of Sino Bull based upon the valuation to be
agreed on by the parties. Sino Bull 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. The transactions are expected to
close by August 31, 2000.
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.
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<PAGE>
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 Hartcour'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 acquisitions of Internet operations in China.
Hartcourt is currently preparing to file 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.
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 as an advance towards the purchase price of eMPACT
shares. Hartcourt is currently negotiating to finalize the remaining investment.
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 currently being delayed pending the
implementation of the WTO (World Trade Organization) agreement. 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.
Heads of Agreement: 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 a fourth 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. Hartcourt is currently having discussions with three possible
investors and is trying to recruit one of these investors to be the fourth
investor. The Agreement does not require Hartcourt to bring on board the fourth
investor and there are no guarantees that Hartcourt will be successful in
recruiting the fourth investor. Per the terms of the Agreement, both Hartcourt
and the fourth investor's obligation are to invest US$2,000,000 each, in the
joint venture company for 25% ownership interest and share the responsibility in
providing funding, finance and technological support. The obligation of
Hartcourt and the fourth investor is to provide funding as working capital for
the joint venture company 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
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<PAGE>
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 August 10, 2000, Hartcourt has no payment obligations
under this Agreement.
Fee Agreement for Introduction Services: 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 business and opportunities for potential
acquisition by Hartcourt. In addition, Introducers will seek out sources of
funding and search for suitable candidates for employment by Hartcourt in its
Chinese operations. Hartcourt agrees to satisfy Introducers time and expense
incurred, up to and including the first acquisition by Hartcourt of an
opportunity introduced or arranged by Introducers, by granting to Introducers
options to purchase up to 2,500,000 shares of Hartcourt common stock at a price
of Five Dollars and 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 Introducers 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 Introducers holds the options.
The Introducers have introduced to Hartcourt a potential acquisition
opportunity and Hartcourt signed the necessary documents to consummate the
purchase of an entity (Shenzhen Rayes Group Limited) on April 27, 2000. The
Introducers have subsequently exercised their option to acquire 2,500,000 shares
of Hartcourt common stock. On May 8, 2000, in accordance with the terms of the
Agreement, Hartcourt filed a Form S-8 to register with the Securities and
Exchange Commission the 2,500,000 options granted to the Introducers under the
Agreement.
Shenzhen Rayes Group Limited ("Shenzhen"): On April 27, 2000, Hartcourt
signed a Stock Purchase Agreement Term Sheet with Shenzhen to form a new entity
of which Hartcourt desires to purchase fifty-one percent (51%) of the
outstanding shares of the capital stock and Shenzhen agrees to retain the
remaining forty-nine percent (49%) of the outstanding shares. Shenzhen 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 up to 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
F-16
<PAGE>
with the value established by Morgan Stanley. On April 28, 2000, Hartcourt
entered into an agreement with another third party who opened the escrow with a
letter of credit and deposited $10,000,000 on behalf of Hartcourt. As of August
10, 2000, the term of the escrow has expired and the parties have mutually
agreed to extend the term of the Agreement to complete the due diligence by
October 31, 2000. Hartcourt is currently performing its own due diligence and
plans to complete the transaction. However, the terms of the agreement,
including the amounts involved, may be significantly modified.
Sino Bull.Com Inc. ("Sino Bull") - On May 1, 2000, Hartcourt and Sino Bull
entered into an Exchange Agreement and agreed to exchange shares of interests
Hartcourt has in certain related businesses for Sino Bull common stock. The
terms of Agreement required Sino Bull 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 Shangdi; d) 50% of
StreamingAsia; e) 50% of GuoMao. The Agreement required Sino Bull to form an
eleven (11) member Board of Directors group with Hartcourt to appoint six (6)
members and Sino Bull to appoint five (5) members. The transaction closed on May
1, 2000 and the parties mutually agreed to make it effective by August 31, 2000.
As a result of this restructure, Sino Bull will become an investment holding
company and an affiliate of Hartcourt. Hartcourt is currently reviewing the
structure of operations of Sino Bull under the laws of China and Hong Kong and
proposes to finalize the structure by the end of September 2000.
Koffman Securities Limited ("Koffman"): On June 12, 2000, Hartcourt entered
into a Stock Purchase Agreement Term Sheet with Koffman, a securities brokerage
firm, to purchase 30% of the expanded capital stock of Koffman for HK$22,285,000
(approximately US$2,857,050). The transaction shall close no later than 60 days
following the execution of the Agreement during which time all due diligence
shall have been completed, which shall include but not be limited to an
evaluation of Koffman by the auditors, appraisers and legal counsel appointed by
Hartcourt for this purpose and a legal opinion of its counsel as to the
acceptability of the proposed structure of Hartcourt's acquisition of 30% of
Koffman, financial reviews, and other usual and customary due diligence. The
purchase price shall be payable as follows: 3/4 of the purchase price shall be
payable upon execution of a definitive agreement to purchase and sell by both
parties based upon completion of all of its due diligence, including evaluation
and appraisal and confirmation by legal counsel as to the acceptability of the
proposed structure of Hartcourt's acquisition of 30% of Koffman; and 3/4 of the
purchase price payable in three successive equal monthly installments. The net
asset value of Koffman of approximately HK$52 million (approximately
US$6,666,667) as at March 31, 2000 was agreed to be the benchmark. The
consideration to be paid for Koffman is subject to adjustment after the result
of an independent audit by the auditors and appraisal of the net asset value of
Koffman within the time set forth above with the adjusted net asset value of
Koffman not being greater than HK$52 million. Hartcourt is currently performing
its due diligence review and both the parties have mutually agreed to extend the
due diligence review of Hartcourt, and plans are to close the transaction by
September 30, 2000.
Shanghai Wind Information Company, Limited ("Wind"): On June 23, 2000,
Hartcourt signed a Stock Purchase Agreement Term Sheet with Wind, a financial
data service company, to purchase 40% of the expanded capital stock of Wind,
excluding its insurance operations, for $4,000,000. The purchase price shall be
payable as follows: $500,000 in cash to be used for Wind business expansion
upon completion of all due diligence by Hartcourt no later than August 15, 2000;
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<PAGE>
$1,500,000 in cash shall be payable within 15 days upon obtaining approval of
the Stock Purchase Agreement by the relevant government authorities; and the
remaining $2,000,000 shall be paid in Hartcourt common stock which shall be
valued at the bid price on the date of closing, such date to be determined by
Wind after the execution of the agreement. It was further mutually agreed that
six months after the date of closing, Wind shall have the option to exchange
one-half of the Hartcourt common shares it received from Hartcourt for cash of
$1,000,000 based on the same valuation of the shares as was used on the date of
closing. Hartcourt is currently performing its due diligence review on the
operations of Wind and has not made any payments as of August 10, 2000.
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 June 30, 2000 and December 31,
1999, and the results of their operations and their cash flows for the six
months ended June 30, 2000 and 1999. The financial statements for the three
months and six months ended June 30, 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 and six
months period ended June 30, 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 and six months ended June
30, 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.
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<PAGE>
Note 3. Supplemental Disclosure of Non-Cash Financing Activities
Six Months Six Months
Ended Ended
June 30, 2000 June 30, 1999
---------------- -----------------
Cash paid for:
Interest $ 43,705 $ -
Taxes - 1,355
------------ -----------------
Non-cash operating and financing activities:
Shares issued to director in liquidation $ 3,509,954 $ -
of payable
Preferred stock issued for dividends - 270,000
Note 4. Loss per Share
<TABLE>
<S> <C> <C> <C> <C>
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
Net loss $ 880,372 $ 414,740 $ 2,551,510 $ 663,918
Effects of dilutive securities
----------- ----------- ----------- -----------
Weighted average shares outstanding 27,940,081 19,640,025 27,134,267 19,306,537
=========== =========== =========== ===========
Basic and dilutive earnings per share $ (0.03) $ (0.02) $ (0.09) $ (.03)
=========== =========== =========== ==========
</TABLE>
At June 30, 2000 and 1999, the Company had 483,530 and 2,000,000 warrants
and options outstanding, each exercisable 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.
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<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 (UNAUDITED)
Note 5. Litigation
Charles E. Hogue vs. Hartcourt. Circuit Court of the Ninth Judicial Circuit,
Orange County, Florida Case N. C10-2190
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.
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<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
JUNE 30, 2000 (UNAUDITED)
Part I
Item 2
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 entrepreneurs as
well as government owned entities. Its mission is to become one of the leading
Internet companies in Asia. With a vision to create the premier financial
portal and financial information technology service provider in Asia, Sino Bull
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 Sino Bull. Upon
completion of the restructuring exercise, Sino Bull 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 and six months ended June
30, 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 $342,213 and
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<PAGE>
$690,441 for the three months and six months ended June 30, 2000 compared to
zero for the same periods in 1999. Net sales consisted of the sale of financial
pagers and the related Internet and telephone services. Cost of sales amounted
to $115,531 and $232,072 for the three months and six months ended June 30, 2000
compared to zero for the same periods in 1999. Hartcourt did not have any
ongoing operations during the first and second quarters of 1999.
Corporate selling, general and administrative (SGA) expenses were
$1,091,997 and $2,896,234 for the three months and six months ended June 30,
2000 compared to $413,385 and $655,160, respectively for the same periods in
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 six months ended June 30, 2000, Hartcourt has 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 $2,551,510 and $663,918 for the six months ended June 30, 2000 and
1999, respectively. Additionally, Hartcourt's current liabilities exceeded its
current assets by $2,341,391 at June 30, 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 $1,301,870 in cash through the issuance of its common
shares upon exercise of an equal number of warrants.
Operating activities. During the six months ended June 30, 2000, the
Company had a net loss of $2,551,510. Net cash used by operating activities
increased to $873,872 during the six months ended June 30, 2000 compared to
$541,052 during the same period in 1999. This is primarily due to the funding of
increase in losses.
Investing activities. Net cash used in investing activities during the six
months ended June 30, 2000 was primarily due to advancing $300,000 towards the
purchase of eMPACT, advances to Sino Bull for investment purposes of $2,126,440,
and purchase of property and equipment for $70,982.
F-22
<PAGE>
Financing activities. Net cash provided by financing activities during the
six months ended June 30, 2000 was primarily due to proceeds from issuance of
common shares and exercise of options and warrants amounting to $4,574,870
offset by advances to related parties of $449,808 and payments on notes payable
of $594,882.
As a result of the above activities, the company experienced a net increase
in cash of $238,346 for the six months ended June 30, 2000. The ability of
Hartcourt to continue as a going concern is still dependent on its success in
obtaining additional financing and fulfilling its plan of restructuring as
outlined above.
F-23
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
OTHER INFORMATION
JUNE 30, 2000 (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.
F-24
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
OTHER INFORMATION
JUNE 30, 2000 (UNAUDITED)
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
F-25
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
OTHER INFORMATION
JUNE 30, 2000 (UNAUDITED)
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: August 11, 2000 By: /s/ Dr. Alan V. Phan
---------------------
Dr. Alan V. Phan
President & CEO
F-26
