SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [Fee Required]
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required] For fiscal year ended December
31, 1999
Commission file number 001-12671
THE HARTCOURT COMPANIES, INC.
(Exact name of registrant as specified in its charter)
UTAH
(State of incorporation)
87-0400541
(I.R.S. Employer Identification No.)
9800 Sepulveda Blvd., Suite # 818, Los Angeles, California
90045, (310) 410-7290 (Address, including zip code, and
telephone number, including area code, of registrant's executive
offices)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
None
Name of each exchange on which registered
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.001 par value
(Title of class)
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 registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
Check if disclosure of delinquent filers in response to item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
Issuer's revenues for most recent fiscal year: $ 379,000
State the aggregate market value of voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days: As of April 13, 2000, $163,987,000.
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: As of April 13, 2000, there
were 30,060,100 shares of common stock outstanding.
<PAGE>
THE HARTCOURT COMPANIES, INC.
1999 Form 10-KSB Annual Report
Table of Contents
PART I Page
Item 1. Description of Business...................................
Item 2. Description of Property...................................
Item 3. Legal Proceedings.........................................
Item 4. Submission of Matters to a Vote of Security Holders.......
PART II
Item 5. Market for Common Equity and Related Stockholder Matters..
Item 6. Management's Discussion and Analysis or Plan of Operation.
Item 7. Consolidated Financial Statements.........................
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure .....................................
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.........
Item 10. Executive Compensation....................................
Item 11. Security Ownership of Certain Beneficial Owners
and Management ...........................................
Item 12. Certain Relationships and Related Transactions............
PART IV
Item 13. Exhibits and Reports on Form 8-K..........................
Signatures................................................
<PAGE>
Explanatory Note:
Unless otherwise indicated or the context otherwise requires, all
references herein to the "Company" are to The Hartcourt Companies, Inc., a Utah
corporation, and its wholly owned subsidiaries, Hartcourt Investments (USA) Inc.
("Hartcourt Investments"), the Hartcourt Pen Factory, Inc,. ("Hartcourt Pen"),
Pego Systems, Inc. ("Pego") and Electronic Components and Systems, Inc. ("ECS"),
which were spun-off on March 1, 1999, and its 58.53% owned subsidiary, Financial
Telecom Limited ("FTL") and its 35% owned equity investment, Beijing UAC Stock
Exchange Online Co., Ltd. ("UAC"). All share and per share information contained
herein has been adjusted to reflect a five-for-seven reverse split of
Hartcourt's common stock effected on October 6, 1995, and a one-for five reverse
split of Hartcourt's common stock effected on August 1, 1996.
PART I
Item 1: Description of Business.
General
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, for
6,110,337 shares of Stardust common stock (after taking into account a reverse
stock split and stock dividend) 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 Investments was organized under the laws of the State of Nevada in
April 1993, to engage in the design, manufacture and sale of writing
instruments. Hartcourt Investments entered into a Stock Exchange Agreement dated
August 8, 1994 with Eastern Rochester Limited's 60% interest in Xinhui Harchy
Modern Pens, Ltd. (The "Xinhui JV"), a joint venture located in the Guangdong
province of the People's Republic of China ("China"), in exchange for 250,000
shares of Hartcourt Investments common stock, representing 80% of the common
stock of Hartcourt Investments outstanding immediately subsequent to the joint
venture agreement governing the Xinhui JV entered into in October 1995,
Hartcourt's interest was reduced to a 52% interest in the Xinhui JV, with the
remaining 48% held by the Xinhui Orient Light Industrial Corp.
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 in exchange for 38,625 shares of Hartcourt
Investments common stock. 1,000 shares of Hartcourt Investments Original
Preferred Stock were issued to Dr. Alan Phan in consideration of certain
intangible assets and services rendered by Dr. Phan in connection with the
establishment of Hartcourt Pen. Through 1995, Hartcourt conducted certain
limited research and development activities in the United States, but has not
engaged in any domestic manufacturing activities.
Hartcourt commenced limited business activities involving the design,
manufacture and sale of writing instruments in December 1994. 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.
<PAGE>
In April 1993, the Xinhui JV commenced construction of a 170,000 square foot
manufacturing plant approximately ten miles north of Xinhui City in China. The
plant commenced limited operations in December 1994 and was fully operational by
July 1995. By July 1996, the plant was operating at approximately 20% of its
capacity and employed approximately 80 people. It was estimated by management
that additional working capital in the amount of approximately $3,000,000 would
be required to permit the plant to operate at full capacity (300,000,000 pens
annually). There was no contractual obligation on the part of the joint venture
partners to provide this additional financing.
In April 1994, Hartcourt entered into a Lease Agreement with Scripto-Toaki
Corporation ("Anja"), for the use of five special ball pen assembly machines by
the Xinhui JV. The lease provided for semi-annual payments of $25,000 over a
ten-year term, subject to adjustment based on future purchases of merchandise by
Hartcourt from the lessor. The machinery that was delivered did not function
properly and Hartcourt and Anja agreed to terminate the lease upon Hartcourt
agreeing to pay Anja a termination fee of $200,000. During 1998, Hartcourt paid
$100,000 on the note. During 1999, the remaining balance was reduced to $10,000
which was paid.
In September 1996, CKES Acquisitions, Inc. ("CKES"), a corporation organized
under the laws of the State of Nevada in September 1996, a non-affiliate,
acquired the Xinhui JV of Hartcourt's wholly-owned subsidiary Hartcourt
Investments, pursuant to a Purchase and Sale Agreement dated September 27, 1996,
thus replacing Hartcourt as a joint venture partner in the Xinhui JV. Ownership
in the joint venture was transferred to CKES in return for a Secured Promissory
Note in the principal sum of $3,000,000, payable monthly, beginning October
1998, with accrued compound interest at six percent (6%) per annum. The
promissory note is secured by a security agreement and allows Hartcourt to have
a security interest in substantially all of the assets of CKES, Inc. The note
was determined by management to be unrecoverable and was written off in full on
December 31, 1998. To date, no payments have been received on the note.
Hartcourt has no present contractual obligation to the Xinhui JV.
In January 1996, Hartcourt entered into a Memorandum of Understanding to acquire
Yafa Pen Company ("Yafa"), a California corporation, with offices in Los
Angeles, California. The purchase price consisted of an initial cash payment of
$285,000 and 80,000 shares (valued at $1.00 per share) of Hartcourt's preferred
stock. Pursuant to the Memorandum of Understanding, Hartcourt advanced to Yafa a
total of $200,000, secured by two promissory notes ($100,000 on January 3, 1996
at 1% over prime due July 3, 1996 and $100,000 on February 9, 1996 at 1% over
prime due August 9, 1996), the amount of this advance to be offset against the
purchase price for Yafa. Various disputes arose between Hartcourt and Yafa, and
in September 1996 the parties entered into a confidential settlement agreement
and agreed to terminate the Memorandum of Understanding. Yafa made all required
payments according to the settlement agreement with the final payment made in
July 1998.
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. As of December 31, 1996, the apartment
buildings were approximately 35% complete, and it was anticipated by Hartcourt
that the project would be completed by August 1997. Hartcourt has no obligation
for construction costs or any other costs relating to the project's completion
and may at its option rescind the Purchase and Sale Agreement if construction is
not completed by August 1997. As of December 31, 1998, the project was still
<PAGE>
incomplete because the developer has elected to wait a period of time for the
Beijing real estate market to return to conditions which existed prior to the
recent Asian financial crisis. 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
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.
In July 1997, Hartcourt entered into an agreement with Capital Commerce, Ltd.
("Capital") (an Isle of Man corporation) whereby Capital agreed to provide
Hartcourt $6,000,000 in free trading securities for the purchase of Pego, a
California corporation, and the formation of ECS, a Nevada corporation. In
consideration for the $6,000,000 in securities, Hartcourt issued to Capital
$4,000,000 in Series A and $2,000,000 in Series B, both 9% convertible preferred
stock. Due to Hartcourt's inability to sell the marketable securities, in March
8, 1999, Hartcourt and Capital reached an agreement whereby, Capital returned
all $4,000,000 of outstanding Series A and $2,000,000 of Series B convertible
preferred stock, plus the Series AB preferred stock dividend issued by Hartcourt
in 1998. Hartcourt returned to Capital all unsold marketable securities with a
book value of $4,894,393, issued 1.9 million shares of Hartcourt's common stock
<PAGE>
plus a 7.35% ownership interest in ECS to the authorized agent of Capital.
Simultaneously, Capital then assigned its rights to the common stock to its
authorized agent, who then assigned 1.3 million shares of common stock received
to Mandarin and Promed and returned 600,000 shares to Hartcourt in settlement of
a subscription receivable balance.
In March 1997, Hartcourt entered into a consulting agreement with DanAllen
Investments, Inc. ("DanAllen") to provide investment banking services to
Hartcourt. DanAllen will make recommendations on Hartcourt's merger and
acquisition activities, especially on financing structure and options. DanAllen
will also assist in the due diligence and negotiation process. Hartcourt issued
to DanAllen 100,000 shares of common stock at $1.50 per share for these services
to be performed. The agreement expired in 1998 and no services were performed by
DanAllen.
In July 1997, Hartcourt agreed to purchase a shopping center located in Perris,
California called Freeway Plaza for a total purchase price of $6.75 million. The
building complex has 85,000 square feet with 82 percent leased and an average
income of $620,000 per year. Terms of the transaction included a $25,000 cash
down payment, bank financing of $3,725,000, and 34 of Hartcourt's 68 mineral
lease gold lode claims, valued at $3,000,000. The transaction was cancelled as
of December 31, 1998 and Hartcourt has been receiving periodic payments for
return of the escrow deposit. The carrying amount of this escrow deposit was
converted into a note receivable of $3,800 as of December 31, 1999.
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 August 6, 1998, Pego acquired 100% percent of the outstanding common stock of
Pacific Pneumatics, Inc. ("PPI"), a California corporation, located in Chino,
California. The purchase price of $215,000 was paid $200,000 in cash and $15,000
in value through issue of 9,796 shares of Hartcourt common shares . PPI
manufactures pneumatic conveying, industrial dust collection and industrial
process electrical controls. PPI has been manufacturing and selling its
components under the trademark names "Pore Poly", "Posit Dust Collectors and
Filters" and "Pow-Air" for over 20 years.
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.
On August 24, 1998, Hartcourt 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.
<PAGE>
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. 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$25,563,842 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 an
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.
<PAGE>
FTL was established in 1983 as 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. FTL is also acting as the marketing agent
for Standard & Poor's Comstock, a division of McGraw Hill, in Hong Kong. FTL was
the first company in Hong Kong to transmit real-time financial services via a
network of wireless system for dissemination of data. This was considered as a
major breakthrough in the information and communication industry in Hong Kong.
Investors were no longer restricted to fixed line terminals and could use a
wireless network, such as financial pager, to access real-time financial
information. At present, FTL maintains a financial portal featuring stock
trading, real-time quotes and company data banks for investors in China and Hong
Kong. These investors include major investment houses, banks, securities firms
and mutual fund houses.
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"). 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
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.
As of December 31, 1999, Hartcourt has not exercised its option to convert the
loan into an additional 15% interest in 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.
Through a PC, investors can dial a local number 162 from anywhere in China to
trade stocks online. Once connected to the network, users can check real time
stock quotes, trade stocks and other securities, access news bulletin and other
related information. UAC intends to use the cash received from Hartcourt to
complete the testing and installation of its systems into all 98 offices of Hua
Xia Securities, the second largest brokerage firm in China. In May 1999, UAC was
granted a license by the Chinese government and signed a contract with China
Telecom to start building the network. As the first and only China Pac operating
agent designated by China Telecom, UAC is in a unique position to market the
services of China Pac and UAC 162 Network to all brokerage firms in China.
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
nonassessable 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
allegeing 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.
In addition, pursuant to a Purchase Agreement with American Equities dated
September 9, 1999, (a) Hartcourt agreed to sell 500,000 shares of restricted
<PAGE>
common stock valued at $0.60 per share. The terms of the Purchase Agreement
required American Equities to issue a promissory note in the amount of $225,000
to Hartcourt, payable at the rate of $75,000 per month, commencing on the 30th
day following the closing date, and shall pay the balance of the purchase price
to Hartcourt on the closing date. Hartcourt received $75,000 in cash on the
closing date and American Equities issued a promissory note for $225,000 dated
October 27, 1999, bearing no interest, payable in full on or before six months
from the execution date; (b) American Equities caused ECS to issue to Hartcourt
157,000 shares of ECS in full satisfaction of all outstanding claims of
Hartcourt against ECS; (c) Hartcourt permitted immediate transfer of 724,990
common shares of Hartcourt into freely tradable unrestricted shares, pursuant to
Rule 144. Such shares were previously issued to Elan shareholders in connection
with the purchase of Elan on August 24, 1998. Hartcourt shall no liability under
the Elan Indemnity. The terms of the agreement were complied by both Hartcourt
and American Equities.
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 $5.0 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 March 30,
2000, Hartcourt has not appointed any director to the GoCall board and has not
exercised any control on GoCall's operations.
Currently, Hartcourt is involved in Internet joint ventures in Asia to
facilitate the expansion of the People's Republic of China's ("China") first
commercial e-trade financial network and Internet Service Provider. Hartcourt's
goal is 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. Through the combined services of
Beijing based UAC and Hong Kong based FTL, Hartcourt intends to merge these two
service providers and create a premier financial portal of 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. Currently, Hartcourt'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.
Risks Relating to the Greater China and Asian Internet Industry
Our industry is intensely competitive
The Greater China and Asian Internet market is characterized by an increasing
number of entrants because the start-up costs are fairly low. The Internet
industry is relatively new and subject to continuing definition and as a result,
our competitors may better position themselves to compete in this market as it
<PAGE>
matures. Many of our competitors, as well as a number of potential new
competitors, have longer operating histories in the Internet market, greater
name recognition, larger customer bases and databases and significantly greater
financial, technical and marketing resources than us. Any of our present or
future competitors may provide products and services that provide significant
performance, price, creative or other advantages over those offered by us. We
can provide no assurance that we will be able to compete successfully against
our current or future competitors.
Portal competition - Our competition with respect to user traffic, ease of use
and functionality include:
o Chinese language based Web search and retrieval companies such as
Yahoo!China, Sina.com. Netease, Sohu, Shanghai Online, ChinaByte and
Netvigator;
o English Language based Web search and retrieval companies such as
Infoseek, Lycos, Yahoo! and Microsoft Network (MSN); and
o Retreival services and products offered by AltaVista, HotWired
Venture's and Open Text.
In the future, we may encounter competition from ISPs, Web site operators and
providers of Web browser software that incorporate search and retrieval features
into their offerings. Our competitors may develop Web search and retrieval
services that are equal or superior to those we offer our users and may achieve
greater market acceptance than our offerings in the area of performance, ease of
use and functionality.
Web Solutions Competition - Our competition with respect to strategic expertise,
technical knowledge and problem solving skills include:
Computer hardware and service vendors such as IBM, DEC and Hewlett-Packard;
Internet integrators and Web site design and development companies such as
iXL, Modern Media Poppe Tyson and Proxicom;
Large information technology consulting service providers such as Andersen
Consulting, Cambridge Technology Partners and EDS; and
Telecommunications companies such as AT&T, Hutchison and Hong Kong
Telecom.
The Greater China and Asian Internet industry is a developing market and has not
been proven as an effective commercial medium
The market for Internet services in Greater China and Asia has only recently
begun to develop. Since the Internet is an unproven medium for commercial
services, our future operating results from portal competition and web solutions
services will depend substantially upon the increased use of the internet for
information, publication, distribution and commerce in Greater China and Asia.
Critical issues concerning the commercial use of the Internet in Greater China
and Asia such as security, reliability, cost, ease of deployment, administration
and quality of service may affect the adoption of the Internet to solve business
needs. For example, the cost of access may prevent many potential users in Asia
from using the Internet. Moreover, the use of credit cards in sales and purchase
transactions is not a common practice in parts of Asia. Until the use of credit
cards, or another alternative viable means of electronic payment becomes more
prevalent, the development of e-commerce through our portal network will be
seriously impeded. In addition, even when credit cards or another means of
electronics payment becomes prevalent throughout Asia, consumers will have to be
confident that adequate security measures protect electronic sale transactions
conducted over the Internet and prevent fraud.
Our entry into the Chinese Internet market depends on the establishment of an
adequate telecommunications infrastructure in China by the Chinese government
Unlike Taiwan and Hong Kong, where the telecommunications infrastructure is
comparable to U.S. standards and where private companies compete as ISPs, the
telecommunications infrastructure in China is not well developed. In addition,
<PAGE>
access to the Internet is accomplished primarily by means of the government's
backbone of separate national interconnecting networks that connect with the
international gateway to the Internet, which is owned and operated by the
Chinese government and is the only channel through which the domestic Chinese
Internet network can connect to the international Internet network. Although
private sectors ISPs exist in the China, almost all access to the Internet is
accomplished through ChinaNet, the Chinese primary commercial network, which is
owned and operated by the Chinese government. We rely on this backbone and China
Telecom to provide data communications capacity primarily through local
telecommunications lines. As a result, we will continue to depend on the Chinese
government to establish and maintain a reliable Internet infrastructure to reach
a broader base of Internet users in China. We will have no means of getting
access to alternative networks and services, on a timely basis or at all, in the
event of any disruption or failure. There can be no assurance that the Internet
infrastructure in Greater China will support the demands associated with
continued growth. If the necessary infrastructure standards or protocols or
complementary products, services or facilities are not developed by the Chinese
government, our business could be materially and adversely affected.
Our computer network is vulnerable to hacking, viruses and other disruptions
Inappropriate use of our Internet services could jeopardize the security of
confidential information stored in our computer system, which may cause losses
to us. Inappropriate use of the Internet includes attempting to gain
unauthorized access to information or systems - commonly known as "cracking" or
"hacking". Although we intend to implement security measures to protect our
facilities, such measures could be circumvented. Alleviating problems caused by
computer viruses or other inappropriate uses or security breaches may require
interruptions, delays or cessation in our services.
There are political, economic and regulatory risks associated with doing
business in China and Asia
China's economy has experienced significant growth in the past decade, but such
growth has been uneven across geographic and economic sectors and has recently
been slowing. There can be no assurance that such growth will not continue to
decrease or that any slow down will not have a negative effect on our business.
The Chinese economy is also experiencing deflation which may continue in the
future. The current economic situation may adversely affect our profitability
over time as expenditures may decrease due to the results of slowing domestic
demand and deflation. A significant part of our facilities and operations are
currently located in Hong Kong. Hong Kong is a Special Administrative Region
("SAR") of China with its own government and legislature. Hong Kong enjoys a
high degree of autonomy from China under the principle of "one country, two
systems". We can give no assurance that Hong Kong will continue to enjoy
autonomy from China. The Hong Kong dollar has remained relatively constant due
to the U.S. dollar peg and currency board system that has been in effect in Hong
Kong since 1983. Since 1998, interest rates in Hong Kong have risen
significantly, real estate and retail sales have declined and Hong Kong has
slipped into a recession. In recent months, Hong Kong has suffered deflation and
the currency has been subject to currency speculation and the SAR government has
substantially supported the market for the Hong Kong dollar, both directly and
indirectly through the large-scale purchase of securities listed on the Hong
Kong Stock Exchange. We can give no assurance that the Hong Kong economy will
not worsen or that the historical currency peg of the Hong Kong dollar to the
U.S. dollar will be maintained. Continued recession in Hong Kong, deflation or
the discontinuation of the historical currency peg could adversely affect our
business.
Regulation of the information industry in China may adversely affect our
business
China has enacted regulations governing Internet access and the distribution of
news and other information. We cannot predict the effect of further developments
in the Chinese legal system, particularly with regard to the Internet, including
promulgation of the new laws, changes to the existing laws or the interpretation
or enforcement thereof, or the preemption of local regulations by national laws.
<PAGE>
A change in currency exchange rates could increase our costs relative to our
revenues
In future, substantial amount of our revenues, expenses and liabilities will be
denominated in Hong Kong dollars and Chinese Renminbi. As a result, we are
subject to the effects of exchange rate fluctuations with respect to any of
these currencies. We have not entered into agreements or purchase financial
instruments to hedge our exchange rate risks although we may do so in the
future.
Restrictions on currency exchange may limit our ability to utilize our revenue
effectly
Although Chinese governmental policies were introduced in 1996 to allow greater
convertibility of the Renminbi, significant restrictions still remain. We
provide no assurance that the Chinese regulatory authorities will not impose
greater restrictions on the convertibility of the Renminbi. Because a
significant amount of our future revenues may be in the form of Renminbi, any
future restrictions on currency exchanges may limit our ability to utilize
revenue generated in Renminbi to fund our business activities outside China,
Doing business in China
Hartcourt's operations in China involve certain risks and special considerations
not typically associated with operations in the United States. These risks
generally related to: (i) social, economic and political uncertainty; (ii)
substantial governmental involvement in and control over the Chinese economy;
(iii) the possibility that the Chinese government could elect to discontinue its
support of the economic reform programs implemented in 1978 and return to a
completely centrally planned economy; and (iv) possible nationalization or
expropriation of assets. Accordingly, government actions in the future could
have a significant effect on economic conditions in China. Such actions and
resulting changes in the Chinese economy could significantly adversely affect,
limit or eliminate opportunities for foreign investment, the prospects of
private sector enterprises operating in China and the value of Hartcourt's
investments in China.
Environmental Regulation
Hartcourt's United States and Chinese operations are subject to various
governmental laws and regulations. The costs and effects of compliance with
environmental laws and regulations in the United States (federal, state and
local) and China have not been material in the past and are not anticipated to
be material in the future.
Patents, Trademarks and Licenses
Hartcourt does not have any patents, trademarks, licenses, franchises,
concessions or royalty agreement.
Employees
Hartcourt currently employs in the United States seven full-time employees at
its principal executive offices located in Los Angeles, California in the United
States. The executive offices provide corporate administrative and advisory
services to other Hartcourt entities. FTL employs at its two sites located in
Hong Kong twenty-two (22) full-time employees, comprising of 10 engineers and
technicians and 12 office/administrative personnel.
Research and Development
Hartcourt spent approximately 18 months doing research and development of our
current business strategy, the cost of which has been borne through the issuance
of securities in the acquisitions. Because of the continuing technological
changes that characterize the Internet, Web design and telecommunications and
<PAGE>
computer industries, Hartcourt's success will depend, to a considerable extent,
upon its ability to continue to acquire companies that are ahead of the
competition in our industry and develop competitive technologies internally
through research and development. Management does not anticipate incurring any
significant costs for such research and development in the near term other than
through acquisitions.
Subsequent Events
No assurance can be given that Term Sheets 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. Innostar
currently provides wireless ISP network and IP phone service in Beijing in
cooperation with Chinese telecom companies. It provides high-speed internet
connections to hotels, office buildings and apartment complexes using a Chinese
satellite with bi-directional data transmission to these commercial users. The
joint venture with Hartcourt and Innostar's license for nationwide ISP service
will allow expansion to many other cities and individual users eventually
reaching users throughout China. The national license will also allow the joint
venture to engage in e-commerce activities and other internet services.
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 antidilution 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 is expected to start in late April 2000. If by April
30, 2000, eSAT does not 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.
eSAT specializes in providing high-speed Internet connections via satellite,
through their proprietary satellite internet gateway products and services. eSAT
system is a user-friendly cost-effective, solution, plug and play installation,
and easily interfaces with any existing computer local and network. eSAT systems
have been serving multi-national corporations, governments and educational
institutions.
Sinobull. Com, Inc. ("Sinobull") - On November 18, 1999, Hartcourt announced
that UAC and FTL agreed to merge into a new holding entity called Sinobull.
Three major American and Chinese companies have agreed in principle to be part
of Sinobull. Sinobull will have the most comprehensive and premier financial
portal and service company in Chinese Internet in operation by the end of April
2000. Hartcourt is currently discussing the structure and incorporation of
Sinobull under the laws of China and Hong Kong and proposes to finalize the
structure by the end of April 2000. As part of the proposed structure, Sinobull
will be a subsidiary of Hartcourt.
StreamingAsia.Com Ltd. ("StreamingAsia.com") - On December 6, 1999, Hartcourt
announced that Sinobull signed a Term Sheet Agreement to purchase 50% of
StreamingAsia.com, a leading Internet software company in Hong Kong for
<PAGE>
HK$5,000,000 (approximately US$650,000). StreamingAsia.com agreed to issue
2,000,000 new shares to Hartcourt for a total consideration of HK$5,000,000. The
terms of payment included HK$500,000 payable in cash upon signing of the Share
Purchase Agreement, HK$500,000 payable in cash within 30 days after signing the
Share Purchase Agreement, HK$1,000,000 payable in cash within 60 days after
signing the Share Purchase Agreement, HK$1,000,000 payable in cash within 90
days after signing of the Share Purchase Agreement, HK$500,000 payable in cash
within 120 days after signing of the Share Purchase Agreement, and HK$1,500,000
within 14 days after signing of the Share Purchase Agreement payable in shares
of Hartcourt based on the closing price in the last 7 trading days before
payment. Sinobull will be paid an additional amount in shares of Hartcourt if
StreamingAsia's sales amount reaches certain targets within the first six months
after signing of the Share Purchase Agreement. Sinobull will appoint two
directors to the board of StreamingAsia. Together with the existing two
directors, the new board shall consist of four directors. The transaction is
expected to close in April 2000.
StreamingAsia.com provides comprehensive Internet-related software development
service with expertise in audio and video delivery or streaming solutions to a
variety of business and industry, especially major financial institutions.
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 wed site 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. The
transaction is expected to close in April 2000.
Shangdi is principally engaged in the business of data broadcasting in China and
its main activities include research, development and sale of data broadcasting
hardware and software. Shandgi is a major shareholder of Hua Xia Info, the
financial data provider of Hua Xia Securities, the second largest stock
brokerage firm in China. Hua Xia Info has its own financial reporters for its
data broadcasting network via cable TV and magazine. Through this relationship,
Sinobull will operate accounts through Hua Xia Securities Brokerages nationwide.
Shangdi has recently completed a software program for cable set top boxes, which
enable users to trade stock online from their home television sets. Shangdi is
also a major shareholder of Orient Research, a well respected stock research and
analysis firm in Shanghai.
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. The transaction is expected to close in April 2000.
<PAGE>
Guo Mao, a major real-time financial data provider in Shanghai, China, using a
satellite network to transmit data specializes in futures, indexes and
commodities data that compliments the financial information database of Hua Xia
Info and the financial data delivery systems of FTL. Association with Guo Mao
gives Sinobull a distinct edge over any competitive financial portal in China.
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 the review of SEC.
PYR Management LLC ("PYR") - On January 26, 2000, Hartcourt completed a private
placement of 227,445 Units and a Class II Warrant to PYR for $3,000,000 pursuant
to a Regulation D Subscription Agreement. Each Unit consists of one share of
Hartcourt common stock and a Class I Warrant to purchase one additional share of
Hartcourt common stock at the Unit Price, subject to adjustment upon certain
events. The Class II Warrant entitles PYR to purchase additional shares of
Hartcourt common stock at par value solely upon the occurrence of certain
events. Hartcourt has also agreed under a Registration Rights Agreement to file
a registration statement to register the shares of Hartcourt common stock,
including the shares issuable upon exercise of the Class I Warrant and Class II
Warrant, under the Securities Act of 1933 for sale by PYR. As part of the
Agreement, Hartcourt granted PYR an option to purchase up to $5,000,000 of
additional Units and a Class II Warrant within five (5) trading days after the
effectiveness of the registration statement. On February 4, 2000 Hartcourt filed
a Form 8-K with the SEC. On January 27, 2000, Hartcourt received $2,743,000 from
PYR to be used for working capital requirements of Hartcourt.
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. The closing is expected in April 2000.
eMPACT, an e-commerce systems management and consulting company, specializes in
providing back-office infrastructure for Internet companies. The services
include technology selection, system design and management, transaction
performance monitoring, resource utilization tracking and security monitoring.
eMPACT will establish a centralized network of servers to facilitate business to
business services for emerging Chinese e-commerce companies including web site
construction and management services.
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 April 30,
2000.
<PAGE>
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.
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 will soon include
newly-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 the 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.
Item 2. Description of Property
Hartcourt's principal executive offices are located at 9800 Sepulveda Blvd.,
Suite 818, Los Angeles, California 90045. The premises consist of approximately
2,700 square feet of office space with a conference room, reception and file
room facilities. Hartcourt is leasing these premises from an unaffiliated party
and occupied these premises on April 4, 2000. The lease term is for three years
commencing on April 1, 2000 and the monthly rent amounts to $2,400 with no
escalation of monthly rent during the lease term.
FTL leases an office space at 99 Queen's Road Central, Hong Kong. The premises
consist of approximately 2,000 square feet of office facility. The lease term is
for three years commencing on December 15, 1999 and allows free rent of 12
months. The monthly lease payment including air-conditioning and management
charges approximate HK$60,917 (US$7,810). Through Topomedia International
Limited, a wholly owned subsidiary, FTL owns 1,439 sq. ft. of office space and
leases the 918 sq. ft. at HK$21,573 (US$2,766) per month. The lease commenced on
February 5, 1999 for a term of three years. FTL also rents 35 roof-top sites for
installation of its transmission equipment. The contract terms vary from site to
site and monthly rent ranges from HK$1,500 (US$192) to HK$3,500 (US$449) per
site.
Hartcourt believes that its facilities currently under lease are adequate for
its present activities, and that additional facilities are available on
competitive market terms to provide for such future expansion of Hartcourt's
operations as may be warranted.
Investment Policies
Hartcourt has placed no limitation on the percentage of assets that may be
invested in any one investment. This policy may be changed by Hartcourt's Board
of Directors and without a vote of Hartcourt's security holders. It is
Hartcourt's policy to acquire assets primarily to add to its equity base and for
income.
Item 3. Legal Proceedings.
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 plantiff in that matter may be the
subject of a cross-complaint by Hartcourt, which will depend on the evidence
disclosed by documents Hartcourt has demanded be produced. The complaint alleges
that Hartcourt 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 plantiff and such settlement will eliminate Hartcourt's
<PAGE>
liability. The prospects for the success of those settlement negotiations, as
well as the approximate range or amount of any potential loss by Hartcourt, are
uncertain at this time.
Item 4. Submission of Matters to a Vote of Security Holders.
At the special meeting of the Board of Directors held on December 7, 1999, the
Chairman of the Board appointed Mr. Frederic Cohn to serve as Director and
Secretary, and Mr. Manu Ohri to serve as Director and Treasurer of Hartcourt. In
addition, the Board appointed Mr. Hans Kloepfer and Mr. Kenneth Silva to serve
as Directors who, together with Mr. Manu Ohri will serve as members of the audit
committee. The Board of Directors approved the appointment of BDO International
as Hartcourt's independent accountants for the year ended December 31, 1999.
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
The common stock is quoted on the bulletin board maintained by the National
Association of Securities Dealers, Inc. The following table sets forth the range
of high and low bid and asked quotations for the common stock during the three
most recent calendar quarters ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
High Bid Low Bid High Asked Low Asked
- ---------------------------------------- ------------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>
- ---------------------------------------- ------------------- ---------------- ----------------- -----------------
March 31, 1997 3.0000 1.5000 4.0000 3.0000
- ---------------------------------------- ------------------- ---------------- ----------------- -----------------
June 30, 1997 3.1250 2.2500 3.3750 2.6875
- ---------------------------------------- ------------------- ---------------- ----------------- -----------------
September 30, 1997 2.3750 .6875 2.6875 .8750
- ---------------------------------------- ------------------- ---------------- ----------------- -----------------
December 31, 1997 3.1250 .8750 3.3750 1.0000
- ---------------------------------------- ------------------- ---------------- ----------------- -----------------
March 31, 1998 1.9220 1.0000 1.9220 1.0000
- ---------------------------------------- ------------------- ---------------- ----------------- -----------------
June 30, 1998 1.7970 .7970 1.7970 .7970
- ---------------------------------------- ------------------- ---------------- ----------------- -----------------
September 30, 1998 1.9380 .2500 1.9380 .2500
- ---------------------------------------- ------------------- ---------------- ----------------- -----------------
December 31, 1998 .5630 .2500 .5630 .2500
- ---------------------------------------- ------------------- ---------------- ----------------- -----------------
March 31, 1999 .4690 .3750 .4680 .3750
- ---------------------------------------- ------------------- ---------------- ----------------- -----------------
June 30, 1999 .8900 .7300 .8900 .7300
- ---------------------------------------- ------------------- ---------------- ----------------- -----------------
September 30, 1999 .8400 .7600 .8400 .7600
- ---------------------------------------- ------------------- ---------------- ----------------- -----------------
December 31, 1999 15.6250 13.8750 15.6250 13.8750
- ---------------------------------------- ------------------- ---------------- ----------------- -----------------
</TABLE>
The above prices were obtained from the National Quotation Bureau, Inc. The
prices shown in the above table represent inter-dealer quotations without retail
mark-up, mark-down or commission, and may not necessarily represent actual
transactions. On December 31, 1999, there were broker-dealers publishing quotes
for the common stock.
Holders
At April 13, 2000, Hartcourt had approximately 10,062 holders of record of its
common stock.
All of the Hartcourt's issued stock has been issued pursuant to Rule 144 of the
Securities Act and could come into any market which exists under Rule 144.
Approximately 8,416,000 and 495,000 outstanding Rule 144 shares held by
principal and directors exist at December 31, 1999 and 1998, respectively.
Dividends
Each shareholder of record on March 31, 1999 received one (1) share of Enova for
every four (4) shares of Hartcourt common stock. Hartcourt does not anticipate
payment of any other stock or cash dividends in the foreseeable future.
Hartcourt does not anticipate payment of any other stock or cash dividends in
the foreseeable future.
<PAGE>
Warrants
At March 14, 2000, there were 690,975 outstanding warrants to purchase 690,975
shares of common stock at $.001 par value, ranging from $1.25 - $15.52 per
share. During 1999, warrants converted to 393,000 shares of common stock
resulted in proceeds of $61,635, and American Equities excercised its cashless
exercise right and converted 800,000 warrants into 621,674 shares of Hartcourt
common stock without payment of any consideration. On January 25, 2000, American
Equities exercised its cashless exercise right and converted the remaining
1,200,000 warrants into 1,070,075 free trading common shares of Hartcourt
without payment of any consideration.
The following information sets forth certain information for all securities the
Company sold during the past three years without registration under the
Securities Act of 1933 (the "Securities Act"). All transactions were effected in
reliance on the exemption from registration afforded by Section 4 (2) of the
Securities Act for transactions not involving a public offering. There were no
underwriters in any of these transactions.
All the transaction hereunder were between the Company and accredited investors
as defined in Section 4(2) of the Securities Act of 1933 or sophisticated
investors that possessed sufficient knowledge and experience in financial and
business matters to be able to evaluate the merits and risks of the investment
and who were allowed access to the books and records of the Company.
On January 29, 1997, Hartcourt issued 18,672 shares of its common stock to
various vendors in settlement of $40,225 in accounts payable.
Pursuant to an investment banking services agreement with DanAllen Investments,
Inc. dated February 1997, Hartcourt issued 100,000 shares of its common stock at
a value of $1.50 per share for investment banking services.
On March 17, 1997 and May 7, 1997, Hartcourt issued 1,000,000 and 138,000
shares, respectively, of Hartcourt's common stock, pursuant to Regulation "S" to
Pacific Rim Capital for $569,000 in cash. Cash was used for working capital and
acquisition of Pego.
On April 7, 1997 and October 4, 1997, Hartcourt issued 289,000 shares at a value
of $.50/share and 50,000 shares, at a value of $1.00/share of its common stock
to various officers, directors and employees of Hartcourt as follows:
Dr. Alan Phan 200,000 shares
Directors 35,000 shares
Employees 104,000 shares
Pursuant to an agreement with Capital, dated July 31, 1997, Hartcourt issued to
Mercantile Investment Trust, Ltd. 685,715 shares of common stock valued at
$600,000 for services as intermediary, broker and finder with respect to this
agreement.
Pursuant to an agreement with Capital, dated July 31, 1997, Hartcourt issued
4,000 shares of Series A 9% Convertible Preferred Stock and 2,000 shares of
Series B 9% Convertible Preferred Stock. Dividends on the Series A and B are
declared and paid monthly.
In connection with the acquisition of Pego, dated October 3, 1997, Hartcourt
issued 1,500 shares, stated value $1,000 per share, redeemable preferred stock
to Michael Caruana, along with 200,000 shares of its common stock. Additionally,
250,000 shares of Hartcourt's common stock was issued to Simerco Trading, Ltd.,
a British Virgin Islands Company.
<PAGE>
On October 28, 1997, pursuant to the reorganization agreement, Hartcourt issued
3,400 shares of 9% Convertible Preferred Stock, stated value $1,000 per share,
and 2,500,000 shares of its common stock in connection with the acquisition of
ECS.
On November 30, 1997, Hartcourt issued 650,000 shares of its common stock to
Mandarin Overseas Investment Co., Ltd. (Mandarin) pursuant to Regulation S for
$520,000 in cash. Cash was used in part for the acquisition of ECS.
During the second quarter of 1998, Hartcourt sold 2,000,000 shares of its common
stock pursuant to regulation S. Hartcourt raised $825,000 of cash and recorded
$301,000 in subscriptions. As part of settlement agreements in March 1999,
600,000 shares of Hartcourt's common stock was returned in settlement of the
subscriptions receivable.
On June 4, 1998 and July 13, 1998, Hartcourt issued 332,857 and 45,000 shares,
respectively at a value of $.50/share of its common stock to various officers,
directors and employees of Hartcourt as follows:
Dr. Alan Phan 240,571 shares
Directors 101,000 shares
Employees 36,286 shares
On August 6, 1998, Pego acquired 100% percent of the outstanding common stock of
Pacific Pneumatics, Inc. (PPI), located in Chino, California. The purchase price
of $215,000 was paid in the form of $200,000 in cash and $15,000 in value with
Hartcourt common shares (9,796 shares). Under the acquisition agreement Pego
caused PPI to prepay $35,000 of its notes payable to a selling shareholder. PPI
manufactures pneumatic conveying, industrial dust collection and industrial
process electrical controls. PPI has been manufacturing and selling it
components under the trademark names "Pore Poly", "Posit Dust Collectors and
Filters" and "Pow-Air" for over 20 years.
On August 24, 1998, Hartcourt and ECS executed an agreement and plan of merger
with Elan Manufacturing, Inc. Elan is a contract manufacturer of electronic
components similar to ECS, located in the Silicon Valley. Under the agreement,
Elan was merged into and with Hartcourt, 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 common shares to the three selling
shareholders based at a value of $0.85 per share. Hartcourt and ECS have
guaranteed to the three selling shareholders that the value of such shares will
be not less than $.85 per share on September 1, 1999. If the value of the shares
does not equal $.85 per share on September 1, 1999, Hartcourt and ECS will make
up any shortfall by issuing additional free trading shares or cash to the
selling shareholders.
On December 28, 1998, Hartcourt sold 200,000 shares of its common stock pursuant
to Rule 144, raising $25,000 in cash. Another 203,000 shares were sold on
January 4, 1999 for $24,500.
In March 1999, Hartcourt cancelled 3,000,000 shares of its common stock valued
at $1,875,000, and 4,000 of Preferred Stock Series A stated value $1,000 per
share, 2,000 of Preferred Stock Series B stated value $1,000 per share, 3,400 of
Preferred Stock Series D stated value $1,000 per share, 4,050 of Preferred Stock
Series AB stated value $100 per share, valued at $9,805,000 in connection with
settlement of litigation with American Equities, Capital and Pruzin.
On September 8, 1999, the Board of Directors issued 118,110 shares to a director
for paying $50,000 as escrow deposit in connection with the acquisition of UAC
and settlement of payment to vendors in the amount of $100,000. In addition,
Hartcourt issued 1,000,000 shares of its common stock to an investor for
<PAGE>
exercising options in the amount of $1,250,0000. Cash in the amount of $763,748
received from the investor was used in connection with the acquisition of FTL
and UAC. The remaining balance of $485,252 was recorded as accounts receivable
and subsequently determined to be uncollectible and fully reserved for at
December 31, 1999. Hartcourt issued 1,000,000 shares of its common stock to a
director upon exercise of options raising $500,000, which was used in connection
with the acquisition of FTL.
On September 27, 1999, Hartcourt issued 1,500,000 shares of its common stock in
connection with the acquisition of FTL valued at $1,401,000.
During 1999, Hartcourt issued 1,014,674 shares of its common stock upon exercise
of warrants to various warrant holders raising cash in the amount of $61,629
used for working capital.
During 1999, Hartcourt issued 394,153 shares of its common stock to several
consultants for services performed during the year valued at $341,223.
On December 14, 1999, Hartcourt exchanged 100,000 shares of its common stock in
settlement of all obligations due to Pego amounting to $1,058,642 and 35,000
shares of ECS owned by Enova valued at $16,358.
During 1999, Hartcourt issued 140,000 shares of its common stock in connection
with settlement of loan from investors amounting to $54,000.
During 1999, Hartcourt sold to investors 700,000 shares of its common stock to
raise $900,000 which was paid in connection with the acquisition of FTL and
investment in UAC.
During the course of the year, Hartcourt issued 910,833 shares of its common
stock valued at $1,004,045 to its directors in connection with performance of
services.
Item 6. Management's Discussion and Analysis or Plan of Operation
General
The following is a summary of certain information contained in this Report and
is qualified in its entirety by the detailed information and financial
statements that appear elsewhere herein. Except for the historical information
contained herein, the matters set forth in this Report include forward-looking
statements within the meaning of the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995. These forward-looking statements are
subject to risks and uncertainties that may cause actual results to differ
materially. These risks and uncertainties are detailed throughout the Report and
will be further discussed from time to time in Hartcourt's periodic reports
filed with the Commission. The forward-looking statements included in the Report
speak only as of the date hereof.
Plan of Operation
Currently, Hartcourt is involved in Internet joint ventures in Asia to
facilitate the expansion of China's first commercial e-trade financial network
and Internet Service Provider. Hartcourt's goal is to create the premiere
financial portal in the Chinese market by building a network of Internet
companies in partnership with young Chinese entreprenuers as well as government
owned entities. Its mission is to become one of the leading Internet companies
in Asia. Through the combined services of Beijing based UAC Stock Exchange
Online, Ltd. ("UAC") and Hong Kong based Financial Telecom Ltd. ("FTL"),
Hartcourt intends to merge these two service providers and create a premier
financial portal of 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.
<PAGE>
Results of Operations
Comparison of the fiscal years ended December 31, 1999 and December 31, 1998
During 1999, Hartcourt continued its previously implemented plan to acquire
profitable companies that were in established industries with a history of
growth. As a result of continuing losses, particularly at Pego and ECS,
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. The restructuring included settlement of certain litigation,
settlement of certain agreements, and a spin-off of Hartcourt's investment in
Pego (100%) and ECS (35%) to Enova. Effective March 1, 1999, Hartcourt
distributed its investment in Enova to Hartcourt shareholders of record of March
31, 1999 as stock dividend. In addition, Hartcourt discontinued its operations
of Hartcourt Pen and Hartcourt Investments, and effectively became an entity
with no operations and its principal assets being the marketable securities
received in exchange for its investment in the Peony Gardens condominium
project.
To stay focused and achieve its mission to become a leading Internet company in
Asia and China, Hartcourt decided to build a network of Internet companies in
partnership with young Chinese enterprenuers as well as government owned
entities. Hartcourt acquired 58.53% FTL on October 4, 1999. 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 U.S. and Europe to institutional and retail investors. On October
18, 1999, Hartcourt formed a joint venture company, UAC, under the laws of China
with UAC Trading. UAC operates the first and only nationwide online securities
trading network connecting investors with their stock brokerage offices via
ChinaPac in China. UAC network consists of proprietary server software and user
interface, servers, gateways and other communication hardware. Through a PC,
investors can dial a local number 162 from anywhere in China to trade stocks
online. Once connected to the UAC network, users can ckeck real-time stock
quotes, trade stocks and other securities, access news and bulletin and other
related information.
The operations of Hartcourt in 1999 primarily consisted of operations of FTL
from the date of acquisition. Operations of Hartcourt Pen and Hartcourt
Investments were discontinued in 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 stock dividend.
Net sales and cost of sales. Net sales in 1999 amounted to $378,677 consisted of
sales of financial pagers and the related Internet and telephone services. Cost
of sales amounted to approximately $71,810. Hartcourt did not have any
operations in 1998 that were still ongoing in 1999.
Selling, general and administrative expenses. Selling general and administrative
expenses increased from $1,472,286 for 1998 to $7,029,180 for 1999. The increase
is primarily due to Hartcourt incurring about $1,925,000 in professional and
consulting fees in connection with litigations and settlements, providing for
allowance for doubtful receivables amounting to about $653,000, and recording
non-cash compensation expense of about $3,380,000 to the officers and directors
of Hartcourt.
<PAGE>
Impairments. No impairments were identified in 1999. Impairments expenses in
1998 were resulted from the write down of the investments in the Peony Gardens
of $6,932,500 and the Alaskan Goldmines of $4,838,413.
Settlements loss. Hartcourt recognized a net settlement loss of $384,013 in 1999
as a result of exchanging investments with GoCall, settling disputes and
litigations with Pruzin, American Equities, and Capital. Hartcourt recognized a
loss of $1,212,327 in 1998 in connection with the settlements of litigations and
disputes with American Equities and Mandarin/Promed.
Loss from discontinued operations. Loss from discontinued operations of $420,810
in 1999 represents the total net loss of Pego of $25,875 and the net loss of ECS
of $394,935 prior to their transfer to Enova and subsequently distributed to
shareholders of Hartcourt as stock dividend. Hartcourt Pen and Hartcourt
Investments did not have any operations in 1999 and were also discontinued in
1999. Loss from discontinued operations of $6,840,127 in 1998 represents the
results of operations of Pego, ECS, Hartcourt Pen and Hartcourt Investments in
1998.
Loss on disposal of discontinued operations. Loss on disposal of discontinued
operations of $7,759 represents the net of the loss of disposals of Hartcourt
Investments amounted to $95,000, and gain on disposalof Hartcourt Pen amounted
to $87,241. There were no operations disposed of during 1998.
Liquidity and Capital Resources
Hartcourt's principal capital requirements during 1999 were to fund the
acquisitions of growth oriented Internet related operating companies in China
and Asia. Hartcourt raised substantial funds necessary 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 $7,862,468 and $21,295,653 for the years ended December 31, 1999 and 1998,
respectively. Additionally, Hartcourt's current liabilities exceeded its current
assets by $6,450,275 at December 31, 1999. 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 opinion of
management, 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.
Operating activities. Net cash used by operating activities decreased to
$239,218 in fiscal 1999, compared to $1,308,746 in fiscal 1998. This is mainly
due to the fact that Hartcourt has discontinued the operations of Hartcourt Pen,
Hartcourt Investments and the spin-off of Pego and ECS during 1999. All these
subsidiaries had losses in both years.
Investing activities. Net cash used by investing activities increased to
$1,408,162 in fiscal 1999, compared to net cash provided by investing activities
of $13,082 in fiscal 1998. This is mainly due to the acquisitions of FTL and UAC
during 1999, which were partly paid by cash. Acquisitions and purchase of
property and equipment during 1998 amounted to 792,113, which were financed by
proceeds on sales of marketable securities and proceeds on notes receivable
within investing activities.
<PAGE>
Financing activities. Net cash provided by financing activities increased to
$1,959,603 in fiscal 1999, compared to $1,602,429 in fiscal 1998. The main
financing sources of Hartcourt are the line of credit from the bank, issuance of
long term debt, proceeds from issuance of its common stock, and proceeds on
exercise of its options and warrants.
The ability of Hartcourt to continue as a going concern is dependent on its
success in fulfilling its plan.
Impact of Year 2000
The Year 2000 Issue ("Y2K") is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of
Hartcourt's computer programs that have time-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
a system failure or miscalculations causing disruption of normal business
activities.
Hartcourt's project to assess and correct Y2K related issues regarding the Year
2000 has been completed and the company has not experienced any significant Y2K
related events. However, interactions with other companies' systems make it
difficult to conclude there will not be future effect. Consequently, at this
time, management cannot provide assurances that the Year 2000 issues will not
have an impact on Hartcourt's operations.
Item 7. Consolidated Financial Statements
Financial Statements are referred to in Item 13(a), listed in the Index to
Financial Statements and filed and included elsewhere herein as a part of this
Annual Report on Form 10-KSB.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
On October 18, 1999, Hartcourt received a letter of resignation from its
independent accountants, Harlan & Boettger, LLP. Harlan & Boettger previously
issued a qualified report dated March 6, 1999. The report noted that because
Hartcourt had suffered recurring losses from operations which raises significant
doubt about the ability of the Company to continue as a going concern. Other
than Hartcourt's ability to continue as a going concern, the report did not
contain any adverse opinions or disclaimers of opinion, or any qualification as
to uncertainty, audit scope or accounting principles. Such report subsequent to
issuance has not been modified. There were no disagreements with Harlan &
Boettger, LLP on any matters of accounting principles or practices, financial
statement disclosures or auditing scope or procedures during the two-year period
covered by their report and subsequently through October 18, 1999.
On February 8, 2000, Hartcourt appointed BDO International as its new
independent accountants. During the two most recent fiscal years and through
February 8, 2000, Hartcourt has not consulted with BDO International regarding
either (1) the application of accounting principles to a specified transaction,
either completed or proposed, or the type of audit opinion that might be
rendered on Hartcourt's financial statements, and either a written report was
provided to Hartcourt or oral advice was provided that BDO International
concluded was an important factor considered by Hartcourt in reaching a decision
as to the accounting, auditing or financial reporting issue; or (2) any matter
that was either the subject of a disagreement, as that term is defined in Item
304 (a) (1) (iv) of Regulation S-K and the related instructions in Item 304 of
Regulation S-K, or a reportable event, as that term is defined in Item 304 (a)
(1) (iv) or Regulation S-K.
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
The following table sets forth certain information about the directors and
executive officers of Hartcourt.
<TABLE>
<CAPTION>
Name Age Position Dates Held
<S> <C> <C> <C>
Dr. Alan V. Phan 54 Chairman of the Board, President Since November 1993
and Chief Executive Officer
Frederic Cohn(1) 60 Director, Vice President Since December 1999
and Secretary
Manu Ohri 44 Director, Executive Vice President Since December 1999
Finance, Chief Financial Officer
and Treasurer
Kenneth Silva 73 Director Since December 1999
Hans Kloepfer 50 Director Since December 1999
Fred Luke 52 Director March 1999 - December 1999
Jon L. Lawver 61 Director March 1999 - December 1999
Leonard J. Roman 50 Director September 1998 - March 1999
</TABLE>
Dr. Alan V. Phan is the founder of Hartcourt and has been Chairman, President
and Chief Executive Officer since November 1993. He is also the founder of
Hartcourt Investments and Hartcourt Pen. From 1986 to 1993, Dr. Phan was the
owner of Hartcourt Consulting, an engineering, equipment and technology exporter
to Asia and South America. From 1981 to 1986, Dr. Phan served as Executive Vice
President of EM Kay Group, which is an international aircraft leasing company,
as well as owner of Village Bank of New Jersey and Magic Marker Industries. From
1975 to 1981, Dr. Phan was the owner of Alpha Development, a California real
estate development company; and UBI Business Brokers of Orange County, a real
estate and business brokerage office. From 1970 to 1975, Dr. Phan was Area
Manager for Eisenberg Group, an Israeli conglomerate, specialized in trading and
manufacturing of industrial and consumer products. Dr. Phan received his
academic training and degrees in Environmental Engineering from Pennsylvania
State University in 1967, and Sussex College of Technology in1975.
Mr. Fred Cohn, Vice President, Secretary and Director since December 1999, has
over 30 years of diversified experience in business management. During the last
five years, Mr. Cohn was a successful entrepreneur owning and operating medium
size companies in the fields of transportation, entertainment, manufacturing and
distribution. Mr. Cohn is a member of the Board of Directors of Enova Holdings,
Inc. Mr. Cohn obtained his law degree from New York School of Law and Bachelors
degree in Accounting from Wilkes University.
Mr. Manu Ohri, Executive Vice President Finance & Chief Financial Officer,
Treasurer and Director since December 1999, has over 19 years of diversified
business management and operations experience in public and private companies.
In addition to serving as the Chief Financial Officer of Hartcourt, Mr. Ohri
currently holds the position of President, CEO and Director of Enova Holdings,
<PAGE>
Inc. From January 1997 to March 1999, Mr. Ohri served as Chief Operating Officer
and Chief Financial Officer of Dynamic Cooking Systems, Inc., a privately-held
manufacturing company. From September 1989 to December 1996, Mr. Ohri served as
Chief Financial Officer of Startel Corporation, a NASDAQ company in software
development business. Mr. Ohri's multi-faceted experience includes operations,
finance as well as administrative functions in the manufacturing, distribution
and software development industries. Mr. Ohri is a Certified Public Accountant
with over six years experience with Deloitte & Touche, LLP and
PriceWaterhouseCoopers, LLP. Mr. Ohri earned his Masters degree in Business
Administration from University of Detroit and Bachelors degree in Accounting
from University of Delhi in India.
Kenneth Silva has been a director of Hartcourt since December 1999. Mr. Silva
retired from active work in July 1996 and has been associated with Hartcourt in
various capacities since his retirement. Mr. Silva earned his B.A. degree in
accounting and banking from Armstrong College in 1950 and attended graduate
courses at American Institute of Banking. Mr. Silva has been in banking for
almost 40 years, including 22 years at Wells Fargo Bank where he last served as
Vice President of Business Development. In addition, Mr. Silva has experience in
real estate finance as Controller for a large construction firm in Los Angeles
called Intercell Industries.
Hans J. Kloepfer has been a director of Hartcourt since December 1999. From July
1999 to February 2000, Mr. Kloepfer served as Vice President, Sales and
Marketing for Pego Systems, Inc., a distributor and representative of air and
gas handling equipment. In March, 2000, Mr. Kloepfer was appointed President of
Pego Systems, Inc. From January 1997 to March 1999, Mr. Kloepfer was a
partner/owner of Strategic Sports Marketing Group, a company engaged in the
development, sales and implementation of a media based turnkey marketing system.
From July 1986 to December 1996, Mr. Kloepfer served as Regional Manager for
Sullair Corporation, a division of Sundstrand Corporation, a manufacturer of
industrial and portable air compressors. Mr. Kloepfer graduated from California
State University Fullerton with a Bachelors Degree in Business Administration
and Economics.
Fred Luke has more than twenty-nine (29) years of experience in domestic and
international financing and the management of privately and publicly held
companies. Since 1982, Mr. Luke has provided consulting services and has served
as Chief Executive Officer and/or Chairman of the Board of various publicly held
and privately held companies in conjunction with such financial and corporate
restructuring services. In addition to his position as director with Hartcourt,
Mr. Luke currently serves as Chairman and Chief Executive Officer of NuOasis
Resorts, Inc., (formerly, Nona Morelli's II, Inc.) ("NuOasis Resorts"), Chairman
and President of NuVen, Chairman and President of Hart Industries, Inc.
("Hart"), and Chairman and President of Diversified Land & Exploration Co.
("DL&E"), Scientific NRG, Incorporated, and NetCommerce, Inc. among others.
NuVen provides managerial, acquisition and administrative services to public and
private companies. Mr. Luke received a Bachelor of Arts Degree in Mathematics
from California State University, San Jose in 1969.
Jon Lawver has 22 years of experience in the area of bank financing where he has
assisted medium size companies ($5 million to $15 million) by providing
expertise in documentation preparation and locating financing for expansion
requirements. From 1970 to present Mr. Lawver has served as President and a
Director of J.L. Lawver Corp., a financial consulting firm. Since 1988, Mr.
Lawver has served as President and a Director of Eurasia, a private finance
equipment leasing company specializing in oil and gas industry equipment. Mr.
Lawver also serves as a director of NetCommerce, SNRG, Hart and NuVen. Mr.
Lawver was with Bank of America from 1961 to 1970, ending his employment as Vice
President and Manager of one of its branches.
Leonard J Roman has 28 years of diversified public and private business
management experience. From 1995 to 1997, Mr. Roman was President of Trumpets
Holdings, Inc. and was Executive Vice President, Chief Financial Officer of W-C
Designs, Inc. From 1991 to 1994, Mr. Roman was General Manager and Chief
Financial Officer of Cosmar Corporation. Mr. Roman is a Certified Public
Accountant and holds a Bachelors Degree from St. John's University.
<PAGE>
Directors serve for a term of one year or until their successors are elected and
qualified. Directors do not receive any cash compensation for serving as such,
although Hartcourt is contemplating the adoption of a plan to compensate
directors through the issuance of shares of common stock. The terms of such a
plan currently are under consideration and there can be no assurance as to when,
if ever, it will be implemented.
Executive officers are appointed by and serve at the will of the Board of
Directors. There are no family relationships between or among any of the
directors or executive officers of Hartcourt.
Rights and Preferences of Preferred Stock
Original Preferred Stock
As the sole holder of the 1,000 outstanding shares of Company Original Preferred
Stock, Dr. Phan is entitled to elect 3/5 of the number of members of Hartcourt's
Board of Directors, whereas the holders of the outstanding shares of common
stock are entitled to elect 2/5 of that number.
Class A Preferred Stock
The 10,000,000 shares of authorized and unissued Class A Preferred Stock may be
split with such designations, powers, preferences and other rights and
qualifications, limitations and restrictions thereof as the Company's Board of
Directors elects for a given series. No shares have been issued.
Series A 9% Convertible Preferred Stock
Non-voting convertible preferred stock, 4,000 shares authorized with a stated
value of $1,000 per share. Holders of shares shall be entitled to receive
cumulative dividends at a rate equal to 9% per annum. Series A convertible
preferred stock is subject to redemption at any time, at the option of
Hartcourt, at a redemption price equal to $1,000 per share plus accrued and
unpaid dividends to the date of redemption. Holders of Series A Convertible
Preferred Stock may convert their shares into either (A) a number of shares of
fully paid and non-assessable common stock of ECS, equal to .0075% of total
outstanding shares of ECS or (B) shares of fully paid and non-assessable common
stock of Hartcourt. Dividends are to be declared and paid monthly. In connection
with settlement of certain litigation and other claims, all outstanding shares
of the Series A Preferred Stock was returned to Hartcourt and cancelled.
Series B 9% Convertible Preferred Stock
Non-voting convertible preferred stock, 2,000 shares authorized with a stated
value of $1,000 per share. Holder of shares shall be entitled to receive
cumulative dividends at a rate equal to 9% per annum. Series B convertible
preferred stock is subject to redemption at any time, at the option of
Hartcourt, at a redemption price equal to $1,000 per share, plus accrued and
unpaid dividends to the date of redemption. Holders of Series B convertible
preferred stock may convert their shares into either (A) a number of shares of
fully paid and non-assessable shares of common stock of Pego, equal to .015% of
total outstanding shares of Pego or, (B) shares of fully paid non-assessable
common stock of Hartcourt. Dividends are to be declared and paid monthly. In
connection with settlement of certain litigation and other claims, all
outstanding shares of the Series B Preferred Stock was returned to Hartcourt and
cancelled.
Series C Redeemable Preferred Stock
Non-voting, non-participating redeemable preferred stock, 1,500 authorized, with
a par value of $1,000 per share. Series C preferred stock is junior to the
original preferred stock and any other class or series of capital stock of the
Company which are specifically ranked senior (senior securities). Series C
preferred stock is redeemable at any time, at the discretion of the Company, at
a redemption price of $1,000 per share. During 1998, the Company redeemed the
stock for $1,300,000 in cash and 200,000 shares of the Company common stock
valued ar $1 per share.
Series AB 9% Convertible Preferred Stock
Non-voting convertible preferred stock, 25,000 shares authorized with a stated
value of $1,000 per share. Holder of shares shall be entitled to receive
cumulative dividends at a rate equal to 9% per annum. Series AB convertible
preferred stock is subject to redemption at any time, at the option of
Hartcourt, at a redemption price equal to $1,000 per share, plus accrued and
unpaid dividends to the date of redemption. Holders of Series AB convertible
preferred stock may convert their shares into fully paid non-assessable common
stock of Hartcourt. In connection with settlement of certain litigation and
other claims, all outstanding shares of the Series AB Preferred Stock was
returned to Hartcourt and cancelled.
<PAGE>
Series D Convertible Preferred Stock
Voting convertible preferred stock, 10,000 shares authorized with a stated value
of $1,000 per share. Holders of Series D Convertible Preferred Stock shall be
entitled to receive, when declared by the Board of Directors, dividends at a par
with holders of Hartcourt's common stock, as if the Series D Convertible
Preferred Stock had been converted in common stock on the record date for the
payment of dividend. Each outstanding share of Series D Convertible Preferred
Stock shall be convertible, at the option of its holder, at any time, into a
number of shares of common stock of Hartcourt at a conversion rate equal to
$1,000 divided by the market price of Hartcourt's common stock. The Series D
Preferred Stock was retired in March 1999, in connection with the sale of a 30%
interest in ECS to Mr. James Pruzin.
By virtue of his activities in founding and organizing Hartcourt, as well as his
beneficial ownership of its voting securities, Dr. Phan may be deemed to be a
"promoter" of Hartcourt.
Item 10. Executive Compensation.
The following summary compensation table sets forth certain information
regarding compensation, required to be paid pursuant to an employment agreement
during each of the three years ended December 31, 1999, 1998 and 1997 to the
person serving as Hartcourt's Chief Executive Officer:
Name and Principal Position Fiscal Year Annual Salary
Dr. Alan V. Phan, Chief Executive Officer 1999 $3,379,788
1998 $200,000
1997 $175,000
Hartcourt is obligated under employment contract with Dr. Alan Phan to provide
salary, bonuses, and other fringe benefits through December 31, 2001. The term
of the contract will be automatically extended for an additional term of three
(3) years, unless Hartcourt or Dr. Phan gives a written notice to the other
party before the expiration of the term. Annual base salary payments under the
contract will be $250,000 per annum for fiscal years 2000 and 2001. Payments
will be made in equal monthly installments. In the event Hartcourt does not have
sufficient cash flow to pay compensation, Dr. Phan has the option to accept
Hartcourt's restricted common shares for the same amount of compensation. Share
price will be calculated at 50% of the market trading bid price on January 1st
of the year of employment. Dr. Phan received 100% of his salary in shares of
common stock of Hartcourt during the last three fiscal years. Hartcourt issued
restricted common shares to Dr. Phan in the amounts of 1,600,284 shares, 213,333
shares and 116,667 shares for the years ended December 31, 1999, 1998 and 1997,
respectively.
There are no salary, bonus or incentive plans covering cash or company stock
except Hartcourt's 1995 Stock Option Plan (the "Plan"). Under the Plan,
incentive and non-qualified stock options may be granted to directors, officers
and key employees to purchase up to 2,000,000 shares of common stock at an
option price not less than the fair market value of the stock at the time the
option is granted; the option period shall not exceed ten years from the date of
grant. Except in the case of the death or disability of an option holder, vested
options lapse 90 days following termination of continuous employment by
Hartcourt. Vested options lapse one year after the death or disability of an
option holder. No options have been granted under the Plan.
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information as of December 31, 1999 with respect
to persons known to Hartcourt to be the beneficial owners of more than 5% of its
voting securities and with respect to the beneficial ownership of such
securities by each director of Hartcourt and by all directors and executive
officers of Hartcourt as a group.
<TABLE>
<CAPTION>
Title of Class Name & Address of Amount and Nature of Beneficial Percent
Beneficial Owner Ownership (1)
<S> <C> <C> <C>
Common stock Dr. Alan V. Phan 6,204,229 (2) 20.7%
1196 E. Willow Street
Long Beach, CA 90806
- -------------------- ----------------------------------- --------------------------------- ------------------
Original Preferred 1,000 (2) 100%
stock
- -------------------- ----------------------------------- --------------------------------- ------------------
- -------------------- ----------------------------------- --------------------------------- ------------------
Common stock CEDE & Co. 19,319,239 (3) 64.4%
55 Water Street 2SL
New York, NY 10041
- -------------------- ----------------------------------- --------------------------------- ------------------
- -------------------- ----------------------------------- --------------------------------- ------------------
Common stock Financial Telecom Limited 1,500,000 (4) 5.0%
The Center, Suite 2705
99 Queen's Road Central, Hong Kong
- -------------------- ----------------------------------- --------------------------------- ------------------
- -------------------- ----------------------------------- --------------------------------- ------------------
All Officers and Directors as a 6,204,229
group
- -------------------- ----------------------------------- --------------------------------- ------------------
</TABLE>
(1) Except as otherwise indicated, each of the parties listed has sole voting
and investment power with respect to all shares of common stock indicated.
Beneficial ownership is calculated in accordance with Rule 13-d-3(d) under the
Securities Exchange Act of 1934, as amended.
(2) Includes (i) an aggregate of 1,000,000 shares of common stock issuable upon
conversion of 1,000 shares of Original Preferred Stock. As the sole holder of
the 1,000 outstanding shares of Original Preferred Stock, Dr. Phan is entitled
to elect 3/5 of the number of members of Hartcourt's Board of Directors.
(3) CEDE & Co. Is a deposit trust corporation (stock brokerage company).
(4) Represents Hartcourt shares issued in connection with the purchase of FTL.
An additional 254,552 shares of common stock were issued on January 18, 2000 as
a result of post closing adjustment to the purchase price of FTL.
Other than the arrangements disclosed in Part I, Item 1 - Subsequent Events,
Hartcourt is not aware of any arrangement that might result in a change in
control in the future.
<PAGE>
Stock Option Plan
In April 1995, the Company adopted a stock option plan (the Plan) to attract and
retain qualified persons for positions of substantial responsibility as
officers, directors, consultants, legal counsel, and other positions of
significance to the Company. The Plan provides for the issuance of both
Incentive Stock Options and Non-Qualified Stock Options. The Plan, which is
administered by the Board of Directors, provides for the issuance of a maximum
of 2,000,000 options to purchase shares of common stock at the market price
thereof on the date of grant. Such options are generally exercisable over a 10
year period from the date of grant. Each option lapses 90 days after the
optionee has terminated his continuous activity with the Company, except that if
his continuous activity with the Company terminates by reason of his death, such
option of the deceased optionee may be exercised within one year after the death
of such optionee. Options granted under the Plan are restricted as to sale or
transfer. All options were granted at not less than fair value at the date of
grant and have terms of 10 years.
The following table summarizes the activity in the plan:
<TABLE>
<CAPTION>
Weighted
Number of Average
Shares Exercise Price
----------------- ----------------
<S> <C> <C>
Shares under option at January 1, 1998 - $ -
Granted 400,000 1.00
Exercised - -
Canceled - -
----------------- ----------------
Shares under option at December 31, 1998 400,000 $ 1.00
Granted 2,000,000 1.265
Exercised (2,000,000 ) 1.265
Canceled - -
----------------- ----------------
Shares under option at December 31, 1999 400,000 $ 1.00
----------------- ----------------
</TABLE>
All stock options issued to employees have an exercise price not less than the
fair market value of the Company's common stock on the date of grant, and in
accordance with the accounting for such options utilizing the intrinsic value
method there is no related compensation expense recorded in the Company's
financial statements. Had compensation cost for stock-based compensation been
determined based on the fair value at the grant dates in accordance with the
method delineated in Statement of Accounting standards No. 123, the Company's
net loss and loss per share for the year ended December 31, 1998, would have
been increased to the pro forma amounts presented below:
<TABLE>
<CAPTION>
1998
-----------------
<S> <C>
Net loss:
As reported $ (21,295,653 )
Pro forma $ (21,683,133 )
Loss per share:
As reported (1.18 )
Pro forma (1.20 )
</TABLE>
<PAGE>
Additional information relating to stock options outstanding and exercisable at
December 31, 1999 summarized by exercise price are as follows:
<TABLE>
<CAPTION>
Outstanding Exercisable
----------------------------------- ----------------------------------
Exercise Price Weighted Average Weighted Average
----------------------------------- ----------------------------------
Per Share Shares Life (Years) Exercise Price Shares Exercise Price
------------------ ------------ ---------------- ---------------- ------------ -------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 400,000 8.5 $1.00 400,000 $1.00
</TABLE>
Warrants
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 at prices ranging from $0.30 to $2.10 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 nonassessable 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 the terms of the
Warrant Agreement, American Equities exercised its cashless exercise right and
converted 800,000 warrants into 621,674 Hartcourt's common shares without
payment of any consideration.
In connection with consulting services, Hartcourt issued warrants to purchase
350,000 shares at prices ranging from $1.25 to $1.50 which expire at various
dates through July 12, 2000. The warrants were issued at the fair market value
on the date of issuance and therefore no expense was recorded.
In connection with the sale of 200,000 restricted shares of its own common
stock, Hartcourt issued warrants to purchase 100,000 shares at $4.00 which
expire on December 12, 2000. The warrants were issued above fair market value
and therefore no expense was recorded.
<PAGE>
Item 12: Certain Relationships and Related Transactions
In August 1996, Hartcourt purchased an apartment complex located near Beijing,
China for $22 million from NuOasis International, Inc. (a wholly owned
subsidiary of Nona Morelli's II). The purchase price included the issuance of 4
million shares of common stock, valued at $10 million, and a promissory note to
NuOasis for $12 million. The Note is due and payable on August 17, 1997 or, if
construction is not complete, then the note is extended to the date the
certificate of occupancy is received. NuOasis is a non-affiliate of Hartcourt.
Under the deposit method of accounting in accordance with Financial Accounting
Standards No. 66 the promissory note for $12,000,000 was deferred until the
complete consummation of the Peony Gardens sale. Also the 4 million shares of
common stock was recorded as a deposit at December 31, 1998 and 1997. In March
1999, Hartcourt entered into an Exchange Agreement pursuant to which Hartcourt
agreed to assign its rights and any and all of its interest in Peony Gardens for
marketable securities which were subsequently valued at $5,000,000. Dragon King
is a wholly owned subsidiary of NuOasis. Subsequent to the transaction, the CEO
of Dragon King became a director of Hartcourt.
On October 3, 1997, Hartcourt purchased the outstanding shares of Pego where
Pego became a wholly-owned subsidiary of Hartcourt. 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, Michael Caruana,
who was prior to the acquisition, a director of Hartcourt.
Effective February 1, 1999, pursuant to a Share Purchase Agreement, Hartcourt
acquired one (1) share of common stock of Enova, 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, all of the 5,213,595 shares of
common stock of Enova. 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. The Board of Directors of Enova includes directors
from Hartcourt.
On June 20, 1999, Hartcourt entered into an agreement to acquire 35% of
ownership interest in UAC. In connection with the purchase, Hartcourt recorded a
payable of $1,868,000 to Shi Zhang, owner of UAC Trading at December 31, 1999.
In addition, Hartcourt agreed to transfer 1,000,000 shares of its common stock
to UAC, 200,000 of these common shares will be used to offset with UAC Trading
for an existing loan of $200,000 and 800,000 common shares were not issued as of
December 31, 1999. 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. As of December 31, 1999, Hartcourt has not
exercised its option to convert the loan for the additional 15% interest in UAC.
The option to convert the loan into an additional 15% interest in UAC is
contingent upon Chinese laws and regulations governing foreign ownership of
Chinese companies. As of December 31, 1999, Hartcourt has payables in the amount
of $87,112 to UAC and 1,868,000 to the owner of UAC Trading.
On August 17, 1999, Hartcourt entered into a stock purchase agreement with FTL
to purchase 4,964,990 shares of common stock, representing 58.53% of the total
common stock outstanding. In connection with the purchase, Hartcourt issued
1,500,000 shares of its common stock and recorded an amount payable to FTL
$840,676 at December 31, 1999. On January 18, 2000, Hartcourt issued 254,552
additional shares of its common stock to FTL for revision in purchase price as a
result of post closing adjustment.
<PAGE>
On September 8, 1999, the Board of Directors authorized to issue 118,110 shares
to Mr. Fred Luke, a Director, for paying $50,000 as escrow deposit in connection
with the acquisition of UAC and settlement of payments to vendors in the amount
of $100,000. In addition, Hartcourt issued 1,000,000 of common stock to Mr. Fred
Luke dba NuVen Advisors, upon exercise of 1,000,000 options raising $500,000,
which was used in connection with the acquisition of FTL.
On December 14, 1999, Hartcourt exchanged 100,000 shares of its common stock in
settlement of all obligations due to Pego amounting to $1,058,642 and 35,000
shares of ECS owned by Enova valued at $16,358.
During the course of the year, Hartcourt issued 910,833 shares of its common
stock valued at $1,004,045 to its directors and officers in connection with
their compensation and performance of services.
At December 31, 1999 and 1998, Hartcourt had outstanding advances to Dr. Alan
Phan, a director, executive officer and promoter of Hartcourt, in the amount of
$ 58,221 and $142,522, respectively.
As at December 31, 1999, Hartcourt has a $50,000 note receivable from Pego,
non-interest bearing, payable upon demand and unsecured.
<PAGE>
PART IV.
Item 13. Exhibits and Reports on Form 8-K
The following list describes the exhibits filed as part of this Annual Report
Form 10-KSB.
Exhibit No. Description of Document
2.01 Agreement and Plan of Reorganization, dated November 5, 1994
among Stardust, Inc.-Production-Recording-Promotion, Hartcourt
Investments (USA) Inc. ("Hartcourt USA") and the shareholders of
Hartcourt USA. (1)
2.02 Agreement and Plan or Reorganization dated December 1, 1994 Among
Hartcourt USA. The Hartcourt Pen Factory, Inc.("Hartcourt Pen")
and the Hartcourt Pen shareholder. (1)
2.03 Agreement between The Hartcourt Companies, Inc. and the
shareholder of Pego Systems, Inc., "Stock Purchase Agreement",
dated June 29, 1997 (4)
2.04 Agreement and Plan of Reorganization, dated October 28, 1997,
between The Hartcourt Companies, Inc., Electronic Component and
Systems, Inc., and Pruzin Technologies, Inc. (5)
3.01 Articles of Incorporation of Hartcourt, as amended. (1)
3.02 Bylaws of Hartcourt. (1)
3.03 Amendment to the Bylaws of Hartcourt. (1)
4.01 Articles of Amendment to Articles of Incorporation of Hartcourt
regarding the Creation of Preferred Stock and the Statement of
Rights and Preferences of Common stock, Original Preferred Stock
and Class A Preferred Stock. (1)
<PAGE>
4.02 Articles of Amendment of the Articles of Incorporation of The
Hartcourt Companies, Inc., Designating Series A 9% Preferred
Stock.
4.03 Articles of Amendment of Articles of Incorporation of The
Hartcourt Companies, Inc. Designating Series B 9% Preferred
Stock.
4.04 Certificate of Amendment of the Articles of Incorporation of The
Hartcourt Companies, Inc. Designating Series C Preferred Stock.
4.05 Articles of Amendment of the Articles of Incorporation of The
Hartcourt Companies, Inc. Designating Series D Preferred Stock.
10.01 Lease between Hartcourt and Larry M. Mitobe for Hartcourt's
headquarters facility, dated April 9, 1996. (1)
10.02 Equipment Lease between Hartcourt USA and Anja Engineering
Corporation, dated April 4, 1994. (1)
10.03 Stock Exchange Agreement between Hartcourt USA and Eastern
Rochester, dated August 8, 1994. (1)
10.04 1995 Stock Option Plan. (1)
10.05 Purchase Contract between The Hartcourt Companies, Inc. and
Exceptional Specialty Products, Inc., dated March 21, 1996. (1)
10.06 Purchase and Sale Agreement, dated August 8, 1996, between The
Hartcourt Companies, Inc. and NuOasis International, Inc., and
Addendum to Purchase and Sale Contract. (1)
10.07 Convertible Secured Promissory Note, dated August 8, 1996, in
connection with Purchase and Sale Agreement, dated August 8, 1996
between The Hartcourt Companies, Inc. and NuOasis International,
Inc.(1)
10.08 Convertible Secured Promissory Note, dated August 8, 1996, in
connection with Purchase and Sale Agreement, dated August 8, 1996
between The Hartcourt Companies, Inc. and NuOasis International,
Inc., as amended. (1)
10.09 Sales Agreement, dated September 17, 1996, between The Hartcourt
Companies, Inc. and Promed International, Ltd. (1)
10.10 Sales Agreement, dated September 17, 1996, between The Hartcourt
Companies, Inc. and Mandarin Overseas Investment Co., Ltd. (1)
10.11 Purchase and Sale Agreement, dated September 27, 1996, between
The Hartcourt Companies, Inc. and CKES Acquisitions, Inc. (1)
10.12 Secured Promissory Note, dated September 27, 1996, in connection
with Purchase and Sale Agreement between The Hartcourt Companies,
Inc. and CKES Acquisitions, Inc. (1)
10.13 Consulting Agreement, dated December 30, 1996, between The
Hartcourt Companies, Inc. and American Equities LLC, a California
limited liability company. (3)
<PAGE>
10.14 Investment Banking Agreement, dated March 1998, between The
Hartcourt Companies, Inc. and DanAllen Investment Group. (2)
10.16 Marketable Securities Agreement, dated July 31, 1997, between The
Hartcourt Companies, Inc. and Capital Commerce, Ltd. (2)
10.17 Lease Termination Agreement, dated March 24, 1998, between
Hartcourt Investment (USA) Corporation and Scripto-Tokai
Corporation. (2)
10.17 Lease Termination Agreement, dated March 24, 1998, between
Hartcourt Investment (USA) Corporation and Scripto-Tokai
Corporation. (2)
10.18 Share Purchase Agreement with Enova Holdings, Inc., dated
February 1, 1999, Exchange Agreement, dated March 23, 1999, and
Distribution Agreement, dated March 24, 1999, File # 99579493.
10.19 Agreement with Beijing UAC Stock Trading Online Co., Ltd.
10.19.1 Financial Statements of Beijing UAC Stock Exchange Online Co.,
Ltd. for the period from October 18, 1999 (date of inception) to
December 31, 1999
10.20 Agreement with GoCall.com
10.21 FTL Stock Purchase Agreement
10.22 Advisory Agreement and 1999 Stock Plan with NuVen Advisors, Inc.
and Hartcourt dated March 18, 1999, File No. 333-74933.
10.23 Consulting Agreement with Fred G. Luke, dba NuVen Advisors, File
No. 99768860
10.24 Consulting Agreement with Archer & Weed, File No. 99768860
16.01 Resignation by Harlan & Boettger LLP, Certified Public
Accountants, dated October 18, 1999, File No. 99731003.
16.02 Amendment to resignation of Harlan & Boettger, LLP, Certified
Public Accountants, dated December 6, 1999, File No. 99769229
23.01 Consent of Independent Certified Public Accountants. (BDO
International)
23.02 Consent of Independent Certified Public Accountants. (Harlan &
Boettger, LLP)
27.01 Financial Data Schedule. Pursuant to Rule 12b-32 under Securities
and Exchange Act of 1934, as amended.
(1) Previously filed as an exhibit to Hartcourt's Form 10SB, File No. 97636406
and incorporated herein by reference.
(2) Previously filed as an exhibit to Hartcourt's 10-KSB, dated April 13, 1998,
File No. 98592254 and incorporated herein by reference.
<PAGE>
(3) Previously filed as an exhibit to Hartcourt's 10-KSB, dated April 15, 1997,
File No. 97581142 and as amended by Hartcourt's Form 10-KSB40/A, dated July 3,
1997, File No. 97636294. Incorporate herein by reference.
(4) Previously filed as an exhibit to Hartcourt's Form 8-K, dated October 21,
1997, file No. 97698732 and as amended by Hartcourt's Form 8-K/A, dated October
27, 1997, File No. 97701302. Incorporated herein by reference.
(5) Previously filed as exhibit to Hartcourt's Form 8-K, dated November 12,
1997, File No. 97715149. Incorporated herein by reference.
Reports on Form 8-K:
(1) On October 18, 1999, Hartcourt filed a report on Form 8-K to disclose
the resignation by Harlan & Boettger LLP, Certified Public Accountants,
File No. 99731003. Incorporated herein by reference.
(2) On December 6, 1999, Hartcourt filed a report on Form 8-K/A concerning
the resignation of Harlan & Boettger, LLP, Certified Public
Accountants, File No. 99769229. Incorporated herein by reference.
(3) On December 8, 1999, Hartcourt filed a report on Form 8-K to disclose
the resignations of Fred Luke and Jon L. Lawver Directors and Officers,
File No. 99770546. Incorporated herein by reference.
(4) Appointment of BDO International, Certified Public Accountants, dated
February 10, 2000, File No. 530104. Incorporated herein by reference.
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT.
The Registrant did not send an Annual Report covering the fiscal year ending
December 31, 1996 nor did it send proxy materials to security holders. If such
report and proxy materials are mailed to security holders, the Registrant shall
furnish to the Commission, for its information, four (4) copies of the Annual
Report to security holders and four (4) copies of the proxy materials.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15 (d) of the Securities Exchange Act of 1934,
the registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized.
THE HARTCOURT COMPANIES, INC.
Date: April 14, 2000 By: /s/ Alan V. Phan
----------------------------------
Alan V. Phan, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
/s/ Alan V. Phan
- ----------------------------- Chairman of the Board, April 14, 2000
Alan V. Phan President and Chief
Executive Officer
/s/ Manu Ohri Executive Vice President April 14, 2000
- ---------------------------- Finance, Chief Financial
Manu Ohri Officer, Treasurer and
Director
/s/ Fred Cohn Secretary and Director April 14, 2000
- ---------------------------------
Fred Cohn
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Reports ........................................F-2
Consolidated Financial Statements
Balance Sheets as of December 31, 1999 and 1998 .................F-4
Statements of Operations for the Years Ended
December 31, 1999 and 1998 .....................................F-6
Statements of Shareholders' Equity for the Years Ended
December 31, 1999 and 1998 .....................................F-7
Statements of Cash Flows for the Years Ended
December 31, 1999 and 1998 .....................................F-8
Summary of Significant Accounting Policies ...........................F-10
Notes to Consolidated Financial Statements ...........................F-14
<PAGE>
Independent Auditors' Report
The Board of Directors and Shareholders of
The Hartcourt Companies, Inc.
We have audited the accompanying consolidated balance sheet of The Hartcourt
Companies, Inc. and Subsidiaries as of December 31, 1999 and the related
consolidated statements of operations, shareholders' equity and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Hartcourt
Companies, Inc. and Subsidiaries as of December 31, 1999 and the results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered recurring losses
from operations, has a negative working capital and needs to raise additional
funds to accomplish its objectives. These matters raise substantial doubt about
the Company's ability to continue as a going concern. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ BDO International
--------------------------------------
BDO International
Hong Kong
March 30, 2000
F-2
<PAGE>
Independent Auditors' Report
To the Board of Directors and Shareholders of
The Hartcourt Companies, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of The Hartcourt
Companies, Inc. (a Utah corporation) and Subsidiaries as of December 31, 1998,
and the related consolidated statements of operations, changes in shareholders'
equity and cash flows for the year then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Hartcourt
Companies, Inc. and Subsidiaries as of December 31, 1998, and the results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered recurring losses
from operations that raises substantial doubt about the Company's ability to
continue as a going concern. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ Harlan & Boettger, LLP
---------------------------------------
Harlan & Boettger, LLP
San Diego, California
March 6, 1999
F-3
<PAGE>
<TABLE>
<CAPTION>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
---------------------------------
1998 1999
---------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 18,834 $ 331,057
Accounts receivable, net of allowance of $167,497 - 37,626
Inventory - 127,091
Notes receivable (Note 3) 91,523 228,800
Prepaid expenses and other 68,355 129,114
Due from related parties (Note 4) 142,522 108,222
-------------- --------------
Total current assets 321,234 961,910
-------------- --------------
Property and equipment, net (Note 5) - 815,085
Investments (Note 2) 11,030,000 5,554,644
Intangibles, net (Note 6) - 2,206,033
Net assets of discontinued operations (Note 7) 6,939,611 -
-------------- --------------
Total assets $ 18,290,845 $ 9,537,672
-------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 40,635 $ 152,709
Deferred revenue - 78,477
Notes payable - current portion (Note 8) 25,000 649,998
Accrued expenses and other current liabilities (Note 10) 32,951 4,073,504
Payables to related parties (Note 9) 1,091,081 2,457,497
-------------- --------------
Total current liabilities 1,189,667 7,412,185
Notes payable, net of current portion (Note 8) - 608,184
-------------- --------------
Total liabilities 1,189,667 8,020,369
-------------- --------------
Commitments and Contingencies (Notes 11 and 18)
Minority Interest (Note 2) - 661,634
F-4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
---------------------------------
1998 1999
---------------------------------
<S> <C> <C>
Shareholders' Equity
Preferred Stock: (Note 12)
Original preferred stock, $0.01 par value, 1,000
authorized, issued and outstanding 10 10
Series A, $1,000 stated value, 4,000 shares authorized,
4,000 and 0 issued and outstanding at December 31,
1998 and 1999 4,000,000 -
Series B, $1,000 stated value, 2,000 shares authorized,
2,000 and 0 issued and outstanding at December 31,
1998 and 1999 2,000,000 -
Series D, $1,000 stated value, 10,000 shares authorized,
3,400 and 0 shares issued and outstanding at
December 31, 1998 and 1999 3,400,000 -
Series AB, $100 stated value, 25,000 shares authorized,
4,050 and 0 issued and outstanding at December 31,
1998 and 1999 405,000 -
-------------- --------------
Total preferred stock 9,805,010 10
Common stock, $0.001 par value, 50,000,000 shares authorized;
19,954,382 shares and 23,832,152 shares issued and
outstanding at December 31, 1998 and 1999 19,955 23,833
Stock subscription receivable (301,000 ) -
Treasury stock, at cost (24,364 shares and 1,524,364
shares at December 31, 1998 and 1999) (279,928 ) (1,680,928 )
Additional paid-in capital 33,257,835 38,895,860
Accumulated deficit (25,400,694 ) (36,383,106 )
-------------- --------------
Total shareholders' equity 7,296,168 855,669
-------------- --------------
Total liabilities and shareholders' equity $ 18,290,845 $ 9,537,672
-------------- --------------
</TABLE>
See accompanying summary of accounting policies and
notes to consolidated financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31,
---------------------------------------
1998 1999
----------------- -----------------
<S> <C> <C>
Net sales $ - $ 378,677
Cost of sales - 71,810
----------------- -----------------
Gross profit - 306,867
----------------- -----------------
Operating expenses
Selling, general and administrative 1,472,286 7,029,179
Depreciation and amortization - 85,879
Impairments (Note 2) 11,770,913 -
Settlements, net (Note 2) 1,212,327 384,013
----------------- -----------------
Total operating expenses 14,455,526 7,499,071
----------------- -----------------
Loss from continuing operations before items below (14,455,526) (7,192,204 )
----------------- -----------------
Other income (expense):
Equity in earnings of affiliate - (9,714 )
Interest expense - (103,709 )
Interest income - 4,130
Other expense - (189,790 )
----------------- -----------------
Total other income (expense) - (299,083 )
----------------- -----------------
Loss from continuing operations before minority interest (14,455,526) (7,491,287 )
Less: Loss in subsidiary attributed to minority interest - 57,388
----------------- -----------------
Loss before discontinued operations (14,455,526) (7,433,899 )
Discontinued operations:
Loss from discontinued operations (6,840,127) (420,810 )
Loss on disposal of discontinued operations - (7,759 )
----------------- -----------------
Net loss $ (21,295,653)$ (7,862,468 )
----------------- -----------------
Basic and fully diluted loss per common share (Note 15)
Loss from continuing operations $ (0.80)$ (0.38 )
Loss from discontinued operations (0.38) (0.02 )
----------------- -----------------
Loss per share $ (1.18)$ (0.40 )
----------------- -----------------
Weighted average number of shares outstanding 18,061,430 19,702,678
----------------- -----------------
</TABLE>
See accompanying summary of accounting policies and
notes to consolidated financial statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
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 - January 1, 1998 16,441,739 $ 16,442 11,900 $ 10,900,010 $ 31,083,604 $ (26,000 )
Sale of shares under Regulation S 2,000,000 2,000 - - 1,123,002 (300,000 )
Stock subscriptions received - - - - - 25,000
Shares issued to employees and BOD 377,857 378 - - 196,123 -
Shares issued for purchase of PPI 9,796 10 - - 14,990 -
Shares issued for purchase of
Elan Manufacturing 724,990 725 - - 615,516 -
Preferred stock redeemed for cash - - (1,300 ) (1,300,000 ) - -
Preferred stock exchanged for common
stock 200,000 200 (200 ) (200,000 ) 199,800 -
Shares issued to investors 200,000 200 - - 24,800 -
Preferred stock dividend - - 4,050 405,000 - -
Net loss - - - - - -
----------- ----------- ----------- ----------- ----------- ------------
Balance - December 31, 1998 19,954,382 19,955 14,450 9,805,010 33,257,835 (301,000 )
Shares issued to investors 700,000 700 - - 899,300 -
Sale of shares to directors 118,110 118 - - 149,882 -
Shares issued upon exercise of options 1,000,000 1,000 - - 1,249,000 -
Shares issued upon exercise of options
by director 1,000,000 1,000 - - 1,279,000 -
Stock subscriptions rescinded - - 301,000
Shares redeemed in connection with
sale of ECS (2,000,000 ) (2,000 ) (3,400 ) (3,400,000 ) (1,248,000 ) -
Shares redeemed in connection with
litigation settlement (1,000,000 ) (1,000 ) (10,050 ) (6,405,000 ) (624,000 ) -
Shares issued to directors and
employees for services 910,833 911 - - 1,003,134 -
Shares issued upon exercise of warrants 1,014,674 1,015 - - 60,614 -
Shares issued in connection with FTL
acquisition 1,500,000 1,500 - - 1,399,500 -
Shares issued for services 394,153 394 - - 340,829 -
Shares issued to related party in
settlement of debt 100,000 100 - - 1,074,900 -
Shares issued in settlement of debts 140,000 140 - - 53,866 -
Dividend of Enova common stock to
shareholders (Notes 2 and 7) - - - - - -
Net loss - - - - - -
----------- ----------- ----------- ----------- ----------- ------------
Balance - December 31, 1999 23,832,152 $ 23,833 1,000 $ 10 $ 38,895,860 $ -
----------- ----------- ----------- ----------- ----------- ------------
</TABLE>
See accompanying summary of accounting policies and
notes to consolidated financial statements.
F-7
<PAGE>
<TABLE>
<CAPTION>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Treasury Stock Total
---------------------- Accumulated Shareholders'
Description Shares Amount Deficit Equity
- --------------------------------------- --------- --------- ----------- ------------
<S> <C> <C> <C> <C>
Balance - January 1, 1998 24,364 $ (279,928)$ (3,835,041)$ 37,859,087
Sale of shares under Regulation S - - - 825,002
Stock subscriptions received - - - 25,000
Shares issued to employees and BOD - - - 196,501
Shares issued for purchase of PPI - - - 15,000
Shares issued for purchase of
Elan Manufacturing - - - 616,241
Preferred stock redeemed for cash - - - (1,300,000)
Preferred stock exchanged for common
stock - - - -
Shares issued to investors - - - 25,000
Preferred stock dividend - - (270,000 ) 135,000
Net loss - - (21,295,653) (21,295,65)
--------- --------- ----------- ----------
Balance - December 31, 1998 24,364 (279,928 ) (25,400,694) 17,101,178
Shares issued to investors - - - 900,000
Sale of shares to directors - - - 150,000
Shares issued upon exercise of options - - - 1,250,000
Shares issued upon exercise of options
by director - - - 1,280,000
Stock subscriptions rescinded - - - 301,000
Shares redeemed in connection with
sale of ECS - - - (4,650,000)
Shares redeemed in connection with
litigation settlement - - - (7,030,000)
Shares issued to directors and
employees for services - - - 1,004,045
Shares issued upon exercise of warrants - - - 61,629
Shares issued in connection with FTL
acquisition 1,500,000 (1,401,00) - -
Shares issued for services - - - 341,223
Shares issued to related party in
settlement of debt - - - 1,075,000
Shares issued in settlement of debts - - - 54,006
Dividend of Enova common stock to
shareholders (Notes 2 and 7) - - (3,119,944 ) (3,119,944)
Net loss - - (7,862,468 ) (7,862,468)
--------- --------- ----------- ----------
Balance - December 31, 1999 1,524,364 $(1,680,92)$ (36,383,106 )$ 855,669
--------- --------- ----------- ----------
</TABLE>
See accompanying summary of accounting policies and
notes to consolidated financial statements.
F-7A
<PAGE>
<TABLE>
<CAPTION>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash For the Years Ended December 31,
---------------------------------------
1998 1999
----------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (21,295,653 ) $ (7,862,468 )
Adjustments to reconcile net loss to net cash used in operating
activities:
Loss on discontinued operations - 420,810
Loss on disposal of discontinued operations - 7,759
Loss on sale of equipment 70,419 -
Write down on note receivable 1,043,795 576,775
Depreciation 405,481 29,314
Amortization 411,928 56,565
Allowance for doubtful accounts (27,003 ) -
Impairments 17,231,138 -
Forgiveness of debt (90,000 ) -
Minority interest in loss of subsidiaries - (47,674 )
Stock issued for services 196,501 2,125,268
Inventory valuation 50,000 -
Settlements 1,212,327 384,013
Changes in operating assets and liabilities:
Accounts receivables (731,054 ) (26,314 )
Inventory 923,046 (3,897 )
Prepaid expenses and other 13,938 (64,559 )
Accounts payable and accrued expenses (758,243 ) 4,186,927
Payable to Mexican affiliate 130,630 -
Deferred revenue - (21,737 )
Other liabilities (95,996 ) -
----------------- -----------------
Net cash used by operating activities (1,308,746 ) (239,218 )
----------------- -----------------
Cash flows from investing activities:
Purchase of property and equipment (329,570 ) (2,572 )
Proceeds on sale of equipment 3,000 -
Proceeds on sale of marketable securities 595,573 -
Proceeds on notes receivable 206,622 -
Payments on acquisitions (462,543 ) (1,405,590 )
----------------- -----------------
Net cash provided by (used in) investing activities 13,082 (1,408,162 )
----------------- -----------------
</TABLE>
F-8
<PAGE>
<TABLE>
<CAPTION>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
---------------------------------------
1998 1999
----------------- -----------------
<S> <C> <C>
Cash flows from financing activities:
Common stock subscriptions (15,000 ) -
Payments on loans to related parties - -
Proceeds from issuance of common stock 875,002 (32,439 )
Net proceeds from line of credit 1,302,609 699,007
Payments on loans from shareholders (209,509 ) -
Payments on capital lease obligations (226,045 ) -
Payments on long-term debt (617,207 ) -
Proceeds from issuance of long-term debt 1,792,579 (33,342 )
Proceeds on exercise of options and warrants - 1,326,377
Redeemed preferred stock (1,300,000 ) -
----------------- -----------------
Net cash provided by financing activities 1,602,429 1,959,603
----------------- -----------------
Net increase in cash 306,765 312,223
Cash in discontinued operations (365,619 ) -
Cash and cash equivalents, beginning of period 77,688 18,834
----------------- -----------------
Cash and cash equivalents, end of period $ 18,834 $ 331,057
----------------- -----------------
</TABLE>
See accompanying summary of accounting policies and
notes to consolidated financial statements.
F-9
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements for 1998 include the accounts
of The Hartcourt Companies, Inc. and its wholly-owned subsidiaries; Hartcourt
Pen Factory, Inc. and Hartcourt Investments (USA), Inc., which includes the
accounts of Pego Systems, Inc., and Electronic Components and Systems, Inc.
These subsidiaries were disposed of during 1999.
The accompanying consolidated financial statements for 1999 include the accounts
of The Hartcourt Companies, Inc. and its 58.53% owned subsidiary, Financial
Telecom Limited (see Note 2). Financial Telecom Limited is located in Hong Kong.
For purposes of these consolidated financial statements The Hartcourt Companies,
Inc. and its subsidiary will be referred to collectively as "the Company." All
material intercompany transactions and balances have been eliminated. The
Company also has a 35% ownership interest in Beijing UAC Stock Exchange Online
Co., Ltd. (see Note 2), which is accounted for using the equity method.
Cash and Cash Equivalents
For purposes of the Statements of Cash Flows, the Company considers all highly
liquid investments purchased with an initial maturity of three months or less to
be cash equivalents.
Accounts Receivable
In the normal course of business, the Company extends unsecured credit to
customers located in Hong Kong. Credit is extended based on an evaluation of the
customer's financial condition. The allowance for doubtful accounts is based on
management's evaluation of outstanding accounts receivable at the end of the
reporting period.
Inventory
Inventory is stated at the lower of cost or market, cost being determined on the
first-in, first-out (FIFO) method.
Property and Equipment
Property and equipment are stated at cost or estimated fair market value on the
date of acquisition. Depreciation is provided over the estimated useful lives of
the respective assets on the straight-line basis ranging from five to forty
years. The Company's policy is to evaluate the remaining lives and
recoverability in light of current conditions.
Intangibles
Goodwill and other intangible assets are amortized on the straight-line over the
estimated future periods to be benefited. Goodwill, the excess of the Company's
purchase price over the fair value of the net assets acquired, is amortized over
10 years.
F-10
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Foreign Currencies
Assets and liabilities denominated in foreign currencies are translated into the
currency of U.S. dollars using the exchange rates at the balance sheet date. For
revenues and expenses, the average exchange rate during the year was used to
translate Hong Kong dollars and Chinese Renminbi into U.S. dollars. Translation
gains and losses resulting from changes in the exchange rate are deferred and
are shown as a separate component of shareholders' equity when material.
Transaction gains and losses are included in the determination of net loss for
the period.
Accounting for Business Combinations
The acquisitions were recorded as purchases in accordance with Accounting
Principle Board Opinion No. 16 (APB No. 16) "Business Combinations", and the
purchase prices were allocated to the assets acquired, and liabilities assumed
based upon their estimated fair value at the purchase date. The excess purchase
price over the net asset value has been recorded as goodwill and is included in
intangibles in the accompanying balance sheet. The operating results of the
acquired entities are included in the Company's consolidated financial
statements from the dates of acquisition.
Income Taxes
Income taxes are provided in accordance with Statement of Financial Accounting
Standards No. 109 (SFAS No. 109), "Accounting for Income Taxes." A deferred tax
asset or liability is recorded for all temporary differences between financial
and tax reporting. Deferred tax expense (benefit) results from the net change
during the year of deferred tax assets and liabilities.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Deferred tax assets and liabilities are
adjusted for the effects of changes in tax laws and rates on the date of
enactment.
Fair Value of Financial Instruments
The following methods and assumptions were used by the Company to estimate the
fair values of financial instruments as disclosed herein:
The carrying amounts of financial instruments including cash and cash
equivalents and accounts payable approximate fair value because of their short
maturity.
The carrying amount of long-term debt approximates fair value because the
interest rates on these instruments approximate the rate the Company could
borrow at December 31, 1999.
The fair value of notes receivable and loans from related parties cannot be
determined due to their related party nature.
F-11
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Loss Per Share
The Company adopted Statement of Financial Accounting Standard No. 128,
"Earnings Per Share" (SFAS 128). SFAS 128 provides for the calculation of Basic
and Diluted earnings per share. Basic earnings per share includes no dilution
and is computed by dividing income (loss) available to common shareholders by
the weighted average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution of securities that could
share in the earnings of the entity. Since the Company incurred losses in 1998
and 1999, basic and diluted per share amounts are the same.
For the year ended December 31, 1999, potential common stock representing
400,000 outstanding stock options and 450,000 outstanding warrants are not
included since their effect would be anti-dilutive.
Stock-Based Compensation
The Company has adopted a method of accounting for stock-based compensation
plans as required by Statement of Financial Accounting Standard No. 123 (SFAS
No. 123) "Accounting for Stock-Based Compensation". SFAS No. 123 allows for two
methods of valuating stock-based compensation. The first method allows for the
continuing application of Accounting Principle Board Opinion No. 25 (APB No. 25)
in measuring stock-based compensation, while complying with the disclosure
requirements of SFAS No. 123. The second method uses an option pricing model to
value stock compensation and record as such within the consolidated financial
statements. Under both methods, compensation cost for stock options is measured
as the excess, if any, of the fair market price of the Company's stock at the
date of grant over the amount an employee must pay to acquire the stock. Such
cost is charged to operations. The Company will continue to apply APB No. 25,
while complying with SFAS No. 123 disclosure requirements.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the consolidated
financial statements, and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Impairment of Long-Lived Assets
The Company has adopted Statement of Financial Accounting Standards No. 121
("SFAS 121") Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of. Under the provisions of this statement, the
Company has evaluated its long-lived assets for financial impairment, and will
continue to evaluate them as events or changes in circumstances indicate that
the carrying amount of such assets may not be fully recoverable.
The Company evaluates the recoverability of long-lived assets by measuring the
carrying amount of the assets against the estimated undiscounted future cash
flows associated with them. At the time such flows of certain long-lived assets
are not sufficient to recover the carrying value of such assets, the assets are
adjusted to their fair values. Accordingly, based on these evaluations,
management has adjusted the carrying value of investments and goodwill in 1998
and 1999.
F-12
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Revenue from product sales are recognized upon shipment. Revenue from service
obligations is deferred and recognized when the services are provided.
Reclassification
Certain 1998 amounts have been reclassified to conform to the 1999 consolidated
financial statement presentation. These reclassifications have no effect on
previously reported net loss.
F-13
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--Organization
Organization and Going Concern
The Hartcourt Companies, Inc. ("Company" or "Hartcourt") was incorporated in
Utah in September 1983. 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's
goal is to create a financial portal in the Chinese market through the combined
services of Beijing-based UAC Stock Exchange Online Ltd. ("UAC") of which
Hartcourt owns 35%, and Hong Kong based Financial Telecom Ltd. ("FTL"), of which
Hartcourt owns a 58.53%.
As shown in the accompanying financial statements, the Company incurred net
losses of $7,862,468 and $21,295,653 for the years ended December 31, 1999 and
1998, respectively. Additionally, the Company's current liabilities exceeded its
current assets by $6,450,275 at December 31, 1999. These factors, as well as
negative cash flows from operations, the Company's inability to meet debt
obligations, and the need to raise additional funds to accomplish its
objectives, create substantial doubt about the Company's ability to continue as
a going concern.
As discussed in Note 2, the Company has taken certain restructuring steps, which
in the opinion of management, 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 (Note 18); 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 (Note 11).
The ability of the Company to continue as a going concern is dependent on its
success in fulfilling its plan. The financial statements do not include any
adjustments that might be necessary if the Company is unable to continue as a
going concern.
NOTE 2-- Investments and Business Acquisitions
Investment in Peony Gardens
In August 1996, the Company purchased an apartment complex located near Beijing,
China for $22 million from NuOasis International, Inc. (NuOasis). The purchase
price included the issuance of 4 million shares of common stock, valued at $10
million, and a promissory note to NuOasis for $12 million. The Note is due and
payable upon completion of construction and the date the certificate of
occupancy is received.
Under the deposit method of accounting in accordance with SFAS No. 66, the
promissory note for $12 million was being deferred until the complete
consummation of the Peony Gardens sale. Additionally, the 4 million shares of
common stock was recorded as a deposit at December 31, 1998. At December 31,
1997, the construction of the complex was halted due to the downturn in the
economy in Asia. The Company had the unilateral option of extending the date for
completion of the contract or rescinding the purchase contract.
F-14
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2-- Investments and Business Acquisitions (Continued)
On March 15, 1999, Hartcourt entered into an exchange agreement with Dragon King
Investment Services, Inc. ("Dragon King"), a wholly-owned subsidiary of NuOasis,
pursuant to which Hartcourt agreed to assign its rights under the Purchase and
Sale Agreement dated August 8, 1996 and any and all of its interest in the Peony
Gardens development located in a suburb of Beijing City, China 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. Subsequent to the transaction, the CEO of
Dragon King became a director of the Company.
On December 23, 1999, Hartcourt entered into an exchange agreement with GoCall,
Inc., ("GoCall"), pursuant to which GoCall agreed to exchange 1,000,000 shares
of its Convertible Preferred Stock (par value $5.00), convertible into 10 shares
of Common Stock (Restricted under Rule 144 for 12 months) for each share of
Convertible Preferred Share, for all of the marketable securities received by
Hartcourt from Dragon King, valued at approximately $5.2 million. In addition,
the Company has the option to appoint three of the five directors to the GoCall
Board. As part of the exchange of the securities with GoCall, Hartcourt withheld
marketable securities - 192,000 shares of common stock of ECS, valued at
$196,358 at the date of closing on December 29, 1999. The amount is recorded as
a payable to GoCall at December 31, 1999. Due to the GoCall shares being
restricted, the Company recorded a loss on the settlement of the transaction of
$2.5 million as of December 31, 1999. The Company also recorded a loss on the
transaction of approximately $200,000, which is included in selling, general and
administrative expenses. The Company has not appointed any directors as of the
date of this report.
Investment in Alaskan Gold Mines
On September 17, 1996, the Company purchased a 50% interest in 68 gold mining
claims encompassing 320 acres of land in the state of Alaska for $6 million. The
purchase was made by issuing 1,298,700 shares of the Company's common stock.
Under the deposit method of accounting in accordance with SFAS No. 66, the
1,298,700 shares of common stock was recorded as a deposit at December 31, 1998
pending a formal geological survey of the land. In March 1999, the Company
entered into a rescission and settlement agreement with Capital, Mandarin and
Promed whereby, Mandarin and Promed returned 1.3 million shares of Hartcourt
common stock in exchange for the return of the interest in the claims. The net
result of the above transaction and the transactions below with Capital,
Mandarin and Promed resulted in an impairment to the assets at December 31, 1998
of $4,838,413.
Marketable Securities
On July 31, 1997, the Company entered into an agreement with Capital Commerce,
Ltd. (Capital) whereby Capital agreed to provide the Company $6,000,000 in free
trading securities for the purchase of Pego Systems, Inc. ("Pego") and the
formation of Electronic Components and Systems, Inc. ("ECS"). The agreement
stipulated that should the value of the stock received by the Company decrease,
Capital shall compensate the Company for such reduction by issuing additional
shares to equate to the total value of $6,000,000. In consideration for the
$6,000,000 in securities, the Company issued to Capital $4,000,000 in Series A
and $2,000,000 in Series B, both 9% convertible preferred stock (Note 12).
Dividends are declared and paid monthly at 9% per annum. Terms of this agreement
F-15
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2-- Investments and Business Acquisitions (Continued)
are over a ten year period. Due to the Company's inability to sell these
marketable securities, in March 1999, the Company entered into a rescission and
settlement agreement with Capital, Mandarin and Promed whereby Capital returned
all $4,000,000 of outstanding Series A and $2,000,000 of Series B convertible
preferred stock, plus the AB preferred stock issued by the Company as dividends.
The Company returned all unsold marketable securities with a book value of
$4,894,393, assigned a 7.35% ownership interest in ECS and issued 1.9 million
shares of the Company's common stock to an agent of Capital, who then assigned
1.3 million shares to Mandarin and Promed and assigned 600,000 shares to Pacific
Rim. Pacific Rim returned the shares to the Company in settlement of a
subscription receivable balance. The remaining balance of prepaid commissions in
conjunction with the original securities exchange totaling $547,557 were written
off in 1998. The Company recorded a settlement loss of $376,906 in 1999 in
connection with this transaction.
Purchase of Pego Systems, Inc.
On October 3, 1997, the Company purchased all the outstanding shares of Pego
Systems, Inc. (Pego). Payment terms of the transaction included a cash payment
of $500,000, the issuance of $450,000 of restricted common stock and 1,500
shares or $1,500,000 of Series C Redeemable Preferred Stock. (Note 12). Included
in the acquisition price is a covenant not-to compete. The excess purchase price
over the fair value of the net assets of $1,326,083 was recorded as goodwill. In
1998, the Company redeemed the Series C Preferred Stock.
Purchase of Electronic Components and Systems, Inc. and Pruzin Technologies,
Inc.
On October 28, 1997, the Company acquired Electronic Components and Systems,
Inc. (ECS) and Pruzin Technologies, Inc. through a tax-free reorganization. The
Company paid $250,000 in cash, issued a note for $250,000, issued 3,400 shares
of Series D 9% Convertible Preferred Stock (Note 12) and 2,500,000 shares of
common stock. The excess purchase price over the fair value of the net assets of
$8,010,307 was recorded as goodwill.
On October 21, 1998, James Pruzin, the selling shareholder and President of ECS,
formally requested a rescission of the October 28, 1997 acquisition, whereby,
the Company, through a wholly owned subsidiary, acquired ECS and Pruzin
Technologies, Inc. Mr. Pruzin alleged that he was authorized to request
rescission of the original transaction based on an alleged breach of the
acquisition agreement by the Company which the Company denied. On November 10,
1998, the Company and Mr. Pruzin entered into a memorandum of understanding,
whereby, he could reacquire ECS from the Company by returning all Hartcourt
common and preferred stock originally issued to him, making payment of
$1,850,000 to the Company during 1999, negotiate the return of Company's common
stock issued in the acquisition of Elan Manufacturing, Inc., and issue to the
Company 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 the Company. The Company
and Mr. Pruzin reached an agreement whereby Mr. Pruzin returned to the Company
2,000,000 shares of Hartcourt common stock representing 80% of the amount
originally issued, and 3,400 shares of Series D preferred stock. The Company
assigned to Mr. Pruzin a 30% ownership interest in ECS and reserved the right to
purchase 500,000 shares of Hartcourt common stock held by Mr. Pruzin at $1 per
share. As of December 31, 1999, the Company has not exercised its right to
purchase the shares. The Company recorded a settlement gain of $3,146,302 in
connection with this transaction during 1999.
F-16
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2-- Investments and Business Acquisitions (Continued)
Purchase of Elan Manufacturing, Inc.
On August 24, 1998, the Company through its ECS subsidiary, purchased all
outstanding shares of Elan Manufacturing, Inc. (Elan). Payment terms of the
transaction included issuance of 724,990 shares of Hartcourt common stock with a
guaranteed value of $.85 per share for total consideration of $616,240. The
excess purchase price over the fair value of the net assets which totaled
$892,642 was recorded as goodwill.
Purchase of Pacific Pneumatics, Inc.
On August 6, 1998, the Company through its Pego subsidiary, purchased all
outstanding shares of Pacific Pneumatics, Inc. (Pacific). Payment terms of the
transaction included $200,000 of cash and 9,796 shares of Company common stock
valued at $15,000. Included in the acquisition price was a covenant not-to
compete. The excess purchase price over the fair value of the net assets which
totaled $442,543 was recorded as goodwill.
Purchase of Assets of SM Technology, Inc.
On December 17, 1998, the Company through its ECS subsidiary, purchased a book
of business from SM Technology, Inc. (SM) in exchange for cash in the amount of
$10,001 and a note payable due to the majority shareholder of SM in the amount
of $350,000. The value of the intangible assets at the acquisition date was
$10,001. The excess purchase price over the fair value of the assets which
totaled $350,000 was recorded as goodwill.
Enova Holdings, Inc.
Effective February 1, 1999, pursuant to a Share Purchase Agreement, the Company
acquired one (1) share of common stock of Enova Holdings, Inc., a Nevada
corporation (Enova) representing 100% of the total issued and outstanding
capital stock of Enova, making Enova a wholly-owned subsidiary. Effective March
1, 1999, the Company and Enova executed an Exchange Agreement (the "Enova
Agreement") whereby, the Company exchanged all of its ownership in two
subsidiaries, Pego and ECS, collectively, the "subsidiaries", for 5,213,594
additional shares of common stock of Enova. On March 24, 1999, the Company
entered into a Distribution Agreement pursuant to which the Company agreed to
distribute to all shareholders of record of The Hartcourt Companies, Inc. on
March 31, 1999, all of the 5,213,595 shares of common stock of Enova and to
file, within a reasonable period of time following such distribution, a
Registration Statement on Form 10-SB to cause the distributed shares of Enova to
be registered under the Securities Exchange Act of 1934. As a result of the
Share Purchase Agreement, the Enova Agreement and the Distribution Agreement,
each shareholder of record of the Company on March 31, 1999 received one (1)
share of Enova for every four (4) shares owned of the Company. Following the
distribution of the Enova shares, both the Company and Enova will continue to
operate as separate companies. However, the Board of Directors of Enova includes
directors from Hartcourt.
F-17
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2-- Investments and Business Acquisitions (Continued)
Purchase of Financial Telecom Limited (Note 6)
On August 17, 1999, Hartcourt entered into a stock purchase agreement with FTL,
to purchase 4,964,990 shares of common capital stock, representing 58.53% of the
total common capital stock outstanding. The purchase price was agreed to be
HK$4.713 per share for a total consideration 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
cash payments amounting to $801,860, issuing 1,500,000 shares of its common
stock and recording a payable of $797,140. 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 on February 28, 1999 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 an additional amount payable to FTL.
Investment in Beijing UAC Stock Exchange Online Co. Ltd.
On June 20, 1999, Hartcourt entered into an agreement with Beijing UAC Stock
Trading Online Co. Ltd. ("UAC Stock") to form a joint venture company under the
laws of the People's Republic of China. The name of the joint venture company is
Beijing UAC Stock Exchange Online Co. Ltd. ("UAC"). Under the terms of the
agreement, for a 35% interest in UAC, Hartcourt agreed to invest $1.0 million in
UAC, pay $1.7 million to the owners of UAC Stock and transfer 1,000,000 common
shares of Hartcourt to UAC, of which 200,000 common shares are to be used to pay
UAC Stock for an existing loan to the owner of UAC Stock of $200,000 and 800,000
common shares to be recorded as loan from Hartcourt to UAC. On August 9, 1999,
Hartcourt and UAC agreed to convert the loan of $200,000 into an option to
purchase an additional 15% interest in UAC from UAC Stock. The option to convert
the loan into an additional 15% interest in UAC is contingent upon Chinese laws
and regulations governing foreign ownership of Chinese companies. As of December
31, 1999, Hartcourt has not exercised its option to convert the loan for the
additional 15% interest in UAC and Harcourt has not issued any of the 1,000,000
shares. Additionally, the Company has payables in the amount of $87,112 to UAC
and $1,868,000 to the owner of UAC Stock as of December 31, 1999.
F-18
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2-- Investments and Business Acquisitions (Continued)
<TABLE>
<CAPTION>
The following is a summary of investments at December 31, 1998 and 1999:
December 31, December 31,
1998 1999
----------------- ----------------
<S> <C> <C>
Investment in GoCall $ - $ 2,500,000
Investment in UAC - 2,858,286
Marketable securities 4,894,393 196,358
Peony Gardens 11,932,500 -
Alaskan Gold Mines 5,974,020 -
----------------- ----------------
Balance 22,800,913 8,054,644
----------------- ----------------
Impairments
Peony Gardens (6,932,500 ) -
Alaskan Gold Mines (4,838,413 ) -
----------------- ----------------
Total impairments (11,770,913 ) -
----------------- ----------------
Balance $ 11,030,000 $ 5,554,644
----------------- ----------------
</TABLE>
The following is a summary of the settlement (gain) loss at December 31, 1998
and 1999:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
----------------- ----------------
<S> <C> <C>
American Equities (Note 11) $ 664,770 $ 653,409
Capital, Mandarin and Promed (Note 2) 547,557 376,906
GoCall (Note 2) - 2,500,000
Pruzin (Note 2) - (3,146,302 )
----------------- ----------------
Total $ 1,212,327 $ 384,013
----------------- ----------------
</TABLE>
F-19
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3--NOTES RECEIVABLE
Notes receivable consist of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
----------------- ----------------
<S> <C> <C>
Note receivable from former attorney Kevin Quinn, interest at 9% per
annum; due on demand; secured by real estate. Included in the
balance is accrued interest of $8,871 at December 31, 1999 and
1998. The note has been fully impaired at December 31, 1999. $ 91,523 $ -
Note receivable from American Equities, non-interest bearing,
payable upon demand; unsecured. - 225,000
Note receivable from individual, non-interest bearing, payable upon
demand; unsecured. - 3,800
----------------- ----------------
Total $ 91,523 $ 228,800
----------------- ----------------
</TABLE>
F-20
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4-- Related Party Transactions
Related party loans receivable consist of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
----------------- ----------------
<S> <C> <C>
Loan to officer of Hartcourt, non-interest bearing; due on demand;
unsecured. $ 142,522 $ 58,222
Note receivable from Pego Systems, non-interest bearing, payable
upon demand; unsecured. - 50,000
----------------- ----------------
Total $ 142,522 $ 108,222
----------------- ----------------
</TABLE>
During 1998, the Company issued 377,857 shares of common stock valued at
$196,501 to employees and the Board of Directors of the Company. The common
stock was valued at the fair market value of the stock on the date of issuance
and the amount was charged to operations.
During 1999, the Company issued 910,833 shares of common stock valued at
$1,004,045 to employees and the Board of Directors of the Company. The common
stock was valued at the market price of the stock on the date of the Board of
Directors minutes and the amount was charged to operations.
During 1999, the Company issued 1,000,000 options to a director with an exercise
price of $0.50. The market price at the date of issuance was $1.28. The
difference of $780,000 was charged to operations. The options were exercised in
1999.
During 1999, the Company issued 100,000 restricted common shares to Enova to
satisfy its debt to Pego Systems of $1,058,642 and in exchange for 35,000 common
shares of ECS.
NOTE 5-- Property and Equipment
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31,
1999
----------------
<S> <C>
Computer and transmission equipment $ 2,508,986
Building 459,237
Furniture and fixtures 158,589
Office equipment and computers 576,663
Leasehold improvements 17,192
----------------
3,720,667
Less accumulated depreciation and amortization (2,905,582 )
----------------
Property and equipment, net
$ 815,085
----------------
</TABLE>
F-21
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6-- Intangibles
Intangibles are summarized as follows:
<TABLE>
<CAPTION>
December 31,
1999
----------------
<S> <C>
Goodwill - FTL $ 2,262,598
Less accumulated amortization (56,565 )
----------------
Intangibles, net $ 2,206,033
----------------
</TABLE>
Goodwill consists of amounts paid in excess of the fair value of the net assets
in the acquisitions.
Consideration paid for FTL:
<TABLE>
<CAPTION>
October 4,
1999
----------------
<S> <C>
Cash $ 1,638,706
Hartcourt common shares 1,638,706
----------------
$ 3,277,412
----------------
Fair value of net assets received:
October 4,
1999
----------------
Cash $ 1,096,036
Accounts receivable and prepaids 1,160,414
Inventory 123,194
Investment 1,401,000
Property and equipment, net 841,827
Accounts payable and accruals (994,511 )
Other receivables (1,894,123 )
----------------
1,733,837
Minority interest (719,023 )
----------------
1,014,814
----------------
Goodwill 2,262,598
----------------
$ 3,277,412
----------------
</TABLE>
Pro forma unaudited information assuming the acquisition of FTL had occurred as
of January 1, 1998, is not provided as the proforma amounts would not be
significantly different than the Company's historical results.
F-22
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7--DISCOUNTINUED OPERATIONS
During March 1999, the Company disposed of Hartcourt Investments and Hartcourt
Pen and spun-off Pego and ECS, the "subsidiaries." As a result the Company
recorded a loss of $7,759 in connection with the disposal of Hartcourt
Investments and Hartcourt Pen and a dividend of $3,119,944 in connection with
the spin-off of Pego and ECS (Note 2). The results of operations for 1998 and
the first two months of 1999 of the subsidiaries have been classified as
discontinued operations in the financial statements.
Information relating to the operations of the subsidiaries for the years ended
December 31, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
Two Months
Ended
February 29,
1998 1999
----------------- -----------------
<S> <C> <C>
Net revenue $ 23,282,452 $ 2,822,596
Expenses 30,122,579 3,243,406
----------------- -----------------
Loss from discontinued operations (6,840,127 )
$ $ (420,810 )
----------------- -----------------
</TABLE>
The assets and liabilities of the subsidiaries have been reclassified as net
assets of discontinued operations and are in the accompanying consolidated
balance sheet as of December 31, 1998 as follows:
<TABLE>
<CAPTION>
<S> <C>
Assets
Cash $ 365,619
Accounts receivable 3,175,305
Inventory 2,613,560
Notes receivable 10,000
Prepaid expenses 44,713
Due from related parties 33,385
Property and equipment 4,262,120
Intangibles 5,198,033
Other assets 18,423
----------------
Total 15,721,158
----------------
Liabilities
Accounts payable and accrued liabilities 3,150,566
Line of credit 1,502,609
Notes payable 2,449,630
Capital lease obligations 1,070,964
Payables to related parties 607,778
----------------
Total liabilities 8,781,547
----------------
Net assets $ 6,939,611
----------------
</TABLE>
F-23
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8-- Notes Payable
Notes payable are summarized as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
----------------- ----------------
<S> <C> <C>
Note payable, bank, monthly principal and interest payments of
$8,413 including interest at the bank's prime rate plus 2.5% per
annum, 11% at December 31, 1999; due May 2009; secured by
building $ - $ 619,183
Trade facilities, bank, monthly interest payments at the bank's
prime rate plus 4.5% per annum, 13% at December 31, 1999;
secured by substantially all assets of FTL with a personal
guarantee from a shareholder - 576,362
Note payable, bank, monthly principal and interest payments of $851
including interest at the bank's prime rate plus 2.5% per annum,
11% at December 31, 1999; due August 2001, secured by building - 62,637
Other 25,000 -
----------------- ----------------
25,000 1,258,182
Less current portion (25,000 ) (649,998 )
----------------- ----------------
Notes payable, net of current portion $ - $ 608,184
----------------- ----------------
</TABLE>
The following is a summary of principal maturities of notes payable:
<TABLE>
<CAPTION>
Year ending December 31, Amount
-----------------
<S> <C>
2000 $ 649,998
2001 46,067
2001 51,525
2002 57,630
2003 64,458
Thereafter 388,504
-----------------
Total $ 1,258,182
-----------------
</TABLE>
The Company was delinquent on payments of the notes payable at December 31,
1999.
F-24
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9-- PAYABLES TO RELATED PARTIES
Payables to related parties are summarized as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
----------------- ----------------
<S> <C> <C>
Payable to owner of UAC $ - $ 1,868,000
Payable to UAC - 87,112
Payable to shareholder of FTL - 502,385
Payable to Pego 991,081 -
Payable to shareholder 100,000 -
----------------- ----------------
Total $ 1,091,081 $ 2,457,497
----------------- ----------------
</TABLE>
NOTE 10-- Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities are summarized as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
----------------- ----------------
<S> <C> <C>
Accrued wages $ - $ 3,379,788
Accrued brokers fees - 57,000
Accrued professional fees - 159,851
Other current liabilities 32,951 476,865
----------------- ----------------
$ 32,951 $ 4,073,504
----------------- ----------------
</TABLE>
NOTE 11-- Commitments and Contingencies
Operating Leases
The Company leases its facilities under long-term, non-cancelable lease
agreements expiring at various dates through June 2004. The noncancelable
operating lease agreements provide that the Company pays property taxes,
insurance and certain operating expenses applicable to the leased premises. Rent
expense for the years ended December 31, 1999 and 1998 was $105,611 and
$48,842, respectively.
The future minimum annual lease payments required under the operating leases are
as follows:
Year Ending December 31,
2000 $ 84,020
2001 84,020
2002 61,894
------------
Total future lease payments $ 229,934
------------
F-25
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11-- Commitments and Contingencies (Continued)
Employment Agreement
The Company is obligated under an employment contract with its chief executive
officer ("Executive") to provide salary, bonuses, and other fringe benefits
through December 31, 2001. The term of the contract will be automatically
extended for an additional term of three (3) years, unless the Company or the
Executive gives a written notice to the other party at least 90 days before the
expiration of the term remaining. Minimum salary payments under the contract
currently amount to $250,000 per year. Payments to the Executive will be made in
equal monthly installments. In the event the Company does not have sufficient
cash flow to pay compensation, the Executive will accept Hartcourt's restricted
common shares for the same amount of compensation, share price to be calculated
at 50% of the market trading bid price on January 1st of the year of employment.
Compensation expense reflected in the accompanying financial statements amounted
to $3,379,788 and $200,000 for the years ended December 31, 1999 and 1998,
respectively. The Company issued 213,333 restricted common shares to the
Executive in 1999 for 1998's salary of $200,000. The Company issued 1,551,887
restricted common shares to the Executive in 2000 for 1999's salary of $225,000.
Consulting Agreements
On December 30, 1996, the Company entered into a consulting agreement with
American Equities, LLC (American Equities), a California Limited Liability
Company which expires on December 31, 2001. Pursuant to the terms of the
agreement, the Company issued 1,000,000 common shares at $1.50 per share as an
advance against future fees to be earned by American Equities. The Company also
advanced 300,000 common shares at $0.50 per share to American Equities for
future operating expenses.
On September 3, 1998, American Equities filed suit against the Company for
breach of contract.
The Company denied that it had breached any contract with American Equities and
filed a cross-complaint for fraud and non-performance against American Equities
and additional cross-defendants. In March 1999, as settlement of these matters,
the parties agreed that all fees paid to American Equities were earned and
American Equities received a 27.65% interest in ECS. Accordingly, prepaid
expenses amounting to $664,770 were written-off to operating expenses for the
year ended December 31, 1998. The Company recorded an additional loss of
$653,409 in 1999 in connection with this transaction.
In connection with the agreement the Company also entered into a warrant
agreement with American Equities (Note 12).
Investments
On October 20, 1999, Hartcourt signed a Joint Venture Agreement with Beijing
Innostar Hi-Tech Enterprises, Ltd. ("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
F-26
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11-- Commitments and Contingencies (Continued)
interest and $10.0 million by Hartcourt for 35% ownership interest. The profits
and losses of the joint venture company shall 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.
On November 29, 1999, Hartcourt signed a Term Sheet with eSAT, Inc. ("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 antidilution 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 is expected to start in late April 2000. If by April
30, 2000, eSAT does not 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.
On November 3, 1999, Hartcourt entered into an Investment Agreement with Swartz
Private Equity, LLC ("Swartz") which was subsequently amended on November 19,
1999. The Investment Agreement, as amended, entitles the Company to issue and
sell its common stock to Swartz for up to an aggregate of $35 million from time
to time during the three-year period ending on November 3, 2002. Each election
by the Company to sell stock to Swartz is referred to as a put right.
In order to invoke a put right, the Company must have an effective registration
statement on file with the Securities and Exchange Commission registering the
resale of the shares of the Company's common stock that may be issued as a
consequence of the exercise of that put right. The number of common shares sold
to Swartz may not exceed the lesser of (i) 15% of the aggregate daily reported
trading volume during a period that begins on the business day immediately
following the day the Company exercises the put right and ends on and includes
the day that is 20 business days after the date of exercise of the put right, or
(ii) 9.9% of the total number of shares of Hartcourt common stock that would be
outstanding upon completion of the put.
For each share of Hartcourt common stock, Swartz will pay the Company the lesser
of the market price for such share, minus $.10, or 91% of the market price for
the share.
Within five business days after the end of each pricing period, the Company is
required to issue and deliver to Swartz a warrant to purchase a number of shares
of Hartcourt common stock equal to 8% of the common shares issued to Swartz in
the applicable put. Each warrant will be exercisable at a price that will
initially equal 110% of the market price of Hartcourt common stock on the date
on which the Company exercised the put right. Each warrant will be immediately
exercisable and have a term beginning on the date of issuance and ending five
years thereafter.
F-27
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11-- Commitments and Contingencies (Continued)
Legal Proceedings
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 plantiff in that matter may be the
subject of a cross-complaint by Hartcourt, which will depend on the evidence
disclosed by documents Hartcourt has demanded be produced. The complaint alleges
that Hartcourt 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.
NOTE 12-- Capital Stock
The Company's Articles of Incorporation (Articles) authorize the issuance of
preferred stock. The Articles provide that the total number of shares of stock
which the Company shall have the authority to issue is 60,001,000, consisting of
50,000,000 shares of common stock, $0.001 par value, 1,000 shares of original
preferred stock having a par value of $0.01 per share (the Original Preferred
Stock); and 10,000,000 shares of preferred stock, having a par value of $0.01
per share (the Class A Preferred Stock).
In September and October 1997, the Company's Articles were amended to authorize
the issuance of Series A, B, C, D, and AB preferred stock. As amended, the
Articles provide that the total number of shares of preferred series A, B, C, D,
and AB stock are 4,000, 2,000, 1,500, 10,000, and 25,000, respectively.
Original Preferred Stock
Until December 31, 2010, with respect to the election of directors, holders of
Original Preferred Stock shall be entitled to elect the number of directors
which constitutes three-fifths (3/5ths) of the authorized number of members of
the Board of Directors and, if such three-fifths (3/5ths) is not a whole number,
then the holders of Original Preferred Stock shall be entitled to elect the
nearest higher whole number of directors that is at least three-fifths (3/5ths)
of such membership.
The holders of record of shares of Original Preferred Stock shall, at their
option, be entitled to convert each share of Original Preferred Stock into 1,000
shares of fully paid and non-assessable common stock. Such shares are owned by
the President of the Company.
F-28
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12-- Capital Stock (Continued)
In the event of liquidation, dissolution, or winding up of the affairs of the
Company whether voluntary or involuntary, the holders of record shall be
entitled to be paid the full par value of Original Preferred Stock, and no more.
The holders of shares of Original Preferred Stock shall not be entitled to
receive any dividends.
Class A Preferred Stock
The 10,000,000 shares of authorized and unissued Class A Preferred Stock may be
split with such designations, powers, preferences and other rights and
qualifications, limitations and restrictions thereof as the Company's Board of
Directors elects for a given series. No shares have been issued.
Series A 9% Convertible Preferred Stock
Non-voting convertible preferred stock, 4,000 shares authorized with a stated
value of $1,000 per share. Holders of shares shall be entitled to receive
cumulative dividends at a rate equal to 9% per annum. Series A convertible
preferred stock is subject to redemption at any time, at the option of the
Company, at a redemption price equal to $1,000 per share plus accrued and unpaid
dividends to the date of redemption. Holders of Series A convertible preferred
stock may convert their shares into either (A) a number of shares of fully paid
and non-assessable common stock of Electronic Components Systems, Inc. equal to
.0075% of total outstanding shares of ECS or (B) shares of fully paid and
non-assessable common stock of the Company. Dividends are to be declared and
paid monthly. Dividends totaling $90,000 were accrued at December 31, 1997 for
Series A. During 1998, Series AB preferred stock was issued as payment of
accrued dividends. In March 1999, the Series A convertible preferred stock was
returned and canceled (Note 2).
Series B 9% Convertible Preferred Stock
Non-voting convertible preferred stock, 2,000 shares authorized with a stated
value of $1,000 per share. Holder of shares shall be entitled to receive
cumulative dividends at a rate equal to 9% per annum. Series B convertible
preferred stock is subject to redemption at any time, at the option of the
Company, at a redemption price equal to $1,000 per share, plus accrued and
unpaid dividends to the date of redemption. Holders of Series B convertible
preferred stock may convert their shares into either (A) a number of shares of
fully paid and non-assessable shares of common stock of Pego Systems, Inc., a
California Corporation, equal to .015% of total outstanding shares of Pego or,
(B) shares of fully paid non-assessable common stock of the Company. Dividends
are to be declared and paid monthly. Dividends totaling $45,000 were accrued at
December 31, 1997 for Series B. During 1998, Series AB preferred stock was
issued as payment for accrued dividends. In March 1999, the Series B convertible
preferred stock was returned and canceled (Note 2).
Series C Redeemable Preferred Stock
Non-voting, non-participating redeemable preferred stock, 1,500 authorized, with
a par value of $1,000 per share. Series C preferred stock is junior to the
original preferred stock and any other class or series of capital stock of the
Company which are specifically ranked senior (senior securities). Series C
preferred stock is redeemable at any time, at the discretion of the Company, at
a redemption price of $1,000 per share. During 1998, the Company redeemed the
stock for $1,300,000 in cash and 200,000 shares of Company common stock valued
at $1 per share.
F-29
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12-- Capital Stock (Continued)
Series D Convertible Preferred Stock
Voting convertible preferred stock, 10,000 shares authorized with a stated value
of $1,000 per share. Holders of Series D Convertible Preferred Stock shall be
entitled to receive, when declared by the Board of Directors, dividends at par
with holders of the Company's common stock, as if the Series D Convertible
Preferred Stock had been converted into common stock on the record date for the
payment of dividend. Each outstanding share of Series D Convertible Preferred
Stock shall be convertible, at the option of its holder, at any time, into a
number of shares of common stock of the Company at a conversion rate equal to
$1,000 divided by the market price of the Company's common stock. In March 1999,
the Series D convertible preferred stock was returned and canceled (Note 2).
Series AB Convertible Preferred Stock
Non-voting convertible preferred stock, 25,000 shares authorized with a stated
value of $100 per share. Series AB convertible preferred stock is subject to
redemption at any time, at the option of the Company, at a redemption price
equal to $100 per share plus accrued interest and unpaid dividends to the date
of redemption. Holders of Series AB convertible preferred stock may convert
their preferred shares into common stock. During 1998, the Company issued 4,050
shares of Series AB convertible preferred stock in payment of dividends for
Series A and B convertible preferred stock. In March 1999, certain shares of AB
preferred stock were returned and canceled (Note 2).
In addition, pursuant to a Purchase Agreement with American Equities dated
September 9, 1999, (a) Hartcourt agreed to sell 500,000 shares of restricted
common stock valued at $0.60 per share. The terms of the Purchase Agreement
required American Equities to issue a promissory note in the amount of $225,000
to Hartcourt, payable at the rate of $75,000 per month, commencing on the 30th
day following the closing date, and shall pay the balance of the purchase price
to Hartcourt on the closing date. Hartcourt received $75,000 in cash on the
closing date and American Equities issued a promissory note for $225,000 dated
October 27, 1999, bearing no interest, payable in full on or before six months
from the execution date; (b) American Equities caused ECS to issue to Hartcourt
157,000 shares of ECS in full satisfaction of all outstanding claims of
Hartcourt against ECS; (c) Hartcourt permitted immediate transfer of 724,990
common shares of Hartcourt into freely tradable unrestricted shares, pursuant to
Rule 144 previously issued to Elan shareholders in connection with the purchase
of Elan on August 24, 1998. Hartcourt shall have no liability under the Elan
Indemnity. The terms of the agreement were complied by both Hartcourt and
American Equities.
NOTE 13-- Income Taxes
The Company has deferred tax assets for the tax effects of temporary differences
between financial and tax reporting for the years ended December 31, 1999 and
1998. The deferred tax assets consist primarily of net operating losses and
impairments of investments and goodwill. The Company has established a 100%
valuation allowance against the deferred tax assets at December 31, 1999 and
1998, because management is unable to determine if it is more likely than not
that these net operating losses and impairments of investments and goodwill will
be realized.
F-30
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13-- Income Taxes (Continued)
Impairment of investments and goodwill are not deductible in 1998 or 1999 for
income tax purposes. Losses on investments for income tax purposes may be taken
in the year the respective transactions are completed. Goodwill is amortized
over fifteen years for income tax purposes or until the Company has disposed of
its ownership in the entity in which the goodwill relates.
The Company has Federal and State net operating loss carryforwards of
approximately $7,100,000 and $3,200,000, respectively. The regular net operating
loss carryforwards, which are approximately the same as the alternative minimum
tax net operating loss carryforwards, if not utilized, will expire in varying
amounts through 2019 and 2004, respectively for Federal and State. The
realization of any future income tax benefits from the utilization of net
operating losses may be limited. Federal and state tax laws provide that when a
more than 50% change in ownership of a company occurs within a three year
period, the net operating loss may be limited. It has not been determined if
such change has occurred.
NOTE 14-- Stock Option Plan and Warrants
Stock Option Plan
In April 1995, the Company adopted a stock option plan (the Plan) to attract and
retain qualified persons for positions of substantial responsibility as
officers, directors, consultants, legal counsel, and other positions of
significance to the Company. The Plan provides for the issuance of both
Incentive Stock Options and Non-Qualified Stock Options. The Plan, which is
administered by the Board of Directors, provides for the issuance of a maximum
of 2,000,000 options to purchase shares of common stock at the market price
thereof on the date of grant. Such options are generally exercisable over a 10
year period from the date of grant. Each option lapses 90 days after the
optionee has terminated his continuous activity with the Company, except that if
his continuous activity with the Company terminates by reason of his death, such
option of the deceased optionee may be exercised within one year after the death
of such optionee. Options granted under the Plan are restricted as to sale or
transfer. All options were granted at not less than fair value at the date of
grant and have terms of 10 years.
The following table summarizes the activity in the plan:
<TABLE>
<CAPTION>
Weighted
Number of Average
Shares Exercise Price
----------------- ----------------
<S> <C> <C>
Shares under option at January 1, 1998 - $ -
Granted 400,000 1.00
Exercised - -
Canceled - -
----------------- ----------------
Shares under option at December 31, 1998 400,000 $ 1.00
Granted 2,000,000 1.265
Exercised (2,000,000 ) 1.265
Canceled - -
----------------- ----------------
Shares under option at December 31, 1999 400,000 $ 1.00
----------------- ----------------
</TABLE>
F-31
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14-- Stock Option Plan and Warrants (Continued)
All stock options issued to employees have an exercise price not less than the
fair market value of the Company's common stock on the date of grant, and in
accordance with the accounting for such options utilizing the intrinsic value
method there is no related compensation expense recorded in the Company's
financial statements. Had compensation cost for stock-based compensation been
determined based on the fair value at the grant dates in accordance with the
method delineated in Statement of Accounting Standards No. 123, the Company's
net loss and loss per share for the year ended December 31, 1998, would have
been increased to the pro forma amounts presented below:
<TABLE>
<CAPTION>
1998
----------------
<S> <C>
Net loss:
As reported $ (21,295,653 )
Pro forma (21,683,133 )
Loss per share:
As reported $ (1.18 )
Pro forma (1.20 )
</TABLE>
Additional information relating to stock options outstanding and exercisable at
December 31, 1999 summarized by exercise price are as follows:
<TABLE>
<CAPTION>
Outstanding Exercisable
----------------------------------- ---------------------------------
Exercise Price Weighted Average Weighted Average
----------------------------------- ---------------------------------
Per Share Shares Life (Years) Exercise Price Shares Exercise Price
------------------ ------------ ---------------- ---------------- ------------ -------------------
<S> <C> <C> <C> <C> <C> <C>
$1.00 400,000 8.5 $1.00 400,000 $1.00
</TABLE>
During 1999, an individual exercised 1,000,000 stock options at $1.25. The
individual paid the Company $764,748. The remaining balance of $485,252 was
deemed uncollectible and written off as of December 31, 1999.
Warrants
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 at prices ranging from $0.30 to $2.10 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 nonassessable 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 the terms of 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.
F-32
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14-- Stock Option Plan and Warrants (Continued)
In connection with consulting services in 1999, the Company issued warrants to
purchase 350,000 shares at prices ranging from $1.25 to $1.50 which expire at
various dates through July 12, 2000. The warrants were issued at the fair market
value on the date of issuance.
In connection with the sale of 200,000 restricted shares, the Company issued
warrants to purchase 100,000 shares at $4.00, which expire on December 12, 2000.
The fair value of warrants issued was not significant.
NOTE 15-- Loss Per Share
The following reconciles amounts reported in the financial statements for the
years ended December 31, 1999 and 1998, respectively:
<TABLE>
<CAPTION>
1998
Income (loss) Shares Per-share
(Numerator) (Denominator) Amount
---------------- ---------------- ----------------
<S> <C> <C> <C>
Income (loss) from continuous operations $ (14,455,526 ) 18,061,430 $ (0.80 )
Income (loss) from discontinued operations (6,840,127 ) 18,061,430 (0.38 )
---------------- ---------------- ----------------
Income (loss) available to common stockholders -
basic earnings per share (21,295,653 ) 18,061,430 $ (1.18 )
Effect of dilutive securities - - -
---------------- ---------------- ----------------
Income (loss) available to common stockholders -
diluted earnings per share $ (21,295,653 ) 18,061,430 $ (1.18 )
---------------- ---------------- ----------------
1999
Income (loss) Shares Per-share
(Numerator) (Denominator) Amount
---------------- ---------------- ----------------
Income (loss) from continuous operations $ (7,433,899 ) 19,702,678 $ (0.38 )
Income (loss) from discontinued operations (428,569 ) 19,702,678 (0.02 )
---------------- ---------------- ----------------
Income (loss) available to common stockholders -
basic earnings per share (7,862,468 ) 19,702,678 (0.40 )
Effect of dilutive securities - - -
---------------- ---------------- ----------------
Income (loss) available to common stockholders -
diluted earnings per share $ (7,862,468 ) 19,702,678 $ (0.40 )
---------------- ---------------- ----------------
</TABLE>
F-33
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15-- Loss Per Share (Continue)
During 1999 and 1998, the Company had 1,650,000 and 2,000,000 warrants
outstanding, each convertible into one share of common stock. In addition,
during 1999 and 1998 the Company had convertible preferred stock outstanding
(Note 12), each share convertible into common stock. These instruments were not
included in the computation of diluted earnings per share for any of the years
presented, due to their antidilutive effects based on the net loss reported each
year.
NOTE 16-- Segment and Related Information
Segments
The Company adopted Financial Accounting Standards No. 131 (SFAS No. 131),
"Disclosures About Segments of an Enterprise and Related Information."
The Company currently operates in one business segment. Total revenues of that
segment are approximately $379,000 for the three months ended December 31, 1999
with a net loss of $138,000. Total assets of the segment are approximately
$2,735,000.
NOTE 17-- Supplemental Cash Flow Information
Supplemental cash flow information:
<TABLE>
<CAPTION>
1998 1999
----------------- ----------------
<S> <C> <C>
Cash paid for interest and income taxes:
Interest $ 380,022 $ 103,709
Income taxes 943 -
Noncash investing and financing activities:
Preferred stock issued for dividends 270,000 -
Preferred stock issued for accrued expenses 135,000 -
Preferred stock converted into common stock 200,000 -
Stock subscription receivable 275,000 -
Stock issued to related party in settlement of debt - 1,075,000
Dividend of Enova stock - 3,119,944
</TABLE>
F-34
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18-- Subsequent Events
On January 26, 2000, Hartcourt completed a private placement with PYR Management
LLC ("PYR") of 227,445 Units and a Class II Warrant to PYR for $3,000,000
pursuant to a Regulation D Subscription Agreement. Each Unit consists of one
share of Hartcourt common stock and a Class I Warrant to purchase one additional
share of Hartcourt common stock at the Unit Price, subject to adjustment upon
certain events. The Class II Warrant entitles PYR to purchase additional shares
of Hartcourt common stock at par value solely upon the occurrence of certain
events. Hartcourt has also agreed to file a registration statement to register
the shares of Hartcourt common stock, including the shares issuable upon
exercise of the Class I Warrant and Class II Warrant, under the Securities Act
of 1933 for sale by PYR. As part of the Agreement, Hartcourt granted PYR an
option to purchase up to $5,000,000 of additional Units and a Class II Warrant
within five trading days after the effectiveness of the registration statement.
On January 27, 2000, Hartcourt received $2,743,000 from PYR to be used for
working capital requirements of Hartcourt.
During March 2000, American Equities exercised 1.2 million warrants, pursuant to
the terms of the Warrant Agreement dated December 30, 1996 (Note 14), in a
cashless transaction and converted the 1.2 million warrants into 1,070,073
Hartcourt common shares.
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. The closing is expected in April 2000.
No assurance can be given that Term Sheets or Letters of Intent will result in
actual agreements.
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 detail terms have been reached and a
definitive agreement to form a joint venture company is expected to be signed by
April 30, 2000. No assurance can be given that Term Sheets or Letters of Intent
will result in actual agreements.
F-35
<PAGE>
Exhibit List
10.19 Agreement with Beijing UAC Stock Trading Online Co., Ltd.
10.19.1 Financial Statements of Beijing UAC Stock Exchange Online Co., Ltd.
for the period from October 18, 1999 (date of inception) to
December 31, 1999
10.20 Agreement with GoCall.com
10.21 FTL Stock Purchase Agreement
27.01 Financial Data Schedule
Exhibit 10.19 Agreement with Beijing UAC Stock Trading Online Co., Ltd.
Beijing UAC Stock Trade Online Co. Ltd.
( )
and
The Hartcourt Companies Inc.
Contractual Joint Venture Contract
June 30, 1999
Chapter 1 General Provisions
In accordance with the "Law of the People's Republic of China on Chinese-Foreign
Cooperative Joint Ventures" and other relevant Chinese laws and regulations,
Beijing UAC Stock Trade Online Corporation Limited and Hartcourt Companies Inc.,
adhering to the principle of equality and mutual benefit and through friendly
consultations, agree to jointly invest to set up a cooperative joint venture
enterprise in Beijing, the People's Republic of China. Both parties have entered
into this Contract on the terms and conditions set forth below.
Chapter 2 Parties
Article 1. The parties to this Contract are as follows.
Party A: Beijing UAC Stock Trade Online Co. Ltd.
Registered Address: Da Yuan Hotel, 1 Fu Yuan Men, Hai Dian District,
Beijing, China
Legal Representative: Shi Zhang
Position: President Nationality: China
Party B: Hartcourt Companies Inc.
Registered Address: 1198 E. Willow St Long Beach, CA. 90806, USA
Legal Representative: Alan V. Phan
Position: President Nationality: USA
<PAGE>
Chapter 3 Organizational Form
Article 2. In accordance with the "Law of the People's Republic of China on
Chinese-Foreign Cooperative Joint Ventures " and other relevant laws and
regulations of China, Party A and Party B agree to set up a contractual joint
venture company (hereafter referred to as the JV Company).
Article 3. The Chinese name of the Company shall be: The English name of the
Company shall be: UAC Stock Exchange Online Co. LTD.
The legal address of the Company shall be: B1005, Tsing Hua Xue Yan Office
Building, Hai Dian District Shuang Qing Road, Beijing, China
Article 4. The Company shall be a Chinese legal person. All activities of the
Company shall be governed and protected by the laws and relevant rules and
regulations of China.
Article 5. The names and the legal addresses of Party A and Party B are:
Party A: Beijing UAC Stock Exchange Online Co. Ltd.
Registered Address: B1005 Xue Yan Building, Tsing Hua Science Park,
Hai Dian District, Beijing 100084, China
Party B: Hartcourt Companies Inc.
Registered Address: 1198 E. Willow St Long Beach, CA. 90806, USA
Article 6. The cooperative joint venture company shall be organized as a limited
liability company. As such, the Company shall only be responsible for the
liabilities of up to the total amount of the total registered capital of the
Company. Subject to the foregoing, the profits, risks and losses of the Company
shall be shared by the parties in accordance with the provisions set forth in
the contract.
Chapter 4 Objectives, Scope and Scale of Production and Business
Article 7. The objective of the joint venture of the parties is, in keeping with
the desire of mutual benefiting, enhancing economic cooperation and technical
exchange, and develop China's electronic information industry, adopt advanced
and appropriate technology and scientific management method, manufacture
advanced and unique cooperatively produced products, achieve satisfactory
economic benefit for both parties.
<PAGE>
Article 8. The business scope of the JV Company shall be as follows: technology
development, service, consulting, transferring and training; computer software
development; computer communication network project; sales of computer
peripheral equipment, mechanical and electronic equipment, electronic device,
hardware and electric equipment, and air conditioner.
Article 9. The business scale of the JV Company shall be small-scale technology
intense software production company.
Chapter 5 Registered Capital and Conditions for Cooperation
Article 10. The registered capital of the Company shall be USD 1,000,000, (one
million dollars) of which Party B shall contribute USD 1,000,000. Party A will
contribute its software, technology and market share. Party A and Party B will
own 65% and 35% of the JV Company, respectively.
Article 11. Within one month from the date the JV company obtains its business
license, both parties shall transfer their respective contribution, cash and
assets, according to the terms of this contract, to the JV company in one
installment.
Article 12. When both parties have made their respective contributions in full,
a Certified Public Accountant in China shall be appointed by the Company to
verify the contributions and issue a verification report. Thereupon, the Board
of the Company shall issue a Certificate of Investment to each party pursuant to
such report.
Article 13. During the period of joint venture, no party should reduce its cash
and assets contribution in the JV company.
Article 14. If both parties believe it is necessary, after the board makes the
decision and receives approval from the authority who approved the joint
venture, the JV company can increase registered capital.
Article 15. In case any party intends to assign all or part of its capital
contribution to a third party, consent shall be obtained from the other party.
The assignment shall be submitted to the original approval authority for
examination and approval. Upon receipt of the approval of the original approval
authority the Company shall register the change in ownership with the relevant
governmental authorities. After each such assignment, the Company shall cancel
the original Investment Certificate issued to the Party which has assigned its
capital contribution and issue a new Investment Certificate to show the new
ownership interest in the Company.
Article 16. When one party to the Company assigns all or part of its investment,
the other party shall have the preemptive right to purchase the same.
<PAGE>
Chapter 6 Loan Application
Article 17. Among the JV company's total investment, besides the contribution
from both parties, if a loan is necessary due to insufficient fund in the
business operation, the JV company can apply loan from financial institutions.
The Party A may assist the loan application if necessary.
Article 18. Both parties shall guarantee the loan according to their percentage
of ownership in the JV company.
Chapter 7 Responsibilities of the Parties
Article 19. In addition to its other obligations under this Contract, Party A
shall be responsible for the following matters: (1) to apply with the relevant
departments in China for approval, registration, business license and other
matters concerning the establishment of the Company; (2) to apply with the land
administration for obtaining the land use right for the Company; (3) to provide
the investment and conditions for cooperation as stipulated in the Article 10 in
this contract; (4) to assist the Company in applying for and putting into place
basic facilities for such things as water supply, electricity supply,
transportation, etc.; (5) to assist foreign personnel and staff in applying for
entry visa, work permits and in handling their travel arrangements, etc.; (6) to
assist the Company to sell the cooperatively produced products within China; and
(7) to be responsible for other matters entrusted by the Company and accepted by
Party A.
Article 20. In addition to its other obligations under this contract, Party B
shall be responsible for the following matters: (1) to provide capital
investment as stipulated in the Article 10 in this contract; (2) to assist Party
A personnel with entry visa formalities for them to visit and receive training
outside of China, and arrange for living accommodations and suitable working and
studying conditions; (3) to provide advanced business management experience,
knowledge, and assist the Company in establishing a quality assurance system;
(4) to be responsible for other matters entrusted by the Company and accepted by
Party B.
Chapter 8 Board of Directors
Article 21. The date of issuance of the business license of the Company shall be
the date of the establishment of the Board of Directors of the Company.
<PAGE>
Article 22. The Board of Directors shall be composed of three Directors, of
which two shall be appointed by Party A and one shall be appointed by Party B.
The Chairman of the Board shall be appointed by Party A and its Vice-chairman
shall be appointed by Party B. The term of office for the Directors, Chairman
and Vice-chairman is four years. Their term of office may be renewed if
reappointed by the appointing party.
Article 23. The Board of Directors shall be the highest authority of the
Company. It shall discuss and decide all major issues including:
1. Make decision to hire president, chief engineer, accountant and other
senior employees;
2. Approve important report submitted by the president;
3. Approve year end financial statement, budget, yearly profit distribution; 4.
Increase the JV company's registered capital, asset guarantee, one party's
assign of its all or partial ownership in the JV company;
5. Make decision to set up branch offices;
6. Revise the joint venture contract and the article of the company;
7. Discuss and decide the JV company's cease of production, termination or
merger with another organization;
8. Be responsible for the liquidation upon the termination of the joint
venture or at the end of the joint venture period;
9. Other important matters that should be decided by the board.
Article 24. The Chairman of the Board shall set the agenda after consultation
with the Vice-chairman and shall be responsible for convening and presiding over
such meetings. The meeting record shall be made in Chinese and shall be filed
with the Company. The meeting record shall be signed by all attending directors.
If a proxy attends the meeting, the proxy shall sign the record.
Article 25. Should a Director be unable for some reason to participate in the
Board Meeting, he shall issue a power of attorney and entrust a proxy to
participate in the meeting with the same rights and powers as the Director
issuing the power of attorney. If a Director fails to participate or to entrust
another to participate, he will be deemed as having waived such right.
Article 26. The minimum number of people attending the board meeting shall be
two-third of the total number of directors. If less than two-third people
attending, any resolution passed in the meeting is void.
Article 27. The Chairman of the Board is the legal representative of the
Company. Should the Chairman be unable to exercise his responsibilities for some
reasons, he shall authorize the Vice-chairman or any other Directors to
represent the Company temporarily.
<PAGE>
Chapter 9 Distribution of Profits, Losses and Risks (Fees)
Article 28. The profits, risks and losses will be distributed according to the
following proportion: Party A: 65%, Party B: 35%
Article 29. Within the term of the Company, it is agreed that the risks and
losses will be jointly shared by both parties according to the following
proportion: Party A: 65%, B: 35%, no matter how much profit Party A and Party B
have obtained or will obtain respectively.
Chapter 10 Joint Venture Term
Article 30. The term of the JV Company shall be 15 years commencing from the
date of issuance of the Company's business license.
Article 31. By agreement of Party A and Party B, application for extension of
the term of the Company may be submitted to the Approval Authority no less than
six (6) months prior to the expiration of the term. The term may be extended
subject to approval of the Approval Authority and procedures for amending the
registration shall be carried out with the relevant office of the administration
for industry and commerce.
<PAGE>
Chapter 11 Termination and Liquidation
Article 32. The Contract shall terminate upon the expiration of the joint
venture term, unless extended pursuant to Article 31 of this Contract. In
addition to this, and to any other reasons stated elsewhere herein, the
following shall constitute the reason for termination of this contract before
the term of the expiration of this contract. (1) if one party materially
breaches this Contract; (2) if the cumulative losses of the Company exceed an
amount acceptable to the parties; (3) if, at any time after the Company
commences manufacturing the cooperatively produced product, and after the
parties have made best efforts, Party A and Party B confirm that a performance
level sufficient to warrant continued operations cannot or will not be met; (4)
if the conditions or consequences of force majeure prevail for a period in
excess of three (3) months and the parties have been unable to find an equitable
solution; or (5) for other reasons provided for in this Contract or in relevant
laws and regulations of China.
Article 33. Upon the expiration of the term or termination in advance, the Board
of Directors shall promptly formulate procedures and principles for liquidation
and shall appoint a committee ("the Liquidation Committee") to assess and
liquidate the Company's remaining assets in accordance with the applicable laws
and regulations and the principles set out below: (1) the Liquidation Committee
shall be made up of two members, of which one members shall be appointed by
Party A and one members by Party B. Members of the Liquidation Committee may,
but need not be, members of the Board of Directors. Each party may also appoint
specialists, such as accountants and lawyers, to be members of the Liquidation
Committee. The Board of Directors shall report the formation of the Committee to
the JV company and to appropriate authorities; (2) the Liquidation Committee
shall have the power to represent the Company in instituting or responding to
legal actions (including arbitration); (3) the Liquidation Committee shall
conduct a thorough examination of the Company's assets and liabilities. Based
upon such valuation, the Liquidation Committee shall develop a liquidation plan
that, if approved by the Board of Directors, shall be executed under the
Liquidation Committee's supervision; (4) the liquidation expenses, including
remuneration to members of the Committee and advisors to the Liquidation
Committee, shall be paid out of the Company's assets in priority to the claims
of other creditors; (5) after the liquidation of the Company's assets and
settlement of all of its outstanding debts, the balance of its assets shall be
paid over to the parties in the proportion as follows: Party A 65%, Party B 35%;
(6) on Completion of all liquidation procedures, the Liquidation Committee shall
submit a final report approved by the Board of Directors to the original
approval authority, and apply with the local office of the administration for
industry and commerce for cancellation of the registration. Chapter 12 Insurance
<PAGE>
Article 34. The Company shall at all times during the term of the joint venture
effect and maintain full and adequate insurance against loss or damage by fire
and such other risks as are customarily issued in connection with the operation
of this type of Company.
Article 35. Insurance policies of the Company on various kinds of risks shall be
underwritten with the insurance company(ies) in China. Types, the value and
duration of insurance shall be discussed and decided by the Board of Directors
in accordance with the stipulations of the insurance company.
Chapter 13 Settlement of Dispute
Article 36. Any dispute arising during the implementation of this contract or
related to this contract should be resolved through friendly discussion among
the joint venture parties. If, within 15 days from the date any party notified
the other party in writing the existence of the dispute according to this
Article, the dispute can not be settled, the dispute should be submitted to
arbitration committee for arbitration according to arbitration procedure. The
arbitration is final and bonding to both parties.
Chapter 14 Liability for Breach of Contract
Article 37. Should either party fail to contribute in full its contribution in
accordance with this Contract, the breaching party shall pay to the other party
5% of the amount the breaching party failed to pay, starting from the first
month after exceeding the time limit; should either party fail to provide its
conditions for cooperation in accordance with this Contract, the breaching party
shall pay to the other party 5% of the total capital of the Company from the
first month after exceeding the time limit.
Article 38. A thirty (30) day grace period shall be allowed before the penalty
is applied. Said penalties shall accrue hereunder for a maximum period of three
(3) months after which the party not in default shall have the right to
terminate this Contract as provided in Article 32
Article 39. Should all or part of the Contract and its appendices be unable to
be fulfilled owing to the fault of one party, the party shall bear all the
responsibility. But if the other party fails to take appropriate measure to
prevent further lose, the other party has no right to demand compensation for
the further lose from the breaching party. Should it be the fault of both
parties, they shall bear their responsibilities respectively.
<PAGE>
Chapter 15 Governing Law
Article 40. The draft, effect, explanation, implementation, and settlement of
dispute of this contract are all governed by the laws of the People's Republic
of China.
Chapter 16 Language
Article 41. This contract is written in both Chinese and English. If the two
versions do not agree, the Chinese version shall be considered accurate.
Chapter 17 Effectiveness of the Contract and Miscellaneous
Article 42. The Contract and its appendices shall come into force from the date
of approval of the examination and approval authority.
Article 43. Any amendment of this Contract or its appendices shall come into
force only after the written agreement signed by Party A and Party B and
approved by the original examination and approval authority.
Article 44. Failure or delay on the part of either party hereto to exercise any
right, power or privilege under this Contract, or under any other agreement
relating hereto, shall not operate as a waiver thereof; nor shall any single or
partial exercise of any right, power or privilege preclude any other future
exercise thereof.
Article 45. Any notice or communication provided for this Contract by either
party to the other, if it is send via telegram, facsimile and it is relevant to
each party's rights and responsibilities, shall be confirmed in writing in
Chinese or English by registered airmail letter, promptly transmitted or
addressed to the appropriate party. All notices and communications shall be sent
to the appropriate address set forth below, until the same is changed by notice
given in writing to the other party or the parties, as the case may be.
<PAGE>
Party A
Address: B 1005, Xue Yan Building, Qing Hua Science Park
Hai Dian District, Beijing 100084, China
Telephone: 62770797
Fax: 62780359
Attention: Zhang Shi
Party B
Address: 1198 E. Willow St Long Beach, CA. 90806, USA
Telephone: 562 426 9796
Fax: 562 490 0633
Attention: Dr. Alan Phan
Article 46. The Appendices attached hereto are hereby made an integral part of
this Contract and are equally binding on this Contract.
Article 47. Each of the parties hereto has caused this Contract to be executed
by its duly authorized representatives on the 2nd July 1999 in China.
Representative of Party A Representative of Party B
/s/ Zhang, Shi /s/ Alan V. Phan
- ----------------------------- ---------------------------------------
Zhang, Shi Alan V. Phan
<PAGE>
JOINT VENTURE AGREEMENT
Two Parties of This Agreement:
Party A: The Hartcourt Companies, Inc.
Address: 1198 E. Willow St Long Beach, CA. 90806 USA
Authorized Representative: Dr. Alan V. Phan, Chairman and CEO
Party B: Zhang, Shi (??)
Owner of Beijing UAC Stock Trade Online Co. Ltd.
( )
Address: Tong Fang Plaza, Building B,
Tsing Hua Science and Technology Park,
Beijing 100084
WHEREAS:
1. The two parties agreed to form a joint venture company (herein
referred to as the JV company) operating under the laws of the
People's Republic of China. The Chinese name of the JV company is: .
And the English name of the JV company is: Beijing UAC Stock Exchange
Online Co. LTD.
2. The detailed terms of the JV company are set forth in the "Joint
Venture Agreement" between Beijing UAC Stock Trading Online Co. Ltd.
( ) and The Hartcourt Companies Inc. and signed on August 9th,
1999.
3. Party B agreed to transfer all tangible and intangible assets, except
the real estate property, of Beijing UAC Stock Trading Online Co. Ltd.
To the JV company in exchange for Fifty (50%) percent ownership of the
JV company.
4. Party A agreed to invest One Million US dollars ($1,000,000) in the JV
company and pay Party B One Million and Seven Hundred Thousand Dollars
($1,700,000) to pay Party B. In addition, Party A agreed to transfer
One Million (1,000,000) common shares of Hartcourt (OTC:HRCT) to the
JV company, from which 200,000 shares shall be used to pay Party B for
existing loan to the company and 800,000 shares to be recorded as loan
from Hartcourt Companies to the JV company. All above payments shall
be made within 15 days from the date of issuance of the JV company
license.
1
<PAGE>
5. Party A has the right to assign this agreement to another US-listed
company. The term of the agreement shall remain the same.
6. The agreement, its effect, interpretation, implementation and
settlement of dispute all are governed by the laws of the People's
Republic of China.
7. This agreement is written in both Chinese and English. If the two
versions do not agree, the Chinese version shall be considered
accurate.
Party A: The Hartcourt Companies, Inc. Party B: Zhang, Shi ( )
Representative: Representative:
s/s/ Alan Phan s/s/ Zhang Shi
- ----------------------------- ---------------------------------------
Dr. Alan V. Phan Zhang, Shi
Date: August 9th, 1999 Date: August 9th, 1999
2
Exhibit 10.19.1 Financial Statements of Beijing UAC Stock Exchange Online Co.,
Ltd. for the period from October 18, 1999 (date of inception
to December 31, 1999
Beijing UAC Stock Exchange Online Co., Ltd.
(a Development Stage Company)
FINANCIAL STATEMENTS
FOR THE PERIOD FROM OCTOBER 18, 1999
(DATE OF INCEPTION) TO DECEMBER 31, 1999
<PAGE>
Beijing UAC Stock Exchange Online Co., Ltd.
(a Development Stage Company)
Independent auditors' report ..............................................3
Financial statements
Balance sheet ........................................................4
Statement of operations ..............................................5
Statement of owners' equity ..........................................6
Statement of cash flows ..............................................7
Summary of significant accounting policies ................................8-9
Notes to financial statements .............................................10-11
2
<PAGE>
Independent Auditors' Report
To the Board of Directors
Beijing UAC Stock Exchange Online Co., Ltd.
Beijing, China
We have audited the accompanying balance sheet of Beijing UAC Stock Exchange
Online Co., Ltd. (a development stage company) (the "Company") as of December
31, 1999 and the related statements of operations, owners' equity, and cash
flows for the period from October 18, 1999 (date of inception) through December
31, 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial
statements. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Beijing UAC Stock Exchange
Online Co., Ltd. (a development stage company) as of December 31, 1999, and the
results of its operations and its cash flows for the period from October 18,
1999 (date of inception) through December 31, 1999, in conformity with generally
accepted accounting principles in the United States.
/s/ BDO International
--------------------------------------
BDO International
Hong Kong
February 11, 2000
3
<PAGE>
<TABLE>
<CAPTION>
Beijing UAC Stock Exchange Online Co., Ltd.
(A Development Stage Company)
Balance Sheet
December 31,
1999
----------------
<S> <C>
Assets
Current assets:
Cash and cash equivalents $ 672,182
Amount due from joint venture partner (Note 1) 170,773
Other receivables, deposits and prepayments 35,764
----------------
Total current assets 878,719
----------------
Property and equipment, net (Note 2) 6,790
----------------
Total assets $ 885,509
----------------
Liabilities and Owners' Equity
Current liabilities:
Other payables and accrued expenses $ 502
----------------
Total current liabilities 502
----------------
Commitments and contingencies (Note 4)
Owners' equity:
Contributed capital (Note 3) 1,000,000
Accumulated deficit during development stage (27,755 )
Capital account receivable (87,238 )
----------------
Total owners' equity 885,007
----------------
Total liabilities and owners' equity $ 885,509
----------------
</TABLE>
See accompanying summary of significant accounting policies and notes to
financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
Beijing UAC Stock Exchange Online Co., Ltd.
(A Development Stage Company)
Statement of Operations
Period From
October 18,
1999 (Date of
Inception)
Through
December 31,
1999
-----------------
<S> <C>
Net sales $ -
General and administrative expenses (27,755 )
-----------------
Loss before income taxes (27,755 )
Provision for income tax (Note 5) -
-----------------
Net loss $ (27,755 )
-----------------
</TABLE>
See accompanying summary of significant accounting policies and notes to
financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
Beijing UAC Stock Exchange Online Co., Ltd.
(A Development Stage Company)
Statement of Owners' Equity
Capital Total
Contributed Account Accumulated Owners'
Capital Receivable Deficit Equity
-------------- ------------- --------------- -----------
<S> <C> <C> <C> <C>
Balance, October 18, 1999 (date of inception) $ - $ - $ - $ -
Injection of capital (Note 3) 1,000,000 (87,238 ) - 912,762
Net loss - - (27,755 ) (27,755 )
-------------- ------------- --------------- -----------
Balance, December 31, 1999 $ 1,000,000 $ (87,238 ) $ (27,755 ) $ 885,007
-------------- ------------- --------------- -----------
</TABLE>
See accompanying summary of significant accounting policies and notes to
financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
Beijing UAC Stock Exchange Online Co., Ltd.
(A Development Stage Company)
Statement of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
Period From
October 18,
1999 (Date of
Inception)
Through
December 31,
1999
-----------------
<S> <C>
Cash flows from operating activities $ (27,755 )
Net loss
Adjustments to reconcile net loss to net cash used in operating activities
Changes in:
Other receivables, deposits and prepayments (35,764 )
Other payables and accrued expenses 502
-----------------
Net cash used in operating activities (63,017 )
-----------------
Cash flows from investing activities
Purchase of property and equipment (6,790 )
Advance to joint venture partner (170,773 )
-----------------
Net cash used in investing activities (177,563 )
-----------------
Cash flows from financing activities
Injection of capital 912,762
-----------------
Net cash provided by financing activities 912,762
-----------------
Net increase in cash and cash equivalents 672,182
Cash and cash equivalents, beginning of period -
-----------------
Cash and cash equivalents, end of period $ 672,182
-----------------
</TABLE>
See accompanying summary of significant accounting policies and notes to
financial statements.
7
<PAGE>
Beijing UAC Stock Exchange Online Co., Ltd.
(A Development Stage Company)
Summary of Significant Accounting Polices
Nature of Business
Beijing UAC Stock Exchange Online Co., Ltd. (a development stage company) ("the
Company") is a Sino-foreign co-operative joint venture established in the
People's Republic of China (the "PRC") on October 18, 1999. The joint venture
partners are Beijing UAC Stock Trading Online Co., Ltd. (the "PRC joint venture
partner") who owns 65% and Hartcourt Companies, Inc. (a United States Company)
(the "foreign joint venture partner") who owns 35%. The Joint Venture is for 15
years commencing October 18, 1999 and profits and losses are shared between the
joint venture partners on a 65% - 35% basis.
Pursuant to the joint venture agreement dated June 20, 1999, Beijing UAC Stock
Trading Online Co., Ltd. is required to contribute certain technical know-how
and intangible assets to the Company for its 65% interest in the Company. Such
technical know-how and intangible assets will be contributed at zero
consideration and therefore will not be reflected in the books of the Company.
The Company is engaged in the provision of internet services for securities
trading and the sales of internet software in the PRC. The Company did not
commence operations in 1999.
Basis of Accounting
The financial statements are prepared in accordance with generally accepted
accounting principles in the United States of America. This basis of accounting
differs from that used in the preparation of the Company's statutory financial
statements which are prepared in accordance with the accounting principles and
the relevant financial regulations applicable to enterprises in the PRC.
Foreign Currency Translation and Transactions
The financial position and results of operations of the Company are determined
using local currency as the functional currency. Assets and liabilities are
translated at the prevailing exchange rate in effect at the end of each
reporting period. Contributed capital accounts are translated using the
historical rate of exchange at the time of capital contribution. Income
statement accounts are translated at the average rate of exchange during the
reporting period. Translation adjustments arising from the use of different
exchange rates from period to period are included in the cumulative translation
adjustment account in owners' equity. Gains and losses resulting from foreign
currency transactions are included in other income (expense).
Revenue Recognition
Revenue from internet services will be recognized when the relevant services are
provided.
Revenue from goods sold will be recognized when title of goods sold has passed
to the buyers, which is usually at the time of delivery.
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid investments with an original
maturity of three months or less.
8
<PAGE>
Beijing UAC Stock Exchange Online Co., Ltd.
(A Development Stage Company)
Summary of Significant Accounting Polices
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method to allocate the cost of depreciable assets over the
estimated useful lives of the assets as follows:
<TABLE>
<CAPTION>
Estimated
Useful Life
(in Years)
---------------
<S> <C>
Computer equipment 5
Office equipment 5
</TABLE>
Maintenance, repairs and minor renewals are charged directly to the statement of
operations as incurred. Additions and betterments to property and equipment are
capitalized. When assets are disposed of, the related cost and accumulated
depreciation thereon are removed from the accounts and any resulting gain or
loss is included in the statement of operations.
Income Taxes
The Company accounts for income taxes using the liability method, which requires
an entity to recognize deferred tax liabilities and assets. Deferred income
taxes are recognized based on the differences between the tax bases of assets
and liabilities and their reported amounts in the financial statements which
will result in taxable or deductible amounts in future years. Further, the
effects of enacted tax laws or rate changes are included as part of deferred tax
expenses or benefits in the year that covers the enactment in the near future
date.
Fair Value of Financial Instruments
The carrying amounts of certain financial instruments, including cash, other
receivables and other payables approximate their fair values as of December 31,
1999 because of the relatively short-term maturity of these instruments.
Use of Estimates
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
9
<PAGE>
Beijing UAC Stock Exchange Online Co., Ltd.
(A Development Stage Company)
Notes to Financial Statements
NOTE 1--AMOUNT DUE FROM JOINT VENTURE PARTNER
This represents short term unsecured cash advance of RMB1,000,000 and US$50,000
made to the PRC joint venture partner. The amount is repayable within one year
from the date the advance is drawn and bears interest at the prevailing market
rate charged by PRC banks for loans with the same maturity.
NOTE 2--PROPERTY AND EQUIPMENT, NET
<TABLE>
<CAPTION>
December 31,
1999
----------------
<S> <C>
Computer equipment $ 6,422
Office equipment 368
----------------
6,790
Less: accumulated depreciation -
----------------
$ 6,790
----------------
</TABLE>
No depreciation is provided by the Company in 1999 as all the assets were
acquired just before the balance sheet date.
NOTE 3--CONTRIBUTED CAPITAL
The registered capital of the Company is $1,000,000 and is fully contributable
by the foreign joint venture partner. As of December 31, 1999, the foreign joint
venture partner has paid $912,762. The remaining $87,238 is recorded as capital
account receivable under owners' equity in the balance sheet.
NOTE 4--COMMITMENTS AND CONTINGENCIES
Operating lease commitments
As of December 31, 1999, the Company had commitments under non-cancellable
operating leases requiring future minimum lease payments as follows:
Years ending December 31, Amount
- ------------------------- --------
2000 $ 20,007
2001 20,007
2002 10,782
--------
$ 50,796
--------
10
<PAGE>
Beijing UAC Stock Exchange Online Co., Ltd.
(A Development Stage Company)
Notes to Financial Statements
NOTE 5--INCOME TAX
No provision for income tax has been made as the Company has not yet commenced
operations during the period.
No provision for deferred taxation has been made as there is no material
temporary difference at the balance sheet date.
NOTE 6--RELATED PARTY TRANSACTIONS
The Company has advanced RMB 1,000,000 ($120,773) and $50,000 to the PRC joint
venture partner. The amount is unsecured and payable within one year from the
date the advance is drawn and bears interest at the prevailing market rate
charged by PRC banks for loans with the same maturity.
The registered capital of the Company is $1,000,000 and is fully contributable
by the foreign joint venture partner. As of December 31, 1999, the foreign joint
venture partner paid $912,762. The remaining $87,238 is recorded as Capital
account receivable under Owners' Equity in the balance sheet. The PRC joint
venture partner is required to contribute certain technical know-how and
intangible assets to the Company. Such technical know-how and intangible assets
will be contributed at zero consideration and therefore will not be reflected in
the books of the Company.
Included in other receivables, deposits and prepayments are advances to
employees of $6,528 and unsecured advances to a company related to the PRC joint
venture party, bearing interest at the prevailing market rate charged by PRC
banks of $24,155 at December 31, 1999.
11
Exhibit 10.20 Agreement with GoCall.com
EXCHANGE AGREEMENT
THIS EXCHANGE AGREEMENT (the "Agreement") is made this 23rd day of
December, 1999 by and between The Hartcourt Companies Inc., a Utah corporation
(`Hartcourt") and GoCall Inc., a Delaware corporation ("GoCall")
WHEREAS, GoCall and Hartcourt wish to form a strategic alliance for the
development of certain common interests of the two corporations, including but
not limited to the development of GoCall's internet related development-stage
businesses and software; and
WHEREAS, Hartcourt and GoCall wish to effect the proposed strategic
alliance by exchanging shares of the two respective corporations' common stock.
IN CONSIDERATION of the mutual promises contained herein, the benefits
to be derived by each party hereunder and other good and valuable consideration,
the receipt and sufficiency of which are hereby expressly acknowledged,
Hartcourt and GoCall agree as follows:
1. Exchange
On the basis of the representations and warranties herein contained,
subject to the terms and conditions set forth herein, GoCall agrees to
exchange One Million(1,000,000 ) shares of its Convertible Preferred
Stock (par value @ $5.00) stock (the GoCall Shares") exercisable to 10
shares of GoCall Common Stock (Restricted under Rule 144 for 12
months)for each share of Convertible Preferred Shares so exchanged for
all of the shares as set forth in Schedule "A" attached hereto and made
a part hereof.("Hartcourt Shares").
2. Closing
A. Closing Date. The closing of the exchange contemplated by this
Agreement (the "Closing") shall occur upon the transfer of the
GoCall Shares to Hartcourt (the Transfer Date"), on December
29, 1999 at 4:00 PM of that day at the offices of Hartcourt. .
At the Closing, Hartcourt shall deliver its consideration to
GoCall and GoCall shall deliver its consideration to Hartcourt
in a simultaneous transaction. Notwithstanding the date of
Closing, the Effective Date shall be December 29, 1999.
3. Representations and Warranties of GoCall GoCall hereby represents and
warrants to Hartcourt that:
A. Organization. GoCall is a corporation validly existing and in
good standing under the laws of Delaware. with the power and
authority to carry on its business as now being conducted. The
execution and delivery of this Agreement and the consummation
<PAGE>
of the transaction contemplated in this Agreement have been,
or will be prior to Closing, duly authorized by all requisite
corporate action on the part of GoCall, including but not
limited to Board of Director Resolutions ratifying this
transaction and that this Agreement has been duly executed and
delivered by GoCall and constitutes a binding and enforceable
obligation of GoCall. On Closing, a single five (5) member
Board of Directors shall be formed having three(3)members
appointed by Hartcourt and two(2)members appointed by GoCall.
B. Third Party Consent No authorization, consent, or approval of,
or registration or filing with, any governmental authority or
any other person is required to be obtained or made by GoCall
in connection with the execution, delivery or performance of
this Agreement, or if required, GoCall has or will obtain same
prior to Closing;
C. Litigation. GoCall is not a defendant or a plaintiff against
whom a claim has been made or reduced to judgement in any
litigation or proceedings before any local, state or U.S.
foreign government, or any department, board, body or agency
thereof, which could result in a claim against the GoCall
Shares or any of GoCall's assets;
D. Status of GoCall Shares. The GoCall Shares will be validly
issued by GoCall and it shall deliver same to Hartcourt at
Closing, as well as resolutions of GoCall's Board of Directors
wherein GoCall agrees not to issue or demand a "stop transfer"
be put into effect or against any of the GoCall Shares, or
otherwise attempt to restrict the transfer or exchange of the
GoCall Shares issued to Hartcourt hereunder. Further. GoCall
represents that it has not created any option, security
interest or encumbrance upon the GoCall Shares that would give
rise to any claims by third parties or otherwise conflict with
or preclude the exchange as contemplated herein; and
E. Authority. This Agreement has been duly executed by GoCall,
and the execution and performance of this Agreement will not
violate, or result in a breach of, or constitute a default in
any agreement, instrument, judgement, order or decree to which
GoCall is a party or to which the GoCall Shares may be
subject.
4. Representations and Warranties of Hartcourt
Hartcourt hereby represents and warrants to GoCall that:
A. Organization. Hartcourt is a corporation validly existing and
in good standing under the laws of Utah with the power and
authority to carry on its business now being conducted. The
execution and delivery of this Agreement and the consummation
of the transaction contemplated in this Agreement have been,
or will be prior to Closing, duly authorized by all requisite
corporate action on the part of Hartcourt. This Agreement has
been duly executed and delivered by Hartcourt and constitutes
a binding, and enforceable obligation of Hartcourt;
B. Third Party Consent. No authorization, consent, or approval
of, or registration or filing with, any governmental authority
or any other person is required to be obtained or made by
Hartcourt in connection with the execution, delivery or
performance of this Agreement, or if required, GoCall has or
will obtain same prior to Closing;
<PAGE>
C. Litigation. Hartcourt is not a defendant or a plaintiff
against whom a counterclaim has been made or reduced to
judgement in any litigation or proceedings before any local,
state U.S. or foreign government, or any department, board,
body or agency thereof, which could result in a claim against
Hartcourt enacting this transaction.
D. Status of Hartcourt Owned Shares. The Shares constituting
Hartcourt's consideration Schedule "A" annexed hereto and
incorporated herein by reference will be validly endorsed by
Hartcourt or released to GoCall by written authorization duly
executed by Hartcourt which it shall deliver to GoCall at
Closing. Further, Hartcourt represents that it has not created
any option, security interest or encumbrance upon the Shares
that would give rise to any claims by third parties or
otherwise conflict with or preclude the exchange as
contemplated herein; and Hartcourt has never been an affiliate
of any of the companies in Schedule "A."
E. Authority. This Agreement has been duly executed by Hartcourt,
and the execution and performance of this Agreement will not
violate, or result in a breach of, or constitute a default in
any agreement, instrument, judgement, order or decree to which
Hartcourt is a party or to which the Hartcourt Shares may be
subject.
5. Conditions Precedent to Obligations of Hartcourt and GoCall
All obligations of Hartcourt and GoCall under this Agreement are
subject to the fulfillment, prior to or as of the Closing Date, of each
of the following conditions:
A. Transfer and Delivery of the Securities. Hartcourt shall have
endorsed or assigned or delivered the Shares to GoCall and
GoCall shall have issued and delivered the GoCall Shares to
Hartcourt pursuant to this Agreement.
B Acceptance of Documents. All instruments and documents
delivered to the parties hereto, pursuant to the provisions of
this Agreement, and the terms and conditions of the
agreement(s) shall be satisfactory to Hartcourt and GoCall.
6. Availability of Information
Hartcourt and GoCall each represent that, by virtue of their respective
business activities and economic bargaining power or otherwise, they
have been able to conduct their own due diligence and have had access
to or have been furnished with, prior to or concurrently with the
execution hereof, the information which they consider to be adequate to
make a decision to exchange the GoCall Shares for the Hartcourt owned
Shares.
7. Private Transaction
A. Private Offering. GoCall and Hartcourt each understand that
the exchange contemplated herein constitutes a private,
arms-length transaction between the parties without the use or
reliance upon a distribution or securities underwriter.
<PAGE>
B. Purchase for Own Account. Neither GoCall nor Hartcourt are
underwriters of, or dealers in, the respective securities to
be exchanged hereunder, and neither party is acting as such or
participating pursuant to a contractual agreement, in the
distribution of such securities.
C. Investment Risk. Hartcourt and GoCall acknowledge the exchange
contemplated by this Agreement may involve a high degree of
financial risk, including the risk that one or both parties
may lose its entire investment.
D. Access to Information. GoCall and Hartcourt and their advisors
each have been afforded the opportunity to discuss the
transaction contemplated herein with legal and accounting
professionals, and to examine and evaluate the financial
impact of such exchange.
E. This Agreement has been duly executed by Hartcourt, and the
execution and performance of this Agreement will not violate,
or result in a breach of, or constitute a default in any
agreement, instrument, judgement, order or decree to which
Hartcourt is a party or to which the Hartcourt Shares may be
subject.
8. Termination
This Agreement may be terminated at anytime prior to the date of
Closing by either party if (a) there shall be any actual or threatened
action or proceeding by or before any court or any other governmental
body which shall seek to restrain, prohibit, or invalidate the
transaction contemplated by this Agreement, and which, in the judgment
of such party giving notice to terminate and based upon the advice of
legal counsel, makes it inadvisable to proceed with the transaction
contemplated by this Agreement.
9. Miscellaneous
A. Authority. The officers of Hartcourt and GoCall executing this
Agreement are duly authorized to do so and each party has
taken all action required by law or otherwise to properly and
legally execute this Agreement.
B. Notices. Any notice under this Agreement shall be deemed to
have been sufficiently given if sent by registered or
certified mail, postage prepaid, addressed as follows:
To GoCall Inc. GoCall Inc.
15 Queen Street East
Cambridge, Ontario, Canada N3C 2A7
Telephone: (519)651-2121
Facsimile: (519) 651-0457
To Hartcourt: The Hartcourt Companies Inc.
1196 E. Willow St.
Long Beach, CA 90806
Telephone: (562) 426-9796
Facsimile: (562) 426-8896
or to any other address which may hereafter be designated by
either party by notice given in such manner. All notices shall
be deemed to have been given as of the date of receipt.
<PAGE>
C. Entire Agreement. This Agreement sets forth the entire
understanding between the parties hereto and no other prior
written or oral statement or agreement shall be recognized or
enforced.
D. Severability. If a court of competent jurisdiction determines
that any clause or provision of this Agreement is invalid,
illegal or unenforceable, the other clauses and provisions of
the Agreement shall remain in full force and effect and the
clauses and provisions which are determined to be void,
illegal or unenforceable shall be limited so that they shall
remain in effect to the extent permissible by law.
E. None of the parties hereto may assign this Agreement without
tbe express written consent of the other parties and any
approved assignment shall be binding on and inure to the
benefit of such successor or, in the event of death or
incapacity on assignor's heirs, executors, administrators and
successors.
F. Applicable Law. This Agreement bas been negotiated and is
being contracted for in the State of California, and it shall
be governed by the laws of California, County of Los Angeles,
notwithstanding any conflict-of-law provision to the contrary.
G Litigation. If any legal action or other preceding
(non-exclusively including arbitration) is brought for the
enforcement of or to declare any right or obligation under
this Agreement or as a result of a breach, default or
misrepresentation in connection with any of the provisions of
this Agreement, or otherwise because of a dispute among the
parties hereto, the prevailing party will be entitled to
recover actual attorney's fees (including for appeals and
collection) and other expenses incurred in such action or
proceeding, in addition to any other relief to which such
party may be entitled.
H. No Third Party Beneficiary. Nothing in this Agreement,
expressed or implied., is intended to confer upon any person,
other than the parties hereto and their successors, any rights
or remedies under or by reason of this Agreement, unless this
Agreement specifically states such intent.
I. It is understood and agreed that this Agreement may be
executed in any number of identical counterparts, each of
which may be deemed an original for all purposes.
J. Further Assurances. At any time, and from time to time after
the Closing, each party hereto will execute such additional
instruments and take such action as may be reasonably
requested by the other party to confirm or perfect title to
the securities being exchanged pursuant to this Agreement, or
otherwise to carry out the intent and purposes of this
Agreement.
K. Broker's or Finder' s Fee: Expenses. GoCall and Hartcourt each
warrant that they have not incurred any liability, contingent
or otherwise, for brokers' or finders fees or commissions
relating to this Agreement for which the other party shall
have responsibility. Except as otherwise provided herein, all
fees, costs and expenses incurred by either party relating to
this Agreement shall be paid by the party incurring same.
<PAGE>
L. Amendment or Waiver. Every right and remedy provided herein
shall be cumulative with every other right and remedy, whether
conferred herein, at law, or in equity, and may be enforced
concurrently herewith, and no waiver by any party of the
performance of any obligation by the other shall be construed
as a waiver of the same or any other default then,
theretofore, or thereafter occurring or existing. At any time
prior to Closing, this Agreement may be amended by a writing
signed by all parties hereto.
M. Headings The section and subsection headings in this Agreement
are inserted for convenience only and shall not affect in any
way the meaning or interpretation of this Agreement.
N. Facsimile. A facsimile, telecopy or other reproduction of
this instrument may be executed by one or more parties hereto
and such executed copy may be delivered by facsimile or
similar instantaneous electronic transmission device pursuant
to which the signature of or on behalf of such party can be
seen, and such execution and delivery shall be considered
valid, binding and effective for all purposes. At the request
of any party hereto, all parties agree to execute an original
of this instrument as well as any facsimile, telecopy or
other reproduction hereof.
O. Announcements Except as required by law, no announcements
shall be made by either party with respect to the receipt or
acceptance of this agreement, or the transaction proposed
herein without the prior written permission of the other.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed the day and year first above written.
"GoCall" "Hartcourt"
GoCall, Inc. The Hartcourt Companies, Inc.
By: By:
- -------------------------- ------------------------------
Michael Ruge, CEO Alan V. Phan, Chairman
<PAGE>
SCHEDULE "A"
1. 2,850,000 Common Stock Shares in Dega Technology, Inc.,
symbol: DEGA 500,000 Restricted, Balance without legend
2. 2,400,000 Preferred Shares in NuOasis Resorts, Inc.
symbol: NUOA without legend
3. 1,500,000 Common Stock Shares in Oasis Resorts International Inc.
symbol: OAIS without legend
4. 192,000 Common Stock Shares in Electronic Components & Systems, Inc.
symbol: ECSX without legend
AS TO ALL OF THE ABOVE SHARES, HARTCOURT REPRESENTS AND WARRANTS THAT IT IS
RELYING UPON THE REPRESENTATIONS OF ITS PREDECESSOR IN TITLE CONCERNING
"LEGENDS" AND IT CANNOT ITSELF CONFIRM THIS INFORMATION NOR IS IT HEREIN
PRESENTING AS TO THE TRUTH OR VALIDITY OF SUCH CLAIMS.
Exhibit 10.21 FTL Stock Purchase Agreement
STOCK PURCHASE AGREEMENT
THIS AGREEMENT is entered into on the 17th day of August, 1999, by and between
The Hartcourt Companies, Inc., a Utah corporation, or its assignee ("BUYER")
with principal offices located at 1198 E. Willow St., Long Beach, CA 90806, USA;
and Financial Telecom Limited, ("SELLER") a Hong Kong corporation with principal
office at 308 Hang Bong Commercial Centre, 28 Shanghai Street, Kowloon, Hong
Kong. BUYER and SELLER are referred to collectively herein as the "Parties"
PRELIMINARY STATEMENTS
SELLER desires to sell and BUYER desires to purchase 4,964,990 shares of common
capital stock to be issued by SELLER and any and all options, warrants, and
other rights that such stock shall carry with it.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and the mutual promises herein
made, and in consideration of the representations, warranties, and covenants
herein contained, Parties agree as follows:
SECTION 1. PURCHASE AND SALE OF SELLERS STOCK.
Basic Transaction. Subject to and in reliance upon the representations,
warranties and agreements hereinafter set forth, and subject to the terms and
conditions hereinafter set forth, BUYER agrees to purchase from the SELLER, all
of the SELLER'S Common Capital Stock above referred to hereinabove, to wit,
4,964,990 shares of capital stock, which in the aggregate will constitute 58.53%
of the expanded capital of SELLER. These shares shall be free and clear of all
liens and encumbrances, for the consideration specified below in this Section 1.
A. Purchase Price. BUYER agrees to pay to the SELLER at Closing (defined in
Section 1.B. below) a purchase price as determined pursuant to Section 1.A.i.
below (the "Purchase Price") and which Purchase Price shall be paid as provided
in Section 1.A.ii. below.
i. The Purchase Price shall be 4.713 Hong Kong Dollars (HK$4.713) per share for
a total of HK$23.4 Million.
<PAGE>
ii. Fifty (50%) percent of said purchase price (HK$11.7 Million) shall be paid
in cash and the remaining fifty(50%) percent paid in free-trading shares of
BUYER or any NASDAQ listed company acceptable to the present shareholders of
SELLER.
iii. The Purchase Price shall be paid by BUYER on the Closing Date in the
following manner:
a. Two-third (2/3) of the cash portion, being HK$7,800,000, shall be remitted by
BUYER by telegraphic transfer to SELLER's bank account (with Wing Lung Bank Ltd
of Account No. 06-000-4115-6 at Ground Floor, 112 Queen's Road Central, Hong
Kong) two (2) days before Closing and the remaining HK$3,800,000, sixty (60)
days after Closing.
b. The free-trading shares portion shall be delivered and deposited on Closing
to SELLER's account opened with a stock broker in the United States.
iv. The stamp duty to be paid to the Hong Kong Government in connection to the
transactions contemplated by this Agreement shall be for the account of the
BUYER. The stamp duty shall be paid by SELLER on behalf of BUYER. BUYER shall
reimburse SELLER for the full amount paid by SELLER within seven (7) days after
receiving the invoice for this purpose from SELLER.
B. Post-Closing Adjustment. In the event the final closing Net Worth (as defined
below) as of the Closing Date shall be more than $5,000 less than the Net Worth
reported in the balance sheet dated as of February 28, 1999, which shall be
delivered to BUYER simultaneously with execution of this Agreement, then SELLER
shall pay to BUYER, within ten (10) days following notice of such deficiency, an
amount calculated as follows:
HK$23,400,000 x [1 - (Closing Net Worth / February 28, 1999 Net Worth)]
In the event the final closing Net Worth (as defined below) as of the Closing
Date shall be more than $5,000 over and above the Net Worth reported in the
balance sheet dated as of February 28, 1999, which shall be delivered to BUYER
simultaneously with the execution of this Agreement, then BUYER shall pay to
SELLER within ten (10) days following notice of such increment, an amount
calculated as follows:
HK$23,400,000 x [(Closing Net Worth / February 28, 1999 Net Worth) - 1]
For purposes hereof, the Net Worth of SELLER shall be equal to the sum of total
assets less total liabilities.
<PAGE>
For the avoidance of doubt, Parties agree that the adjustment described
hereinabove shall not in any manner affect or change the holding of BUYER of
58.53% in SELLER's expanded capital immediately after the completion of the
transaction anticipated in the Agreement.
C. The Closing and the Closing Date. The closing of the transactions
contemplated by this Agreement (the "Closing") shall take place at the offices
of SELLER in Hong Kong, commencing at 10:00 a.m. local time on the third (3rd)
business day following the satisfaction or waiver of all conditions (including
all conditions set forth in Section 6 hereto) to the obligations of the Parties
to consummate the transactions contemplated hereby, including all necessary
regulatory approvals, other than conditions with respect to actions the
respective Parties will take at the Closing itself or thereafter) or such other
date as BUYER and the SELLER may mutually agree but not later than 45 days from
the execution of this Agreement (the "Closing Date").
D. Deliveries at Closing. At the Closing, (i) the SELLER will deliver to BUYER
the various certificates, instruments, and documents referred to in Section
6.A.i. and 6.A.iii. below, (ii) BUYER will deliver to the SELLER the various
certificates, instruments, and documents referred to in Section 6.B.ii. below,
(iii) SELLER will deliver to BUYER stock certificates representing all of the
4,964,990 shares SELLER Stock original certificates or endorsed in blank or
accompanied by duly executed assignment documents, and (iv) BUYER will deliver
to SELLER the consideration in the manner specified in Section 1.A. above.
E. As used herein, the term shares of The Hartcourt Companies, Inc. refers to
free trading common stock, the certificates for which shall not bear any legend
restricting transfer of the shares. All payments referred to herein which are
payable in Common Stock shall be based on the average closing price per share of
such Common Stock quoted on the NASDAQ bulletin board , or on such other
securities exchange as the Common Stock is then trading, for the seven (7)
trading days prior to the Closing Date.
SECTION 2. REPRESENTATION AND WARRANTIES RELATING TO SELLERS .
The SELLER, represents and warrants to BUYER that the statements contained in
this Section 2 are current and complete as of the date of this Agreement and
will be correct and complete as of the Closing Date (as though made then and as
though the Closing Date were substituted for the date of this Agreement
throughout this Section 2). Nothing in the Schedules hereto shall be deemed
adequate to disclose an exception to a representation or warranty made herein,
unless the disclosure identifies the exception with particularity and describes
the relevant facts in detail. In addition, for purposes of this Agreement, the
terms "reserved" or "reflected" when used with reference to financial statements
shall mean an item accounted for either: (a) as an expense on the income
statements included in such financial statements; or (b) as an offset to a
particular asset account or as a liability on the balance sheet included in such
financial statements. The terms "reserved" or "reflected" shall not mean an item
which is disclosed in the notes to a financial statement and which is not also
accounted for in the financial statements as contemplated in the preceding
sentence.
<PAGE>
For purposes of this Agreement, an inaccuracy, breach or non-fulfillment of a
warranty, representation or covenant shall not constitute any inaccuracy, breach
or non-fulfillment hereunder unless and until the aggregate of all such
inaccuracies, breaches, and non-fulfilled representations or covenants exceeds
the sum of Twenty thousand ($20,000) dollars. All such inaccuracies, breaches
and non-fulfilled warranties, representations and covenants that would
constitute an inaccuracy, breach or non-fulfillment of any representation,
warranty or covenant but for the fact that, individually or in the aggregate,
they do not satisfy such $20,000 threshold are hereinafter collectively
described a "Nonmaterial Breaches". Once the aggregate of all Nonmaterial
Breaches exceeds $20,000, then the aggregate amount of all such Nonmaterial
Breaches (from the first dollar of such Nonmaterial Breaches) shall nevertheless
be deemed breaches in respect of which BUYER may assert a claim pursuant to
Section 8 hereof.
A. Organization and Standing. SELLER is a corporation duly organized, validly
existing and in good standing under the laws of Hong Kong, has all requisite
corporate power to own and operate its properties and assets, and to carry on
its business as presently conducted and as presently proposed to be conducted in
the future and SELLER is qualified by virtue of existing licenses to do business
in any jurisdiction permitted under the laws of Hong Kong. SELLER has delivered
to BUYER complete and correct copies of its Memorandum and Articles of
Association, licenses, Board of Director Resolutions and if required,
shareholder approval. Such copies are true, correct, complete and properly
executed (if applicable) and contain all amendments through the date of this
Agreement, and will be true, correct and complete as of the Closing Date.
B. Capitalization and Ownership.
i. The authorized capital stock of SELLER consists of 3,800,000 shares of common
stock, par value HK$1.0, of which 3,519,349 shares are issued and outstanding.
There is no other class of capital stock authorized or outstanding. The issued
and outstanding shares of SELLER Stock are duly authorized, validly issued in
compliance with applicable law, are fully paid and non-assessable and are
registered in the names of the shareholders in such amounts as appearing on the
stock transfer books of SELLER. The outstanding SELLER Stock, together with any
stock options granted by SELLER and any shares of capital stock issued pursuant
to the exercise of any stock options, have not been issued in violation of
securities laws, rules and regulations. The number of authorized, issued and
outstanding shares of each class of capital stock of SELLER as of the Closing
Date is set forth on Schedule 2(b)(i) attached hereto. Upon completion of the
transaction contemplated hereby, fifty-eight & fifty-three hundredth percent
(58.53%) of the outstanding capital stock of SELLER will have been transferred,
sold and delivered to BUYER and all rights of any nature whatsoever to purchase
or otherwise acquire any of the capital stock of SELLER shall have been
terminated.
<PAGE>
ii. There are (a) no dividends or other distributions accrued or declared but
unpaid in respect of the shares of capital stock of SELLER; (b) no outstanding
contracts, subscriptions, warrants, options or other rights of any kind
(including conversion, exchange or preemptive rights) to subscribe for or
purchase any capital stock or other securities of SELLER; (c) no voting trusts,
voting agreements or irrevocable proxies executed by SELLER; (d) no existing
rights of SELLER or any other party to require SELLER to register any securities
of SELLER or to participate with SELLER in any registration by SELLER of its
securities; (e) no other agreements by SELLER which provide for the purchase,
sale, pledge, lien, encumbrance or other transfer of the shares of common stock
of SELLER or any other capital stock or securities of SELLER, authorized or not,
or any restrictions thereon; and (f) no agreements, commitments or rights of
SELLER or any other party to purchase, redeem or otherwise acquire any shares of
SELLER.
C. Subsidiaries. SELLER does not own, directly or indirectly, any capital stock
or other equity or ownership or voting interest (whether controlling or not) in
any corporation, trust, partnership, association or business entity of any
nature whatsoever save and except those already disclosed to BUYER.
D. Corporate and Individual Power; Validity of Agreements; Consents. SELLER have
all requisite power and authority (including all corporate power and authority
with respect to SELLER under its Memorandum and Articles of Association, Bylaws
and the rules, regulations and laws of Hong Kong) to execute and deliver this
Agreement and all of the agreements, instruments and other documents to be
executed and delivered by SELLER incidental to the consummation of the
transactions contemplated hereby ("Ancillary Documents") and to carry out and
perform its obligations hereunder and thereunder. The execution, delivery and
performance of this Agreement and all Ancillary Documents have been duly
authorized by the Board of Directors of SELLER. No other approval, consent,
waiver or authorization of, or filing or registration with, any governmental
authority or third party is required on the part of SELLER for the execution,
delivery or performance of this Agreement and the Ancillary Documents and the
transactions contemplated hereby and thereby. This Agreement is, and the
Ancillary Documents are, duly executed and delivered by SELLER and constitute
valid and binding obligations of the SELLER, legally enforceable against SELLER
in accordance with their terms, except that such enforcement may be subject to
bankruptcy, insolvency, reorganization or other laws now or hereafter in effect
affecting the enforcement of creditors' rights generally and general principle
of equity.
<PAGE>
E. No Violation. Subject to the fulfillment of the requirements of Sections 6.A.
hereof as applicable to SELLER, the execution, delivery and performance of this
Agreement and the Ancillary Documents will not and do not result in any
violation or breach of, be in conflict with, or constitute a default or event of
default (whether by notice of lapse of time or both) or give rise to a right of
termination, cancellation or acceleration under any provision of (i) the
Memorandum and Articles of Association or Bylaws of SELLER, (ii) any law, rule
or regulation, or any judgment, decree, order, ruling, or award of any court or
governmental authority, domestic or foreign, applicable to SELLER or its
business as conducted on the date of this Agreement and as expected to continue
thereafter based on applicable law and regulations currently in existence, the
violation of which would have a material adverse effect on the business of
SELLER, taken as a whole; (iii) any license, certificate or permit (all such
licenses, certificates or permits are set forth in Schedule 2(l) attached
hereto) of SELLER; or (iv) any agreement, contract, understanding, indenture or
other instrument to which SELLER is a party or by which its assets or business,
or the shares of SELLER are bound; nor will such execution, delivery or
consummation give to others any rights in or with respect to the shares of
SELLER of any of the assets or businesses of SELLER or result in the creation of
any lien, charge or encumbrance upon the shares of SELLER or any such assets or
businesses.
F. Minute Books. The minute books and the corporate secretaries' files of SELLER
have been made available to BUYER and shall be available until the Closing Date.
SELLER agrees to provide a copy of its minutes books to BUYER before Closing and
further agrees to provide BUYER copy of minute to be recorded in or filed into
the minutes books after Closing. The minute books contain a complete and
accurate summary of all meetings of or actions by directors and shareholders
which were required for compliance with all material statutes and regulations
and are in compliance with SELLER's Memorandum and Articles of Association and
Bylaws.
G. Financial Statements. SELLER, prior to the Closing Date, will have delivered
to BUYER true and correct copies of the following which shall be attached hereto
as Schedule 2(g): the reviewed balance sheet, statement of income, statement of
changes in shareholders' equity and statement of cash flows for the last fiscal
year prior to June 30, 1999, which have been prepared and reviewed, at SELLER's
expense, by Certified Public Accountants, including any and all related notes,
supplementary information and exhibits thereto (the "Reviewed Financial
Statements") and any monthly financial statement ended prior to 120 days prior
to the Closing Date. SELLER has previously delivered to BUYER the unaudited
balance sheet and statement of income of SELLER for the eight months ended
February 28, 1999, any Corporate Income Tax Returns dated 1996 and 1997, 1998,
and a complete schedule of all of the equipment owned by SELLER (the "Previous
Financial Statements"). Such Previous Financial Statements are attached hereto
as a part of Schedule 2(g). SELLER shall provide prior to the Closing Date
either (i) copies of any management letter comments prepared by a firm of
independent certified public accountants for SELLER in the previous five years
and SELLER's responses thereto, or (ii) a certification by a director of SELLER
that no such comments have been received with respect to such periods. The
Reviewed Financial Statements and the Previous Financial Statements are sometime
referred to herein as the "Financial Statements".
<PAGE>
SELLER represents and warrants that the Financial Statements as of, and for the
periods ending on, the respective dates thereof are and will be complete and
correct in all respects and fairly present the information purported to be shown
therein and (a) are and will be in accordance with, and have been derived from,
the books and records of SELLER, (b) have been prepared in conformity with
generally accepted accounting principles ("GAAP") consistently applied
throughout the periods indicated except as stated therein, (c) fairly present
the results of operations of SELLER as well as changes in shareholders' equity
for the periods indicated, (d) fairly present the combined financial condition,
assets and liabilities (fixed and contingent) of SELLER as of the dates thereof,
(e) make full and adequate provision for all fixed or contingent obligations,
liabilities, or commitments of SELLER as of the dates thereof in accordance with
GAAP, (f) reflect all accrued and unpaid benefits of SELLER's employees
including, without limitation, vacation and holiday pay, sick leave and pension
liability, and (g) do not contain any statement that is false or misleading with
respect to any material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein not
misleading.
H. Absence of Undisclosed Liabilities. SELLER does not have any debt, liability
or obligation of any nature, whether accrued, absolute, contingent or otherwise
(including, without limitation, amounts owed to any Government Department),
except as reserved or reflected in the Financial Statements or incurred in the
ordinary course of business after the date hereof, which debt, liability or
obligation would have, or could reasonably be expected to have, a material
adverse effect on the business of SELLER, taken as a whole. There is no basis
for the assertion against SELLER of any liabilities not reflected in the
Financial Statements, except for liabilities incurred in the ordinary course of
business after the date hereof.
I. Absence of Changes.
i. Since June 30, 1999, SELLER has conducted its business in the ordinary and
usual course consistent with past practice so as to maintain and preserve intact
its properties, businesses, and other assets including but not limited to the
goodwill of customers and others having relations with SELLER.
ii. Since June 30, 1999, there has not been any change in or effect on the
business of SELLER that has had an adverse effect on SELLER's business,
operations, properties, assets, working capital, liabilities, relationship with
marketing agents and brokers, prospects or condition (financial or otherwise),
and no fact or condition exists or, to the knowledge of SELLER, is contemplated
or threatened that has a reasonable probability of resulting in any change in or
effect on the business of SELLER or that would result in an adverse effect on
SELLER's business, operations, relationships with marketing agents and brokers,
properties, assets, working capital, liabilities, prospects or condition
(financial or otherwise). No representation or warranty is made by SELLER
regarding the possible impact of future changes in the law of Hong Kong.
<PAGE>
J. Insurance.
i. Schedule 2(j) sets forth a list of all SELLER policies of property, theft,
fire, liability, workers' compensation, title, professional liability, life
insurance, reinsurance, fidelity or any other insurance owned or maintained by
SELLER or in which SELLER is a named insured or on which SELLER is paying any
premiums. SELLER has provided BUYER with access to and copies of all SELLER
policies listed on Schedule 2(j). All such SELLER policies are of a type
customary in businesses such as those engaged in by SELLER and are and shall
remain in full force and effect at all times through and as of the Closing Date,
and none of the insured parties thereunder is in default with respect to any
provision contained in any such insurance policies, or in the payment of
premiums, nor has any party failed to give any notice or present any claim
thereunder when due, to the extent such default, nonpayment or failure would
have an adverse effect on SELLER. Except as set forth in Schedule 2(j) hereto,
no claims have been settled during the preceding two (2) year period nor are
there any claims outstanding with respect to any such policies which would have
an adverse effect on SELLER.
K. Title to Properties and Assets; Liens, etc.
i. Save and except those already disclosed to BUYER, SELLER does not own any
real property. Schedule 2(k) hereto is a true, complete and correct list of all
personal property owned by SELLER including all patents, trademarks or
copyrights and operating licenses which are material to the businesses thereof
including all personal property reflected in the Financial Statement. All such
personal property is under physical custody of SELLER, including personal
property under capital leases.
ii. Except as otherwise set forth in the Financial Statements, SELLER has good
and marketable title to all of its properties and assets, whether real,
personal, mixed, tangible or intangible, in each case free and clear of all
mortgages, liens, charges, encumbrances, security interests, adverse claims,
contracts of sale, covenants, conditions or restrictions on use or transfer, or
other defects of title of any kind or nature which would have an adverse effect
on SELLER. None of the encumbrances set forth in the Financial Statements
impairs or interferes with the present or contemplated use of any of the
properties subject thereto or affected thereby or otherwise impairs the business
operations conducted by SELLER in a manner which will have an adverse effect
thereon.
iii. Schedule 2(k)(iii) also lists all leases and other agreement or instruments
under which SELLER holds, leases or is entitled to the use of any real or
personal property. All such leases and agreements are in full force and effect
<PAGE>
and all rentals, royalties or other payments due and payable thereunder prior to
the date hereof have been duly paid. SELLER has made available to BUYER a true
and correct copy of each lease and agreement for real property and for equipment
utilized in the business of SELLER. Any property (real or personal) covered by
the terms of such leases is presently occupied or used by SELLER as lessee under
the terms of such leases for its business, and SELLER is entitled, by the term
of such leases and under applicable laws, rules and regulations, to use any
leased premises and/or property for the purposes for which and in the manner in
which they are currently being used by SELLER. SELLER is not in default or in
breach of any material provision of any of its leases or licenses, nor has any
event occurred which, with the passage of time or giving of notice or both,
would constitute a default or breach of material provision by SELLER thereunder.
To SELLER's knowledge, none of the other parties to any of such leases or
licenses is in default or in breach of any material provision of any of such
leases or licenses. SELLER holds a valid leasehold or licensed interest in the
property which it leases or which is licensed to it.
iv. The property, machinery and equipment listed on Schedule 2(k)(iv) are all of
the property, machinery and equipment material to and used by SELLER in the
ordinary course of its operations, are in good repair, well maintained, and in
good and satisfactory operating condition, except for normal wear and tear and
such minor defects as do not substantially interfere with the continued use
thereof in the conduct of normal operations. To the best knowledge of SELLER,
all property, machinery and equipment used by SELLER in their operations are in
conformity with all applicable laws, ordinances, regulations, orders and other
requirements currently in effect or scheduled to come into effect relating to
their ownership, use and operation, the violation of which would have an adverse
effect on the business, operations, properties, prospects, working capital,
condition (financial or otherwise), liabilities or assets of SELLER.
L. Compliance with Law and Other Instruments. Attached as Schedule 2(l) is a
list of all licenses, certificates and permits of SELLER, together with true and
correct copies of each such license, certificate and permit, which licenses,
certificates and permits are in full force and effect, and SELLER is in
compliance with the terms, undertakings, conditions and provisions of such
licenses, certificates and permits. Except where a violation or the
non-compliance would have a material adverse effect on SELLER's business or
financial condition, SELLER is in compliance with all laws, ordinances, rules,
regulations and orders of all governmental or regulatory entities, bodies,
agencies and commissions ("Regulatory Entities") which are material and
applicable to the operation of its business as currently operated and as
anticipated to be operated. No notice has been issued and no investigation or
review is pending or, to the knowledge of SELLER, threatened by any Regulatory
Entities (i) with respect to any alleged violation by SELLER of any law,
ordinance, rule, regulation, order or guideline of any of the Regulatory
Entities, or (ii) with respect to any alleged failure to have all permits,
certificates, licenses, approvals and other authorizations required in
<PAGE>
connection with the operation of the business of SELLER as operated currently
and as anticipated to be operated. Except as otherwise set forth on Schedule
2(l), no proceeding is pending, or to the knowledge of SELLER, threatened, which
could result in a revocation or denial to renew any license, permit,
certificate, approval or other authorization required in connection with the
operation of the business of SELLER as conducted on the date hereof and as
SELLER proposes to conduct such business thereafter. There is no existing law,
rule, regulation or order prohibits SELLER from conducting its business in any
jurisdiction in which it is now conducting such business or in which it
presently proposes to conduct business in the future.
M. Regulatory Filings. Schedule 2(m) contains a list of all filings and
submissions (other than submission of forms and approvals) made to, and all
inspection, audit or compliance survey reports received from, all federal and
state regulatory bodies having jurisdiction over SELLER, and (i) each of the
filings and submissions listed on Schedule 2(m) was in compliance with all
applicable laws, rules and regulations in all material respects; (ii) none of
the filings or submissions listed on Schedule 2(m) contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading or necessary in order
to provide the applicable Regulatory Entities with adequate information as to
SELLER, subject to the jurisdiction of such Regulatory Entities; (iii) neither
any of the SELLER or SELLER has received notice of, and, to the knowledge of
SELLER, none of the applicable Regulatory Entities have threatened to issue
notice of, any deficiencies (a) with respect to any filings or submissions
listed on Schedule 2(m) or (b) with respect to the financial condition or
conduct of the business of SELLER under applicable regulatory standards; and
(iv) neither any of the SELLER or SELLER has not submitted nor is presently
preparing or planning to prepare any written response to any inspection, audit
or compliance survey report or to any notice of deficiency relating to the
ownership, operations or other activities of SELLER.
N. Material Contracts.
Except as previously set forth on a different Schedule, Schedule 2(n)(i) sets
forth a true and complete list of all written or oral contracts (in the case of
oral contracts, a summary description is provided), agreements, leases,
mortgages, guarantees, matters of suretyship, powers of attorney, indemnity
arrangements and commitments ("Contracts") to which SELLER is a party or by
which any of its assets are bound and which in any case involve total payments
or receipts by SELLER of $25,000 or more, or that do not expire within one year.
All the Contracts constitute legal, valid and binding obligations of SELLER and
(i) are in full force and effect on the date hereof, and (ii) SELLER has not
violated any provision of, or committed or failed to perform any act which, with
notice, lapse of time or both, would constitute a default, of any material
provision of any Contract. To SELLER's knowledge, no other party to any of the
Contracts is in default thereof. Except as set forth on Schedule 2(n)(ii),
<PAGE>
SELLER has performed its obligations under all Contracts in all material
respects and, to SELLER's knowledge, no party to any Contract has grounds to
terminate such Contract. Except as set forth on Schedule 2(n)(iii), each
Contract is with unrelated third parties and was entered into on an arm's length
basis in the ordinary course of business. None of the transactions contemplated
by this Agreement or any Ancillary Document creates in any party to the
Contracts the right to revise the terms of, to demand a penalty or premium, to
terminate or to accelerate any obligations of SELLER, or declare that such
Contracts have been breached, and no facts or circumstances exist, or upon
Closing will exist, which, with notice or lapse of time or both, would
constitute a breach or default under any of the terms of any Contract. Correct
and complete copies of all written Contracts disclosed on Schedule 2(n) have
been made available to BUYER.
O. Litigation. Except as set forth and summarized in Schedule 2(o), there is no:
(i) action, suit, claim, proceeding, audit or investigation pending or, to the
knowledge of SELLER, after inquiry of senior management and attorneys for
SELLER, threatened by any private or governmental litigant or before or by any
federal, state, municipal or other governmental department, court, commission,
board, bureau, agency or instrumentality, domestic or foreign, against SELLER or
any of its assets or employees, officers or directors (in their capacities as
employees, officers or directors of SELLER) or against persons or entities who
perform professional services under contract with SELLER; (ii) arbitration
proceedings relating to SELLER or pending under collective bargaining agreements
or otherwise; or (iii) governmental or professional inquiries pending or
threatened against SELLER (including, without limitation any inquiry as to the
qualification of SELLER to hold or receive any license or permit), and to the
best of SELLER's knowledge, there is no basis for any of the foregoing as to
SELLER or any of its employees, officers, directors or assets or as to entities
or persons who perform professional services under contract with SELLER in
connection with the performance of such services on behalf of, or rendered to
SELLER. SELLER is not subject to any continuing injunction, judgment, or other
order of any court, arbitrator, or governmental or quasi-governmental agency.
SELLER is not in default under any order, license, regulation, or demand of any
Federal, state, municipal or other governmental agency or regulatory body or
with respect to any order, writ, injunction or decree of any court.
P. Fees and Commissions. Save and except the commission agreements signed
between the BUYER and Agri-China Corporation Limited and SELLER and K.C. Tan and
Co. Limited, no person, firm or other entity retained or procured by or through
SELLER is entitled to or may claim any fee or other payment as a finder, broker,
agent, intermediary or in similar capacity (collectively "Intermediary") nor is
SELLER acting for the benefit of any person or entity (other than the parties to
this agreement) in connection with the transactions contemplated by this
agreement, and SELLER will indemnify and hold harmless BUYER from liability for
any compensation to any Intermediary retained by, or claiming through SELLER and
from the fees and expenses of defending against such liability or alleged
liability. The foregoing indemnification is hereby made part of the
indemnification obligation of SELLER pursuant to Section 8 hereof.
<PAGE>
Q. Interested Party Transactions. Except as set forth on Schedule 2(q), no
officer, director or shareholder, or any affiliate (defined below) of any such
person or entity or of SELLER, has, either directly or indirectly, (i) an
interest in any person or entity which (a) furnishes or sells services or
products which are furnished or sold or furnishes or sells products or services
which compete with products or services which are furnished or sold by or
proposed to be furnished or sold by SELLER, or (ii) purchases from or sells or
furnishes to SELLER any goods or services, or (b) has a beneficial interest in
or is a party to any contract or agreement to which SELLER is a party or by
which SELLER may be bound or affected, or has any direct or indirect interest
(other than in his capacity as a shareholder of SELLER) in any property, real or
personal, tangible or intangible of SELLER.
For purpose of this Agreement, the term "affiliate" shall mean any corporation,
partnership, joint venture, person or other entity who directly, or indirectly
through one or more intermediaries, controls or is controlled by or is under
common control with any other corporation, partnership, joint venture, person or
other entity.
R. Taxes.
i. SELLER has accurately prepared and timely filed with the appropriate
governmental authorities all Tax Returns and reports required to be filed by it
under all applicable laws or regulations, including but not limited to payroll
and other employee taxes which are required to be filed, and has paid, or made
provision for the payment of, all amounts of Taxes which have or may have become
due pursuant to said returns or reports or pursuant to any assessment which has
been received by it or which are otherwise due by SELLER. SELLER has provided to
BUYER true, accurate and complete copies of all such tax returns and all
schedules and other supporting documents thereto filed by SELLER with all
appropriate taxing authorities, including all communications relating thereto,
for each of the last three (3) fiscal years. The provisions for Taxes reflected
in the Financial Statements are, or will be, adequate for all Taxes for the
periods ending on the respective dates of said Financial Statements and all
years and periods prior thereto and for which SELLER may have been liable on
such date. SELLER is not a party to any pending action, proceeding or audit,
nor, to the knowledge of SELLER, is any such action, proceeding or audit
threatened by any governmental authority for any assessment or collection of
taxes, interest, penalties, assessments or deficiencies, and there is no basis
for any assessment or collection of taxes, interest, penalties, assessments,
deficiencies or for any deficiency notice, thirty (30) day letter, or similar
notice with respect to Taxes. There are no tax liens on any of the properties or
assets of SELLER. SELLER has made all payments of all Taxes required to be made
under the Laws of Hong Kong and any comparable provisions law and have collected
or withheld (and have duly remitted or deposited) all amounts required to be
<PAGE>
collected or withheld. SELLER has not waived any law or regulation fixing, or
consented to the extension of, any period of time for assessment of any Taxes
which waiver or consent is currently in effect and there is no outstanding
request for any extension of time within which to pay any Taxes or file any Tax
Returns with the appropriate governmental authorities.
ii. For purposes of this Agreement, "Tax" or "Taxes" shall mean any and all
taxes, levies, fees, duties and charges of whatever kind (including any
interest, penalties or additions to the tax imposed in connection therewith or
with respect thereto), whether or not imposed on SELLER, including, without
limitation, taxes imposed on, or measured by, income, franchise, profits, or
gross receipts, and also ad valorem, value added, sales, use, service, real or
personal property, capital stock, license, payroll, withholding, employment,
social security, worker" compensation, unemployment compensation, utility,
severance, production, excise, stamp, occupation, premium, windfall profits,
transfer, and gains taxes, and customs duties; and "Tax Return" shall mean
returns, reports, information statements, and other documentation (including any
additional or supporting material) filed or maintained, or required to be filed
or maintained, in connection with the calculation, determination, assessment or
collection of any Tax.
S. Bank Accounts. Schedule 2(s) sets forth a true and correct list of the names
and addresses of all banks and other institutions at which SELLER has accounts,
borrowing resolutions, deposits or safety deposit bases, with the nature of such
account, the account number, and the names of all persons authorized to draw on
or give instructions with respect to such accounts or deposits, or to have
access thereto, and the names and addresses of all persons, if any, holding a
power-of-attorney on behalf of SELLER. Except as set forth on Schedule 2(s), all
cash in such accounts is held in demand deposits and is not subject to any
restriction or limitation as to withdrawal.
T. Employees, Consultants, Independent Contractors and Agents.
i. Schedule 2(t)(i) contains, under the heading "Employment, Consulting and
Other Personal Service Contracts", a true and correct list of all contracts
(whether written or oral) with employees, marketing representatives, agents,
independent contractors and consultants of SELLER, together with their titles or
positions and the annualized amounts of base pay or compensation being paid to,
or accrued for, each such person. Except as otherwise disclosed on Schedule
2(t)(i), no contract or agreement whether written or oral, requires SELLER to
pay compensation, commissions (i.e., marketing sales of agent broker agreements)
or other remunerations at any time subsequent to termination of such contract or
agreement. SELLER has not guaranteed any bonus due and/or payable, now or in the
future, to any employee, representative, agent, contractor or consultant.
ii. Schedule 2(t)(i) also contains a complete list of all employees, their date
of hire, their position or job description, and their annualized compensation.
<PAGE>
U. Environmental Matters. To the best knowledge of SELLER, after reasonable
investigation and inquiry, the operations of SELLER comply with all applicable
environmental and health and safety laws, regulations, ordinances and
requirements. SELLER has obtained all environmental, health and safety permits,
licenses, authorizations or other entitlement necessary for its operations, the
lack of which could cause a material adverse effect on the business, operations,
properties, assets, liabilities, working capital, prospects or condition
(financial or otherwise) of SELLER, and all such permits, licenses,
authorizations or other entitlement are in good standing and SELLER is in
compliance with all material terms and conditions of such permits. SELLER is not
aware of, nor have SELLER made or filed, any report or notice reporting a
release, spill, emission, leaking, disposal, discharge, leaching or migration
into the indoor or outdoor environment of a waste, pollutant, hazardous
substance, toxic substance, hazardous waste, extremely hazardous waste, medical
waste, restricted waste, special waste, asbestos or any substance or waste
relating to the operations or activities of SELLER, the presence of which will
or could require remedial action.
V. Books and Records. The books and records of SELLER have been made available,
and shall be available hereafter, to BUYER. Subject to the specific disclosures,
exceptions, qualifications and limitations as to the matters represented and
warranted herein, the books and records taken as a whole contain a complete and
accurate record of the business and operations of SELLER and have been
maintained in accordance with good business practices. SELLER has not engaged in
any material transaction, maintained any bank account or used any of its
corporate funds which has not been reflected in the regularly maintained books
and records of SELLER.
W. Proprietary Rights. SELLER owns or possess adequate licenses or other rights
to use all copyrights, uncopyrighted works, trademarks, service marks, trade
names, patents, unpatented inventions, trade secrets, know-how and other
proprietary rights necessary or desirable to conduct its business as now
conducted and hereafter proposed to be conducted (collectively, the "
Proprietary Rights") and has made all applications and licenses necessary
therefor. All such Proprietary Rights are listed and briefly described on
Schedule 2(w). Neither the validity of the Proprietary Rights nor the title
thereto or use thereof by SELLER is being questioned in any pending or
threatened litigation and the conduct of the business of SELLER, as now or
heretofore conducted, does not violate licenses, copyrights, uncopyrighted
works, trademarks, service marks, trade names, trade name rights, patents,
patent rights, unpatented inventions or trade secrets of others in any way which
could have an adverse effect on the business, assets, liabilities, or conditions
(financial or otherwise) of SELLER. To SELLER's knowledge, there is no
infringement by others of any of the Proprietary Rights.
<PAGE>
X. Letters of Intent. Except with respect to BUYER and as contemplated hereby,
SELLER has not entered into a letter of intent, agreements in principle or other
written agreement, whether binding or non-binding by its terms, with respect to
any merger, sale of assets or other corporate transaction which could result in
the sale, disposition or exchange of any material assets of SELLER, other than
as contemplated by this Agreement.
Y. Receivables. All receivables of SELLER shown on the Financial Statements
(except to the extent reflected on the Financial Statements as reserved against
uncollectible receivables) are good and collectible in the normal course of
business.
Z. Fraud and Abuse. To the knowledge of SELLER or SELLER's officers, directors
and employees, as applicable, have not engaged in any activities which are
prohibited under federal, state or local statutes or regulations or which are
prohibited by rules of professional conduct or which otherwise could constitute
fraud.
AA. Post Closing Liability of SELLER. Notwithstanding anything to the contrary
herein, from and after the Closing Date, SELLER shall be liable for any breach,
inaccuracy, non-fulfillment or misrepresentation of any representation,
warranty, covenant or agreement contained in this Agreement or any Ancillary
Documents.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF BUYER.
BUYER represents and warrants to SELLER as follows, as of the date hereof and
the Closing Date:
A. Organization and Standing. BUYER is a corporation organized, validly
existing, and in good standing under the laws of the State of Utah, United
States of America.
B. Corporate Power; Validity of Agreement; Consents. BUYER has all requisite
corporate power and authority under its Articles of Incorporation, Bylaws and
the Utah General Corporation Law to execute and deliver this Agreement and all
of the agreements, instruments and other documents to be executed and delivered
by BUYER incident to the consummation of the transaction contemplated hereby,
(collectively, the BUYER Ancillary Documents) to which it is a party, and to
carry out and perform its obligations under the terms of this Agreement and the
BUYER Ancillary Documents. The execution, delivery and performance of this
Agreement and the BUYER Ancillary Documents, and the consummation of the
transactions contemplated hereby and thereby, have been duly authorized by all
necessary corporate action by BUYER. This Agreement and the BUYER Ancillary
Documents have been duly executed and delivered by BUYER and constitute the
legal, valid and binding obligations of BUYER, legally enforceable against it in
accordance with their terms, except that such enforcement may be subject to (i)
bankruptcy, insolvency, reorganization or other laws now or hereafter in effect
affecting the enforcement of creditors rights generally, and (ii) general
principles of equity.
<PAGE>
C. No Violation. Subject to the fulfillment of the requirements of Sections 6.A.
hereof as applicable to BUYER, the execution, delivery and performance of this
Agreement and the BUYER Ancillary Documents will not and do not result in any
violation or breach of, be in conflict with, or constitute a default or event of
default (whether by notice or lapse of time or both) or give rise to a right of
termination, cancellation or acceleration under any provision of (i) the
Articles of Incorporation or Bylaws of BUYER or (ii) any law, rule or
regulation, or any judgment, decree, order, ruling, or award of any court or
governmental authority, applicable to BUYER and its business as conducted on the
date of this Agreement and as expected to continue thereafter based on
applicable law and regulations currently in existence.
SECTION 4. CONDUCT OF BUSINESS PENDING CLOSING; ASSETS.
A. Ordinary Course of Business. During the period from the date of this
Agreement to the Closing Date and except as otherwise agreed to by the parties
in writing, SELLER shall conduct, or shall have conducted, its operations
according to its ordinary and usual course of business consistent with past
practice. Until the Closing Date, SELLER shall also use its best efforts to
preserve intact its business organization, contracts and properties, keep
available the services of its officers and employees, maintain satisfactory
relationships with licensors, suppliers, distributors, customers, employees,
contractors and others having business relationships with SELLER. Without
limiting the generality of the foregoing, prior to the earlier of the Closing
Date or the termination of this Agreement, and except as otherwise required by
this Agreement or any of the Ancillary Documents, SELLER shall not, without the
prior written consent of BUYER:
i. amend its Memorandum and Articles of Association;
ii. authorize for issuance, issue or deliver any additional shares of any stock
of any class or securities convertible into shares of stock or issue or grant
any right, option, warrant or other commitment for the issuance of shares of
stock or such securities;
iii. split, combine or reclassify any shares of SELLER's capital stock or
declare, set aside or pay any dividend (whether in cash, stock or property) in
respect of SELLER's capital stock or redeem or otherwise acquire any of SELLER's
capital stock;
iv. solicit or encourage any inquiries or proposals (other than with BUYER) for
the acquisition of any of SELLER's capital stock, assets or business;
v. sell or purchase marketable securities owned by SELLER, if any;
vi. prepay expenses or obligations except in accordance with the terms of
applicable contracts or agreements and in the ordinary course of business (or
otherwise not to exceed $1,000);
<PAGE>
vii. increase compensation and/or benefits for any of SELLER's employees,
consultants or officers;
viii. terminate or enter into any employment or consulting contracts or any
collective bargaining agreement;
ix. sell or dispose of or encumber any amount of SELLER's capital assets with an
aggregate value of $5,000 or more or make any capital expenditures in an
aggregate amount in excess of $5,000, or enter into, renew or extend any lease
of capital equipment or real estate involving payments in an aggregate amount in
excess of $5,000 for the term of the lease;
x. create, amend, extend, renew, assume, incur or guarantee any indebtedness
either involving amounts in excess of $1,000, individually or in the aggregate
which is not in the ordinary course of its business;
xi. enter into any contract or commitment (including employment, consulting and
collective bargaining agreements) or engage in any transaction which is not in
the usual and ordinary course of SELLER's business or which is inconsistent with
SELLER's past practices and which is not terminable at will upon 30 days notice
without penalty of any kind;
xii. create any stock option or other stock-based incentive plan;
xiii. acquire any other business or interest therein;
xiv. enter into, amend or terminate (other than by expiration) any material
contract to which SELLER is a party or by which its assets are bound;
xv. amend, supplement or otherwise alter, in any material respect, any contracts
or relationships with suppliers or customers, except as required hereunder or
pursuant to any of the Ancillary Documents;
xvi. commence, compromise, settle, waive, approve or permit the settlement of,
any litigation, proceeding, hearing, arbitration or other dispute or claim
involving amounts in controversy of more than $1,000 in the aggregate, other
than for fair consideration in the ordinary course of business consistent with
past practice;
xvii. enter into any agreement or engage in any transaction with any affiliate,
stockholder, director, officer or affiliate of SELLER;
<PAGE>
xviii. make any change in the accounting practices of SELLER;
xix. fail to keep in full force and effect insurance covering SELLER and
SELLER's assets comparable in amount and scope of coverage to that which is now
maintained;
xx. fail to comply with any laws and regulations applicable to SELLER, or to the
conduct of SELLER's business;
xxi. enter into any agreement or arrangements, written or oral, that would cause
any of the statements contained in Section 2 to be untrue; or
xxii. enter into any contract or commitment to do any of the things described in
Clauses (i) through (xxi) above.
B. Assets. The assets of SELLER as of the Closing Date (tangible and intangible)
will include all the equipment, inventory and other assets being presently used
in and necessary or useful for the conduct of or related to its business, except
those consumed after the date hereof in the ordinary course of business or those
sold with BUYER's express written consent.
SECTION 5. ADDITIONAL AGREEMENTS.
A. Access and Information.
i. SELLER has afforded and shall continue to afford BUYER and its accountants,
counsel and other representatives full access for the period commencing on the
date hereof through and as of the Closing Date to all of the properties, books,
contracts, commitments, records and employees of SELLER and, during such period,
shall furnish to BUYER all information concerning the business, properties and
personnel of SELLER as BUYER may reasonably request, provided that no
investigation pursuant to this Section 5 shall cure any breach of any
representations or warranties of SELLER. BUYER shall take all reasonable efforts
to maintain the confidentiality of the existence of this Agreement and the
transactions contemplated hereby, including, without limitation, reviewing
information requested by BUYER at a location in Hong Kong other than at the
premises of SELLER during normal business hours when employees are present, and
obtaining the consent of SELLER prior to contacting or otherwise communicating
with any employee, supplier or customer of SELLER.
ii. SELLER shall use their best efforts and at BUYER's own cost to cause
SELLER's independent auditors to make available copies of all such documents and
information with respect to the business and properties of SELLER as
representatives of BUYER may from time to time reasonably request, including,
without limitation, the working papers used to prepare the Financial Statements
and income tax returns filed by SELLER.
<PAGE>
B. Notice of Changes. Between the date hereof and the Closing Date, SELLER,
shall promptly advise BUYER in writing of any changes or matters which change or
supplement the information set forth in this Agreement or the Schedules attached
hereto; provided, however, that no such change or supplement shall cure any
breach of any representations or warranties of SELLER. If, between the date
hereof and the Closing Date, any authority of the Hong Kong SAR Government shall
commence any examination, review, investigation, action, suit or proceeding
against SELLER shall give prompt notice thereof to the BUYER and shall keep the
BUYER informed as to the status thereof. BUYER shall have the right to be
present at and participate in any such proceeding affecting SELLER or its status
or operations.
C. Certain Defaults. SELLER shall give prompt notice to BUYER of any notice of
default received by it subsequent to the date of this Agreement and prior to the
Closing Date under any instrument or agreement to SELLER is a party or by which
SELLER is bound, which default could, if not remedied, result in any adverse
effect on SELLER's business, prospects, condition (financial or otherwise),
properties, operations, working capital, liabilities, or assets or which would
render incorrect any representation or warranty made herein.
D. Consents. Each party shall cooperate with the other party hereto and shall
use its best efforts to take, or cause to be taken, all actions and to do, or
cause to be done, all things necessary and proper or advisable to consummate and
make effect, as soon as reasonably practicable, the transactions contemplated by
this Agreement and use its best efforts to file all applications and information
in order to obtain the Closing Date all licenses, permits, consents or other
approvals required, respectively, to be obtained by each such party from any
governmental authority or other person in connection with consummation of the
transactions contemplated by this Agreement, including without limitation, all
consents necessary from regulatory agencies and under supplier or lease
agreements, so that the same will continue in effect after the Closing.
E. Notice of Breach. Each party shall immediately give notice to the others of
the occurrence of any event, or the failure of any event to occur, that results
in a breach of any representation or warranty contained herein by such party or
a failure by such party to comply with any covenant, condition or agreement
contained herein.
F. Expenses. Except as otherwise expressly provided herein or in any Ancillary
Document, BUYER shall pay all of its costs and expenses incurred in connection
with this Agreement and the transactions contemplated herein, and the SELLER
shall pay all of the costs and expenses of the SELLER incurred in connection
with this Agreement and the transactions contemplated herein.
<PAGE>
G. Press Release. Prior to the Closing Date, neither BUYER nor SELLER shall
issue any press releases concerning the terms and conditions of this Agreement
or the transactions contemplated hereby without the prior review and approval of
BUYER and SELLER, other than such announcements, filings or press releases as
required by law.
H. Conduct. Except as provided by this Agreement or as BUYER may otherwise
consent in writing, SELLER will enter into, any transaction, take any action or
permit any event to occur which would result in any of the representations and
warranties contained in this Agreement, or in any other agreement, certificate
or other document delivered by or on behalf of SELLER, or any of their
representatives, to BUYER in connection with this Agreement or the transactions
contemplated herein, not being true and correct immediately after such
transaction has been entered into or consummated or such event has occurred.
I. Further Assurances. At the request of BUYER, SELLER shall promptly take, or
cause to be taken, all action, and do or cause to be done, all things, and
execute and deliver, or caused to be executed and delivered, as the case may be,
to BUYER or for the benefit of BUYER, all such further assignments,
endorsements, and other documents as BUYER may reasonably request in order to
consummate the transactions contemplated by this Agreement. At the request of
SELLER, BUYER shall take all action, do all things, and execute and deliver to
SELLER all such further assignments, endorsements, and other documents as SELLER
may reasonably request in order to consummate the transactions contemplated by
this Agreement. In case at any time after the Closing Date any further action is
necessary or desirable to carry out the purposes of this Agreement or any of the
Ancillary Documents, the SELLER, proper officers or directors of SELLER, or
BUYER, as the case may be, shall take all such necessary action.
J. No Shop. Save and except those already disclosed to BUYER, until the Closing
Date or the termination of this Agreement pursuant to Section 7 hereof, SELLER
shall not solicit, directly or indirectly, any inquiries or proposals for the
acquisition of any of the capital stock, assets or business of SELLER from, or
furnish information relating to the foregoing to, or engage in negotiations or
discussions relating to the foregoing with, or accept any proposal relating to
the foregoing from, any corporation, partnership, person or other entity or
group other than BUYER, and SELLER shall use all reasonable efforts to restrict
any officer, director, employee, investment banker, attorney or other advisor
retained by SELLER from doing any of the foregoing. SELLER shall, after closing,
confidential documents and information or compilations of such documents or
information provided to third parties, if any, in connection with any previous
negotiations or discussions since January 1, 1999, relating to the foregoing.
SELLER will, immediately upon receipt, advise BUYER orally and promptly
thereafter in writing of any inquiry or proposal received for the acquisition of
the capital stock, assets or business of SELLER.
<PAGE>
K. Withholding. SELLER shall provide any certificates or affidavits required by
BUYER so that BUYER shall not be required to withhold any taxes from amounts to
be paid the SELLER hereunder.
L. Business Name. On and after the Closing Date, SELLER authorizes BUYER to use
the corporate and/or trade names of SELLER for all purposes in connection with
the operations of BUYER.
M. Intercompany Indebtedness. Prior to or as of the Closing Date, any obligation
owed to SELLER by any officer, director, employee, agent or representative of
SELLER shall be paid irrespective of the terms of repayment described in any
note evidencing such obligation other than amounts advanced in the ordinary
course of business under standard travel and expense plans in connection with
any such person's employment, including for education purposes.
N. BUYER will, within 14 days from the date hereof, complete its due diligence
covering the relevant business areas and information pertinent to the subject
new share issuance. Such due diligence shall be at the sole cost and expense of
BUYER.
O. SELLER will continue its existing operation and will use its best efforts to
develop an electronic real time financial data distribution infrastructure
targeting financial institutions and investors in the Greater China area as well
as being involved in the business of an Internet Service Provider with focus on
the investment and financial market.
P. BUYER will use its best effort to locate and transfer from North America
technology and marketing ideas that can be adopted by SELLER in the Greater
China area.
Q. Parties understand that further funding of approximately US$ 3 Million to US$
5 Million will be required to finance the expansion of SELLER's services in the
Greater China area.
R. BUYER will provide such guarantees as will relieve Mr. Stephen Tang of his
obligations as guarantor to various banks and financial institutions that are
now providing credit facilities to SELLER or its subsidiary.
S. Parties agree that SELLER's existing loans from SELLER's shareholders, in the
approximate amount of HK$5,200,000, shall be settled in the following manner:
i. HK$2,000,000 shall be repaid by SELLER in twelve (12) equal monthly
installments beginning from the end of the first month after Closing;
<PAGE>
ii. The balance, being the amount of the existing shareholders' loan less the
HK$2,000,000 to be repaid in the manner described hereinabove, shall be repaid
by BUYER on behalf of SELLER by the issuance of shares of The Hartcourt
Companies, Inc. in such number and quantity based on the per share value
calculated according to Section 1.E. hereof. Sale of the shares of The Hartcourt
Companies, Inc. so acquired by the SELLER's existing shareholders will be
restricted within the first twelve (12) month after Closing. Save and except
this restriction, BUYER warrants that the said shares shall rank pari-passu with
all the existing shares of The Hartcourt Companies, Inc. and will continue to be
freely tradable at NASDAQ.
T. SELLER will grant share options to employees and full time directors to
subscribe for not more that 10% of the issued share capital of SELLER at terms
and conditions to be decided by the board of directors subsequent to the Closing
contemplated herein.
SECTION 6. CONDITIONS PRECEDENT.
A. Conditions Precedent to Closing. Subject to waiver as set forth in Section
7.F. below, the respective obligations of each party hereto to consummate the
transactions contemplated by this Agreement are subject to the fulfillment at or
prior to the Closing Date of each of the following conditions:
i. All statutory and regulatory requirements necessary for the valid
consummation by BUYER and SELLER of the transactions contemplated by this
Agreement and any Ancillary Documents shall have been fulfilled; all
authorizations, consents, approvals and waivers of all Regulatory Entities
necessary to be obtained in order to permit consummation of the transactions
contemplated by this Agreement, including, without limitation, the consents set
forth in Section 2.D., shall have been obtained. Parties hereto agree to
promptly apply for any license, permit or other consent necessary to consummate
the transactions contemplated under this Agreement and the Ancillary Documents.
ii. No injunction, restraining order or other ruling or order issued by any
court of competent jurisdiction or governmental authority or regulatory body or
other legal restraint or prohibition shall be in effect, and no proceeding,
action, suit or claim brought or made by any governmental authority or
regulatory body shall be pending or threatened that seeks any injunction,
restraining order or other order or other relief, and no statute, rule,
regulation or executive order shall have been enacted, promulgated or proposed,
in each case, that would prohibit the consummation of the transactions
contemplated by this Agreement; it being understood that the parties hereto
shall use their best efforts to have any such injunction, ruling, order,
restraint or prohibition (each, a ?Restraint) lifted and to oppose any action to
impose a Restraint, and to reasonably extend the date set forth in Section
7.A.ii. hereof so long as such efforts are continuing in good faith.
<PAGE>
iii. All approvals, consents, authorizations and waivers which SELLER is
required to obtain to continue obligations or rights under the lease agreement
of its office premises or Contracts after the Closing Date shall have been
obtained.
iv. SELLER and BUYER each shall have complied with and performed in all material
respects all of its obligations and duties hereunder as of the Closing Date and
shall not have breached in any material respect any of the terms and conditions
of this Agreement or the Ancillary Documents.
B. Conditions Precedent to Obligations of SELLER. Subject to waiver as set forth
in Section 7.F. below, the obligations of SELLER to effect the transactions
contemplated by this Agreement are subject to the fulfillment on or prior to the
Closing Date of each of the following conditions:
i. BUYER shall have performed and complied with all of the agreements and
covenants contained in this Agreement required to be performed and complied by
it on or prior to the Closing Date and the representations and warranties of
BUYER contained in this Agreement shall be true in all material respects on the
date hereof and as of the Closing Date.
ii. BUYER shall have delivered to SELLER copies of the actions of its Board of
Directors authorizing and approving the execution, delivery and performance of
this Agreement and the Ancillary Documents.
iii. No Restraint issued by any court of competent jurisdiction or governmental
authority or regulatory body or other legal Restraint shall be in effect, and no
proceeding, action, suit or claim brought or made by any governmental authority
or regulatory body shall be rending or threatened that seeks any Restraint or
other relief, and no statute, rule, regulation or executive order shall have
been enacted, promulgated or proposed, in each case, that would prohibit the
consummation of the transactions contemplated by this Agreement; it being
understood that the parties hereto shall use their best efforts to have any such
Restraint lifted and to oppose any action to impose a Restraint, and to
reasonably extend the date set forth in Section 7.A.ii. hereof so long as such
efforts are continuing in good faith.
C. Conditions Precedent to Obligations of BUYER. Subject to waiver as set forth
in Section 7.F., the obligations of BUYER to effect the transactions
contemplated by this Agreement are subject to the fulfillment on or prior to the
Closing Date of each of the following conditions:
i. SELLER shall have performed and complied with all of the agreements and
covenants contained in this Agreement required to be performed and complied with
by it on or prior to the Closing Date and the representations and warranties of
SELLER contained in this Agreement shall be true in all material respects on the
date hereof and as of the Closing Date.
<PAGE>
ii. No Restraint issued by any court of competent jurisdiction or governmental
authority or regulatory body or other legal Restraint shall be in effect, and no
proceeding, action, suit or claim brought or made by any governmental authority,
regulatory body, or third party shall be pending or threatened that seeks any
Restrain or other relief, and no statute, rule, regulation or executive order
shall have been enacted, promulgated or proposed, in each case, that would
prohibit the consummation of the transactions contemplated by this Agreement, it
being understood that the parties hereto shall use their best efforts to have
any such Restraint lifted and to oppose any action to impose a Restraint, and to
reasonably extend the date set forth in Section 7.A.ii. hereof so long as such
efforts are continuing in good faith.
iii. SELLER shall have delivered to BUYER a certificate to the effect that each
of the conditions specified in Sections 6.C.i. and 6.C.ii. are satisfied in all
respects.
iv. BUYER shall have received a certificate of SELLER dated as of the Closing
Date certifying to the incumbency of the officers of SELLER signing for it and
as to the authenticity of their signatures.
v. SELLER shall have delivered to BUYER certified copies of its written consent
and unanimous resolution of its Board of Directors authorizing and approving the
execution, delivery and performance of this Agreement.
vi. BUYER shall , concurrent with the closing hereof and upon completion of the
subject new share issuance appoint five (5) directors to the Board of Directors
of SELLER. SELLER shall retain its existing 4 directors, it being intended that
the new Board of Directors shall have 9 members. SELLER shall deliver its duly
executed Board of Directors' resolution to this effect at least five (5)
business days prior to the Closing Date.
vii. SELLER's Reviewed Financial Statements and Previous Financial Statements
shall be acceptable to BUYER and its representatives.
viii. Prior to the Closing Date, BUYER shall have received certified copies of
release and termination agreements executed by all the shareholders of SELLER,
and all other parties to, or which may be bound by, any shareholders'
agreements, voting agreements, stock option agreements and any and all other
similar agreements between current and/or past shareholders or employees of
SELLER (collectively, the "Corporate Agreements"). The release and termination
agreements to be provided hereunder shall be in form and substance acceptable to
BUYER and shall provide for a full and complete release and termination of all
Corporate Agreements.
ix. Prior to the Closing Date, BUYER shall have received an estoppel letter
dated not more than three (3) business days prior to the Closing Date from the
lessors of the office premises occupied by SELLER, in form and substance
<PAGE>
acceptable to BUYER, which estoppel letter(s) shall set forth all contracts
between SELLER and such lessor, the term remaining under each such contract and
shall certify that as of the date of such letter(s) (i) all such contracts are
in full force and effect, (ii) to the best of their knowledge, no party to any
such contract has violated any provision of, or committed or failed to perform
any act which, with notice, lapse of time or both, would constitute a default,
of any material provision of any such contract, (iii) to the knowledge of the
lessor, no other party to any of such contracts, if any, is in default thereof,
and (iv) the lessor consents to and approves the transactions contemplated in
this Agreement.
SECTION 7. TERMINATION, AMENDMENT AND WAIVER; DEFAULT.
A. Termination. This Agreement may be terminated at any time prior to the
Closing Date;
i. By mutual agreement of SELLER and BUYER;
ii. By the Non-Defaulting Party, in the event of a Completed Default pursuant to
Section 7.B. hereof, upon written notice of default and a fifteen (15) business
day cure period.
B. Default Generally. In the event that prior to the Closing Date, any party
hereto fails in the due performance or observance of its obligations under this
Agreement, or any of its representations or warranties set out herein is
breached or determined to be materially inaccurate as of the date of this
Agreement or as of the Closing Date, then so long as such state of facts
continues, such party (a "Defaulting Party") shall be deemed to be in default
("Default"). In such event, the other party ("Non-Defaulting Party") may deliver
a written notice identifying the claimed failure, breach or inaccuracy. If said
failure or breach is not or cannot be cured within fifteen (15) business days
after the delivery of written notice, or said inaccurate representation or
warranty is not or cannot be made true within fifteen (15) business days after
the delivery of written notice, a "Completed Default" may be declared by the
Non-Defaulting Party.
C. Default by SELLER. In the event of a Completed Default by the SELLER, BUYER
may (in its sole discretion):
i. terminate this Agreement and (a) bring an action against SELLER and/or SELLER
for damages and/or (b) make a Claim (as defined in Section 8.A. hereof) against
SELLER as provided in Section 8.A. hereof; or
ii. consummate the purchase of the SELLER Stock by requiring SELLER to continue
to satisfy their other covenants and agreements provided herein and, in
furtherance thereof, bring an action against SELLER for equitable relief,
including an action for specific performance, and further to make a claim
against SELLER for any damages or losses suffered by BUYER as a result of the
default.
<PAGE>
No partial exercise of any remedy provided above shall preclude any further
exercise thereof.
D. Default by BUYER. Prior to the Closing Date, in the event of a Completed
Default by BUYER, SELLER may:
i. terminate this Agreement and (i) bring an action against BUYER for damages
and/or (ii) make a Claim against BUYER as provided in Section 8.B. hereof; or
ii. Consummate the sale of the SELLER Stock by requiring BUYER to continue to
satisfy their other covenants and agreements provided herein and, in furtherance
thereof, bring an action against BUYER for equitable relief, including an action
for specific performance.
No partial exercise of any remedy provided above shall preclude any further
exercise thereof.
E. Effect of Termination. In the event of termination of this Agreement by
either SELLER or by BUYER as provided in this Section 7, no party hereto shall
have any further liability hereunder; provided, however, such termination shall
not relieve a party whose breach of this Agreement gave rise to such termination
from liability for damages for such breach and provided further that the
indemnification provisions of Section 8 hereof and the confidentiality provision
of Section 9 hereof will survive any such termination.
F. Extension; Waiver. At any time, any party may (i) extend the time for the
performance of any of the obligations or other acts of the other parties hereto,
(ii) waive any inaccuracies in the representations and warranties contained
herein for its benefit or in any document delivered to it pursuant hereto,
and/or (iii) waive compliance with any of the agreements or conditions contained
herein for its benefit to the extent legally permissible. Any agreement on the
part of a party hereto to such extension or waiver shall not be valid unless set
forth in an instrument in writing signed on behalf of such party and shall not
operate as an extension or waiver of any subsequent or other failure.
SECTION 8. INDEMNIFICATION; SURVIVAL OF REPRESENTATIONS AND WARRANTIES.
A. Indemnification by SELLER. Subject to Section 8 hereof, SELLER, if this
transaction is not completed, agrees to indemnify, defend and hold harmless
BUYER and its respective directors, officers, employees, agents, affiliates,
successors, attorneys and assigns (collectively, "Indemnitee") from and against
<PAGE>
any and all losses, claims, demands, damages, liabilities, deficiencies, costs
and expenses (including, without limitation, reasonable attorneys' fees and
disbursements and amounts paid in settlement of any claim, act or suit) of every
kind, nature and description (each, a "Claim" and collectively, "Claims")
suffered by Indemnitee based upon, arising out of or otherwise in respect of:
i. any inaccuracy in or breach or non-fulfillment of any representation,
warranty, covenant or agreement of the SELLER contained in this Agreement or in
any Ancillary Document, certificate or other documents delivered by or on behalf
SELLER pursuant to this Agreement;
ii. the ownership, management and conduct of SELLER's business prior to and
including the Closing Date, including, but not limited to, Claims arising out of
termination of any of SELLER's employees, if any, as of and including the
Closing Date, except for Claims fully reflected or reserved against on the
Financial Statements; or
iii. Any act or omission of SELLER, or any of their respective agents and
employees in respect of periods prior to and including the Closing Date, except
for Claims fully reflected or reserved against on the Financial Statements.
Any cost resulting from the undisclosing of liabilities by SELLER will be offset
against SELLER by reducing the existing shareholders' loan by the same amount.
B. Indemnification by BUYER. Subject to Section 8 hereof, BUYER agrees to
indemnify, defend and hold harmless SELLER and its directors, officers,
employees, agents, affiliates, successors, attorneys and assigns (collectively,
"SELLER Indemnitee") from and against any and all Claims, costs , expenses cost,
demands, damages, liabilities, deficiencies (including, without limitation,
reasonable attorney's fees and disbursements and amounts paid in settlement of
any claim, act or suit) of every kind, nature and description (each, a "Claim"
and collectively, "Claims") suffered by SELLER Indemnitee based upon, arising
out of or otherwise in respect of any inaccuracy in or breach or non-fulfillment
of any representation, warranty, covenant or agreement of BUYER contained in
this Agreement or in any Ancillary Document, certificate or other documents
delivered by or on behalf of BUYER pursuant to this Agreement.
The rights of Indemnitee and SELLER Indemnitee to indemnification hereunder
shall not be prejudiced or limited in any manner by any right to indemnification
under any of the Ancillary Documents and each such right of indemnification and
agreements shall be cumulative. An Indemnitee or SELLER Indemnitee may proceed
against the other party with respect to all or any portion of a Claim.
<PAGE>
C. Notice and Opportunity to Defend.
i. Promptly after receipt by an Indemnitee or SELLER Indemnitee of notice of the
assertion of any Claim or discovery of any fact upon which such party expects to
make a claim for indemnification hereunder, the Indemnitee or SELLER Indemnitee
shall give the party or parties who may become obligated to provide
indemnification hereunder (the "Indemnifying Party") written notice describing
such Claim or fact in reasonable detail; provided, however, that the failure of
the Indemnitee or SELLER Indemnitee to provide notice of the Claim promptly
after the Indemnitee or SELLER Indemnitee receives notice of such Claim shall
not relieve the Indemnifying Party of its obligations to indemnify the
Indemnitee or SELLER Indemnitee with respect to such Claim except to the extent
that such failure actually prejudices the Indemnifying Party hereunder. Such
Indemnifying Party shall have the right, at such Party's option, to compromise
or defend, at such Party's own expense and by such Party's own counsel, any such
matter involving the asserted liability of the Indemnitee or SELLER Indemnitee
as to which the Indemnifying Party shall have acknowledged its obligation to
indemnify the party seeking indemnification hereunder; provided that counsel for
the Indemnifying Party shall be approved by the Indemnitee or SELLER Indemnitee;
and provided further that the Indemnifying Party shall not, without the consent
of the Indemnitee or SELLER Indemnitee, consent to the entry of any judgment or
enter into any settlement that adversely affects the business or operations of
the Indemnitee or SELLER Indemnitee or that does not include the giving by the
claimant or plaintiff to such Indemnitee or SELLER Indemnitee of a release from
all liability with respect to such Claim for litigation. If any Indemnifying
Party shall undertake to compromise or defend any such asserted liability, such
party shall promptly notify the Indemnitee or SELLER Indemnitee of such party's
intention to do so, and the Indemnitee or SELLER Indemnitee agrees to cooperate
fully with the Indemnifying Party and such party's counsel in the compromise of,
or defense against, any such asserted liability. All costs and expenses incurred
in connection with such cooperation shall be borne by the Indemnifying Party. In
any event, the Indemnitee or SELLER Indemnitee shall have the right at its own
expense to participate in the defense of such asserted liability.
ii. An Indemnitee or SELLER Indemnitee shall not compromise or settle any matter
which, if sustained, would entitle the Indemnitee or SELLER Indemnitee to
indemnification hereunder from SELLER or BUYER, as the case may be, which
consent shall not be unreasonably withheld or delayed. Mr. Stephen Tang
(including any successor designated by the unanimous written consent of SELLER)
is hereby irrevocably designated as the SELLER agent for purposes of consenting
to any compromise or settlement in accordance with this Section 8.B.ii. and each
shall have authority to determine the validity of, satisfy, compromise, settle
or otherwise to adjust any Claims on behalf of SELLER which may, in the sole
judgment of either of them, affect the liability of SELLER to any Indemnitee or
SELLER Indemnitee pursuant to this Agreement.
<PAGE>
D. Survival of Representations and Warranties. All representations and
warranties of SELLER contained herein (including all schedules and exhibits
hereto) or in any certificate, Schedule or other instrument or document
delivered pursuant to this Agreement and the Ancillary Documents and the
provisions of this Section 8 shall survive the execution hereof and Closing Date
for a period of two (2) years from and after the Closing Date, except that with
respect to any warranty or representation with respect to Taxes and/or any
willful, intentional or knowing misrepresentation of SELLER or any of the
officers, directors, employees, agents or representatives of SELLER
(collectively "SELLER and their Agents"), such warranty and representation shall
survive until the later of the end of said two- year period or expiration of the
applicable statute of limitations pursuant to which BUYER or any Indemnitee or
SELLER Indemnitee can seek recovery from SELLER and its Agents.
SECTION 9. CONFIDENTIALITY.
A. Respective Obligations. Each of the parties hereto and their respective
representatives will hold in confidence any data and information obtained with
respect to any other party, or the business of any other party, from any
representative, officer, director or employee of such party, or from any books
or records of such party in connection with this Agreement or the transactions
contemplated by this Agreement, and shall not use such data and information
except for the reasonable due diligence purposes of such party exclusively
related to the transactions contemplated hereby. No party receiving such
confidential information shall disclose such information to any person except
for such party's officers, directors, independent accountants, legal counsel or
other representatives (collectively, "Representatives") with a need to know such
information for the purpose of evaluating the transactions contemplated hereby.
The parties will inform their respective Representatives that by receiving any
such confidential information, they are agreeing to be bound by the terms of
this Section 9. Confidential information shall not include information in the
public domain, information published or disseminated by the party generating
such information without restriction to other persons, information which is
independently developed by the other party, information identified in writing by
the furnishing party as not being confidential or information which is required
by any applicable law or regulation to be disclosed.
B. Survival. The obligations and rights of the parties under this Section 9
shall survive any expiration or termination of this Agreement for any reason
whatsoever.
C. Termination. If this Agreement is terminated pursuant to Section 7, all
copies of written data and information, including copies in the possession of
such Party's Representatives, obtained by any of the parties hereto from any
other party shall be returned promptly to the relevant party upon request
therefore by the party providing such data or information or that Party's
counsel. Each party hereto agrees to use all reasonable efforts to keep
<PAGE>
confidential any information obtained by it unless and until such information is
ascertainable from public or published information or trade sources or is
otherwise a matter of public knowledge or unless the information is needed in
connection with any on-going dispute among the parties hereto. Each party shall
keep all information confidential and shall not use such information for such
Party's benefit in the event this Agreement is terminated pursuant to Section 7.
The obligations under this Section 9 are in addition to the and not in lieu of
obligations arising under any other confidentiality or similar agreement between
BUYER and any of the other parties hereto.
SECTION 10. MISCELLANEOUS.
A. Governing Law. This Agreement and all transactions contemplated by this
Agreement shall be governed by, and construed and enforced in accordance with,
the internal laws of the State of California without regard to principles of
conflicts of laws to the extent that such principles would require the
application of the laws of any jurisdiction other than the State of California.
B. No Assignment; Successors and Assigns. BUYER may assign its rights and
obligations hereunder to any entity wholly owned by BUYER, without the consent
of notice to SELLER. Except as otherwise provided herein, the provisions hereof
shall inure to the benefit of, are binding upon and are enforceable by and
against the parties and their respective legal representatives, successors and
permitted assigns. SELLER may not assign their rights and obligations hereunder
without the written consent of BUYER.
C. Entire Agreement. This Agreement (including all the Exhibits and Schedules
hereto) constitutes the full and entire understanding and agree among the
parties with regard to the subject matter hereof and supersedes all prior
negotiations, understandings and representations, both written and oral, if any,
made by and among such parties, including, without limitation, the Memorandum of
Understanding dated June 18, 1999, between SELLER and BUYER.
D. Notices. All notices and other communications hereunder shall be in writing
and shall be deemed given (i) on the date of receipt, if delivered personally;
(ii) seven (7) days after being mailed by registered or certified mail, return
receipt requested; (iii) upon delivery by commercial overnight courier (e.g.,
Federal Express, DHL, etc.), return receipt or confirmation of delivery
requested; or (iv) by facsimile transmission with voice confirmation of receipt,
to the parties at the following addresses (or at such other address for a party
as shall be specified by like notice):
<PAGE>
i. If to BUYER to:
The Hartcourt Companies, Inc.
1198 E. Willow St.
Long Beach, CA 90806 USA
(562)426-9796
Fax# (568)426-8896
ii. If to SELLER to:
Financial Telecom Limited
308 Hang Bong Commercial Centre,
28 Shanghai Street
Kowloon, Hong Kong
(862)2868-0668
Fax#(852)2877-5021
E. Cooperation. The parties agree to execute and deliver such other documents,
certificates, agreements and other writings and to take such other actions as
may be necessary or desirable in order to expeditiously consummate or implement
the transactions contemplated by this Agreement.
F. Interpretation. The headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement.
G. Delays or Omissions. No delay or omission to exercise any right, power or
remedy accruing to any party to this Agreement, upon any breach or default of
another party under this Agreement, shall impair any such right, power or remedy
of such party nor shall it be construed to be a waiver of any such breach or
default, or an acquiescence therein, or of or in any similar breach or default
thereunder occurring; nor shall any waiver of any single breach or default
theretofore or thereafter occurring act as a waiver of any other breach or
default under this Agreement. Any waiver, permit, consent or approval of any
kind or character on the part of any party of any breach or default under this
Agreement, or any waiver on the part of any party of any provisions or
conditions of this Agreement, must be in writing and shall be effective only to
the extent specifically set forth in such writing subject to the provisions of
Section 7 hereof. Except as otherwise provided herein, all remedies, either
under this Agreement, or by law or otherwise afforded to any party, shall be
cumulative and not alternative.
H. Counterparts. This Agreement may be executed in any number of counterparts,
each of which may be executed by less than all of the parties, each of which
shall be enforceable against the parties actually executing such counterparts,
and all of which together shall constitute one instrument.
<PAGE>
I. Severability. If any provision of this Agreement or any Ancillary Document
entered into pursuant hereto is contrary to, prohibited by or deemed invalid
under applicable law or regulation, such provision shall be inapplicable and
deemed omitted to the extent so contrary, prohibited or invalid, but the
remainder hereof shall not be invalidated thereby and shall be given full force
and effect so far as possible. If any provision of this Agreement may be
construed in two or more ways, one of which would render the provision invalid
or otherwise voidable or unenforceable and another of which would render the
provision valid and enforceable, such provision shall have the meaning which
renders it valid and enforceable.
J. Attorney's Fees. In the event any arbitration, litigation or other legal
action or proceeding is brought between the parties to enforce any provision of
this Agreement or because of an alleged dispute, breach, default or
misrepresentation in connection with any provision of this Agreement, the
prevailing party will be entitled to an award of judgment for all reasonable
costs incurred by reason of such proceeding, including reasonable attorneys'
fees even if incident to appellate, bankruptcy, post-judgment or alternative
dispute resolution proceedings, payments owed to arbitrators, travel expenses,
per diem expenses, witness fees, investigative fees, paralegal fees and all
other reasonable charges billed by an attorney for the prevailing party. A party
not entitled to recover its costs shall not recover attorneys' fees. No sum for
attorneys' fees shall be counted in calculating the amount of a judgment for
purposes of determining whether a party is entitled to recover its costs or
attorneys' fees.
K. Specific Performance. Each of the parties acknowledges that the parties will
be irreparably damaged (and damages at law would be an inadequate remedy) if
this Agreement is not specifically enforced. Therefore, in the event of a breach
or threatened breach by any party of any provision of this Agreement, then the
other parties shall be entitled subject to the provisions of Section 9 hereof,
in addition to all other rights or remedies, to injunctions restraining such
breach, without being required to show any actual damage or to post any bond or
other security, unless the court adjudicating the motion for equitable relief
otherwise requires a bond, in which case the parties agree that a bond in the
amount of $1,000 is sufficient and appropriate.
L. Waivers. No action taken pursuant to this Agreement, including any
investigation by or on behalf of any party hereto, shall be deemed to constitute
a waiver by the party taking such action of compliance with any representation,
warranty, covenant or agreement contained herein or in any Ancillary Document.
The waiver by any party hereto of a breach of any provision of this Agreement
shall not operate or be construed as a waiver of any subsequent breach.
M. Rules of Construction. In this Agreement, unless the context otherwise
requires, words in the singular include the plural and in the plural include the
singular, and words of masculine gender include the feminine and the neuter, and
when the sense so indicates words of the neuter gender may refer to any gender,
and the word "his" may include "its".
<PAGE>
N. Jurisdiction. Each of the parties hereto irrevocably consents to the
exclusive jurisdiction of the federal and state courts located in Los Angeles
County, California, in any and all actions between or among any of the parties
hereto, whether arising hereunder or otherwise.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day first
above written.
BUYER:
THE HARTCOURT COMPANIES, INC.,
a Utah corporation, USA
By:_________________________
Alan V. Phan, Chairman
SELLERS:
FINANCIAL TELECOM LIMITED,
a Hong Kong corporation
By:_________________________
Stephen Tang, Managing Director
<PAGE>
Schedule 1(a)(iv)
Bonus, Compensation, Health and Other Plans
Bonus
Bonus may be paid to the staff members from time to time based on staff
performance and profitability of the company while such payment is solely at the
discretion of the company.
Compensation - Overtime
Overtime work with prior approval of immediate supervisor is subject to overtime
pay based on the following formula :-
Overtime pay per hour = Basic monthly salary / 8 hours / 30 days x 1.5
Minimum overtime work being 30 minutes.
Compensation - Vacation Leave and Casual Leave
Staff member having completed the probation period is entitled to pay vacation
leave of :
14 working days for the first year 17 working days for the second year
and thereafter
21 working days per year for staff member who is also the authorized
signatory of the company
Vacation leave entitlement is calculated on the fiscal year basis from July 1 to
June 30 starting from the joining date of staff member. A maximum of 14 days of
unclaimed leave is allowed for rolling over to the succeeding fiscal year, while
the unclaimed leave in excess of 14 days will be forfeited.
Casual leave application will be considered on the merits of the individual case
and requires approval by the department head in advance, whenever possible.
Casual leave taken wil offset the balance of vacation leave of the staff member.
Compensation - Advance Leave
No advance leave will be allowed to staff member except under the following
situations :
Examinations
Marriage
Emergency
and provided that sound and proven evidence is available for consideration and
approval by supervisor, and that the staff member has served the company for
more than 3 months. Under NO circumstances however, that more than 7 days of
advance leave will be granted.
<PAGE>
Schedule 1(a)(iv) continued
Compensation - Meal and Travel Allowance
Meal allowance of HK$30 will be paid to staff member having overtime work of
over 3 hours and that such work period either cover 1:00 pm on Saturdays and
Holidays or 8:30 pm on weekings.
Travel allowance of HK$30 will be paid to staff member having overtime work
beyond 10:00 pm on any working day or on Sunday or public holiday.
Compensation - Education Allowance
Subject to prior approval by department head, staff member will be entitled to
reimbursement of education fees including course fees and examination fees on
subjects directly related to the job nature of the staff member.
Health Plan [Refer to Attachment 1(a)(iv)] Staff member is entitled to company
medical benefits from either :
Government Hospital / Clinics Consultations
Staff member to pay 100% of total bill amount first and to claim for
reimbursement of 70% from the company subsequently
Doctors of the SMS Group
Staff member to pay 30% of the bill for General Care consultation in
clinic, remaining 70% to be settled by the company. For Specialist Care
consultation referred by the General Care doctors, staff will have to pay
HK$140 in clinic, remaining HK$160 to be settled by the company. For
laboratory and X-ray tests referred by the panel doctors, staff will have
to pay 30% of the bill and the company will settle the remaining 70%.
A ceiling of HK$3,000 on the above benefits will be applicable to each
staff member per annum.
Hospitalization Allowance
A ceiling of HK$3,000 for reimbursement of hospitalization expenses will
also be applicable to each staff member per annum
<PAGE>
Schedule 2(b)(i)
Authorized, Issued and Outstanding Capital Stock
COMMON STOCK
Authorized:
[ 8,800,000 ] Shares Authorized.
Outstanding: 3,519,349
Shareholder Shares Percentage
Bowland International Limited 3,427,349 97.39%
Tang Wing On 92,000 2.61%
--------- -------
3,519,349 100.00%
No other common stock is outstanding.
PREFERRED STOCK
NIL
<PAGE>
Schedule 2(g)
FINANCIAL STATEMENTS
Attachment
Details Reference
- ------------------------------------------------------------- -------------
Audited Financial Statements for the year ended June 30, 1996 2(g)-1
Audited Financial Statements for the year ended June 30, 1997 2(g)-2
Audited Financial Statements for the year ended June 30, 1998 2(g)-3
Financial Statement for the eight (8) months ended February 28, 1999 2(g)-4
<PAGE>
Schedule 2(j)
Insurance Policies and Claims
Refer to Attachment 2(j)
<TABLE>
<CAPTION>
I N S U R A N C E P O L I C I E S
Policy Expiry Insurance Sum
Coverage Details Number Date Company Insured
(HK$)
<S> <C> <C> <C> <C>
Financial Telecom Limited
Employee' Compensation W53-041442 31/12/99 Wing Lung Insurance $1,427,000
Public Liability - Office W53-041443 31/12/99 Wing Lung Insurance $2,000,000
Public Liability - Satellite Disc & Equip. W53-041444 31/12/99 Wing Lung Insurance $5,000,000
Public Liability - Transmission Sites W53-041445 31/12/99 Wing Lung Insurance $5,000,000
Burglary W53-041446 31/12/99 Wing Lung Insurance $120,000
Money In Transit W67-045012 30/06/00 Wing Lung Insurance $30,000
Commercial Fire - Transmitter & Equip. W11-137909 30/06/00 Wing Lung Insurance $900,000
Fire & Extended Perils - F & F, Computers 100000805 02/02/00 Sedgwick $1,350,000
Topomedia
Buildings - Hang Bong Commercial Centre W11-136533 16/05/00 Wing Lung Insurance $5,000,000
Bowland
Buildings - Hang Bong Commercial Centre W11-136532 16/05/00 Wing Lung Insurance $3,000,000
</TABLE>
<PAGE>
Schedule 2(k)
Material Personal Property
NIL
<PAGE>
Schedule 2(k)(iii)
Real Property Leases
Office
Landlord: Bowland International Ltd
Agreement Details: Leased Agreement of Office Premises
Leased Location: Shop No. 5 & 6, 3/F, Hang Bong Commercial
Centre
28 Shanghai Street, Kowloon, Hong Kong
Current Period: Feb 5, 1999 to Feb 4, 2002
Monthly Rental: HK$21,573.00 per month
(rates, utility bills and management fee are
paid by Tenant)
Refer to Attachment 2(k)(iii)-1
Transmission Sites
Refer to Attachment 2(k)(iii)-2
<PAGE>
Schedule 2(k)(iv)
Property, Machinery and Equipment
Refer to Attachment 2(k)(iv)
<PAGE>
Schedule 2(l)
Licenses, Certificates and Permits and
Pending/Threatened Proceedings
<TABLE>
<CAPTION>
Licenses:
Effective / Attachment
Authority Name Licence Details Expiry Date Reference
<S> <C> <C> <C>
Office of the Telecommunications Public Radiocommunication May 1, 1996 / 2(l)-1
Authority Service Licence April 30, 2006
(Licence No: 054)
Post Office Telecom Licensing Radio Dealers Licence (Restricted) Jan 11, 1988 / 2(l)-2
Office - Hong Kong **
</TABLE>
** No expiry date. Agreement is continuous until notice of termination from
either party.
<TABLE>
<CAPTION>
Certificate:
Issue Attachment
Issuance Office Name of Certificate Date Reference
<S> <C> <C> <C>
Registrar of Companies Certificate of Incorporation Jun 10, 1983 2(l)-3
Inland Revenue Department Business Registration Certificate Jun 10, 1999 2(l)-4
(renew annually)
</TABLE>
<PAGE>
Schedule 2(m)
Regulatory Filings
Filing Document Year of Filing Attachment Reference
Annual Return 1999 2(m)-1
Profits Tax Computation 1996/97 2(m)-2
Profits Tax Computation 1997/98 2(m)-3
Profits Tax Computation 1998/99 2(m)-4
<PAGE>
Schedule 2(n)(i)
Material Contracts
<TABLE>
<CAPTION>
Effective / Attachment
Vendor Contract Details Expiry Date Reference
<S> <C> <C> <C>
Bowland International Ltd Tenancy Agreement for Office Premises Feb 5, 1995 / 2(n)(i)-1
Feb 4, 2002
China Motion Telecom (HK) Ltd Radio Paging Network Operation Mar 1, 1998 / 2(n)(i)-2
**
Hong Kong Futures Exchange Ltd Provision of Real Time Composite Signal Jan 1, 1998 / 2(n)(i)-3
**
Internet Access H.K. Ltd Real-time Online Financial Data and Jul 29, 1996 / 2(n)(i)-4
Information through Internet **
Korea Leasing (Hong Kong) Ltd Property Mortgage Loan to Bowland May 17, 1994 / 2(n)(i)-5
International Ltd on Office Premises May 16, 2009
Omega Research International Reseller on Omega's Feb 20, 1998 / 2(n)(i)-6
Product in Hong Kong Feb 19, 2000
Shanghai VSAT Network Systems Transmission of Real-time AFX news May 6, 1998 / 2(n)(i)-7
Co Ltd through Satellite for News Translation **
Sino Information Services Co Ltd Distribution of Financial Data and Jan 19, 1996 / 2(n)(i)-8
Information from Bank of China **
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Effective / Attachment
Vendor Contract Details Expiry Date Reference
<S> <C> <C> <C>
Commodity Quotations, Inc. ComStock Information Distribution Dec 1, 1990 / 2(n)(i)-9
License Agreement #
Stock Exchange Information Provision of Market Datafeed Service Apr 1, 1998 / 2(n)(i)-10
Services Ltd **
Tse's Forex Investment Co Ltd Distribution of Foreign Exchange Sep 26, 1995 / 2\(n)(i)-11
Quotation from Tse's Co. **
Commodity Quotations, Inc. ComStock Service Marketing May 1, 1991 / 2(n)(i)-12
Representative Agreement #
</TABLE>
** No expiry date. Agreement is continuous until notice of termination from
either party.
# Renewed by verbal agreement. Valid until notice of termination from either
party.
<PAGE>
Schedule 2(n)(ii)
Contracts in Default
NIL
<PAGE>
Schedule 2(n)(iii)
Related Party Contracts
Nature of Contract: Tenancy Agreement
Party: Bowland International Ltd
Relationship: 1. Mr Tang Ping Wing is both the Director
of Bowland International Ltd and
Financial Telecom Ltd.
2. Mr Tang Wing On is both the shareholder of
Bowland International Ltd and Financial
Telecom Ltd.
Refer to Attachment 2(n)(iii)
<PAGE>
Schedule 2(o)
Litigation Summary
NIL
<PAGE>
Schedule 2(q)
Interested Party Transactions.
NIL
<PAGE>
Schedule 2(s)
Bank Accounts
<TABLE>
<CAPTION>
Bank Name Address Account No. Signatories
<S> <C> <C> <C>
Wing Lung Bank Ltd Ground Floor S/A#06-201-6354-2 Class A & B
12 Queen's Road Central C/A#06-000-4115-6
Hong Kong
Standard Chartered Bank Shop 101 C/A#343-0-007752-1 Class A & B
One Exchange Square
Central, Hong Kong
Bank of China Bank of China Tower C/A#012-875-00203399 Class A & B
1 Garden Road Central
Hong Kong
Hongkong Bank Shop 101, Pioneer Centre S/A#472-1-006163 Class A & B
750 Nathan Road, Kowloon C/A#472-017680-001
Hong Kong
Bank of East Asia Ltd Ground Floor Class A only
10 Des Voeux Road Central C/A#514-40-33884-2
Hong Kong
</TABLE>
Signatories of Class A includes: Tang Wing On, Pang Kam Wing & Tang Ping Wing
Signatories of Class B includes: Yeung Lai Ping & Lai Shuk Har
Remarks: All bank signature must be signed by two signatories and one of the
signatory must be in Class A.
<PAGE>
Schedule 2(t)(i)
Employment, Consulting and Other Personal Service Contracts
Employment Contracts
Employee Position/Job Description Hire Date Annual Salary
Refer to Attachment 2(t)(i) (inside sealed envelope)
<TABLE>
<CAPTION>
Consulting Contracts
Name of Party Service Monthly Charge Termination
<S> <C> <C> <C>
ABC Data & Telecom Ltd General consultancy and computer HK$27,000 3 months advance *
software development notice
Mr Eric Yuen General consultancy on software HK$3,000 plus 1 month advance **
development HK$250 per hour notice
</TABLE>
* Agreement being prepared
** Verbal contract
<PAGE>
Schedule 2(w)
Proprietary Rights
Right Description Expiration
NIL
<PAGE>
ESCROW AGREEMENT
This ESCROW AGREEMENT (the "Agreement") is effective as of September 9,
1999 by and among The Hartcourt Companies, Inc., a Utah corporation, whose
principal executive office is located at 1198 E. Willow St., Long Beach, CA
90806 ("Buyer"), Financial Telecom Limited ("Seller"), a Hong Kong corporation
with principal office at 308 Hang Bong Commercial Centre, 28 Shanghai Street,
Kowloon, Hong Kong and Patrick Chan & Co., whose principal office is located at
18/F, The China and South Sea Building, 22-26 Bonham Strand, Sheung Wan, Hong
Kong (the "Escrow Agent"), with reference to the following facts:
RECITALS:
WHEREAS, Buyer and Seller have entered into a separate agreement on
August 17, 1999 for the purchase and sale of 58.53 percent of the common shares
of Seller, for the purchase price of 4.713 Hong Kong Dollars per share, total
shares being 4,964,990 common shares of FTL the total purchase price being
HK$23.4 Million which purchase price is payable as follows: Fifty (50%) percent
of said purchase price (HK$11.7 Million) shall be paid in cash and a like sum to
be paid in common shares of Buyer or any acceptable NASD listed company under
the following terms, conditions and schedules, and
WHEREAS, Buyer and Seller do hereby agree that the purchase price shall
be paid as follows:
A. On or before September 20, 1999, Buyer shall deposit with the Escrow
Agent HK$ 3.9 million (hereinafter called "Escrow B1") and Seller shall deposit
827,498 of its common shares with said Escrow Agent (hereinafter called "Escrow
S1"). Upon receipt of Escrow B1 by the Escrow Agent, the Seller hereby
irrevocably authorizes the Escrow Agent to release and the Escrow Agent shall
release Escrow S1 to the Buyer. Upon receipt of Escrow S1 by the Escrow Agent,
the Buyer irrevocably authorizes the Escrow Agent to release and the Escrow
Agent shall release Escrow B1 to the Seller.
B. On or before October 15, 1999, Buyer will deliver to the Escrow
Agent its common shares or common shares of another acceptable NASD listed
company equivalent in value to HK$ 11.7 Million (hereinafter called "Escrow B2")
with the price per share and consequential number of shares determined in
accordance with the formula agreed to in the previously executed purchase
agreement of August 17, 1999. Seller will inform the Escrow Agent in writing the
contents of Escrow B2 on or before October 15, 1999. Seller will deliver
4,137,492 of its common shares (hereinafter called "Escrow S2") which shares
<PAGE>
represent the balance of its shares which shall result in Buyer having
Fifty-Eight and Fifty Three Hundredths (58.53%) Percent ownership of Seller.
Upon fulfillment of these conditions by Buyer and Seller, the Escrow Agent is
hereby authorized by Buyer and by Seller to deliver Escrow S2 to Buyer and
Escrow B2 to Seller.
C On or before October 20, 1999, Buyer shall pay directly to Seller HK$
3.9 Million.
D. On or before November 20, 1999, Buyer shall pay directly to Seller
HK$ 3.9 Million in final payment of its purchase.
.
Buyer and Seller further agree and understand that the provisions herein
contained shall supercede and take precedence over the "payment" provisions
previously executed by Buyer and Seller in the Stock Purchase Agreement and the
above provisions A, B, C and D replace Section 1-A.iii of the Stock Purchase
Agreement executed by and between Buyer and Seller.
WHEREAS, Buyer and Seller have requested the Escrow Agent to act as
escrow agent for the transactions contemplated in this Agreement, and to accept
the delivery of documents, funds and shares, and to disburse such shares, funds
and documents, in accordance with the terms of this Agreement; and
WHEREAS, the Escrow Agent is amenable to acting in such separate and
independent capacity pursuant to the terms and conditions of this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and promises
contained herein, and for valuable consideration, the receipt and sufficiency of
which are hereby mutually acknowledged, the parties to this Agreement
(collectively "parties," and individually "party") agree as follows:
AGREEMENT:
1. ACCEPTANCE OF DOCUMENTS, FUNDS AND SHARES; RELATIONSHIP TO BUYER
The Escrow Agent agrees to accept for retention all documents, funds and shares
from Buyer and Seller, which may only be disbursed as described above. Buyer and
Seller acknowledge and agree that the Escrow Agent is performing this service at
the request of, and as an accommodation to Buyer and Seller. Except for the
duties of the Escrow Agent to disburse documents, funds and shares as provided
by the Agreement, the Escrow Agent shall have no duties or obligations to Buyer
or Seller or any of them, and, in any event, the Escrow Agent shall not be
presumed, implied or otherwise construed to be acting as legal counsel to Buyer
or Seller or any of them. The Escrow Agent shall have no responsibility for any
funds or shares not transmitted to the Escrow Agent.
<PAGE>
2. RESPONSIBILITIES AND DUTIES OF THE PARTIES
(a) Deliveries by the Parties: Delivery of the escrow items shall be
made in the manner and amounts as above set forth in Sections A and B above
written.
3. DISBURSEMENT OF ESCROWED DOCUMENTS, FUNDS AND SHARES TO THE BUYER
AND SELLER
(a) In the event that all the terms of this Agreement are complied
with, and Buyer and Seller have fulfilled all requirements set forth for each,
then in that event the Escrow Agent shall disburse to each documents, funds and
shares in accordance with Sections A and B hereinabove set forth.
4. DISCHARGE OF ESCROW AGENT'S OBLIGATIONS
The obligations of the Escrow Agent for the documents and shares received
hereunder shall terminate upon the disbursement of all documents and shares to
Buyer pursuant to the terms of this Agreement.
5. COMPENSATION
The Escrow Agent shall receive such compensation for its services hereunder as
shall be agreed to by Buyer, Seller and the Escrow Agent.
6. MATTERS PERTAINING TO ESCROW AGENT
(a) No Liability for Acts; Indemnity. The Escrow Agent shall not be
personally liable for any act it may do or omit to do under this Agreement while
acting in good faith and in the exercise of its best judgment. In the event of a
dispute between Buyer and Seller, except as otherwise expressly provided herein,
the Escrow Agent is authorized and directed to disregard any and all notices or
warnings given by Buyer, excepting only: (i) orders or process of court; or (ii)
instructions jointly executed by Buyer and Seller. The Escrow Agent is hereby
expressly authorized to comply with and obey any and all orders, judgments or
decrees issued by any court and any instructions jointly executed by Buyer and
Seller. Buyer and Seller shall indemnify the Escrow Agent and hold it harmless
from and against any and all damages, including attorneys' fees, which the
Escrow Agent may suffer or incur by reason of the compliance by the Escrow Agent
with any such order, judgment or decree, notwithstanding that any such order,
judgment or decree may be subsequently reversed, modified, annulled, set aside
or vacated, or found to have been entered without jurisdiction.
<PAGE>
(b) Right to File Interpleader Action. The Escrow Agent has the
absolute right, at the Escrow Agent's election, to file an action in
interpleader in a court of proper jurisdiction requiring Buyer to answer and
litigate their claims and rights among themselves, and the Escrow Agent is
authorized to deposit with the clerk of the court all documents, funds and
shares held by it pursuant to this Agreement. In the event such action is filed,
Buyer agrees to equally pay all costs, expenses and reasonable attorneys' fees
which the Escrow Agent incurs in such interpleader action. Upon filing of such
action, the Escrow Agent shall thereupon be fully released and discharged from
all obligations to further perform any duties or obligations otherwise imposed
by the terms of this Agreement.
(c) Sole Agreement between the Parties. The Escrow Agent shall not
be bound in any way by any other agreement between Buyer and Seller as to which
the Escrow Agent is not a party, whether or not the Escrow Agent has knowledge
thereof. The Escrow Agent shall have no duties or responsibilities except as
expressly set forth in this Agreement. The Escrow Agent may rely conclusively on
any certificate, statement, request, waiver, receipt, agreement or other
instrument which the Escrow Agent believes to be genuine and to have been signed
and presented by an appropriate person or persons, including copies and
facsimiles.
(d) Performance and Release. The retention and distribution of the
documents, funds and shares in accordance with the terms and provisions of this
Agreement shall fully and completely release the Escrow Agent from any
obligation or liability assumed by the Escrow Agent hereunder as to such
documents, funds or shares.
(e) No Liability for Acceptance of Documents, Funds or Shares. The
Escrow Agent shall not be liable in any respect for verifying the identity,
authority or rights of the parties executing or delivering or purporting to
execute and/or deliver the documents, funds or shares deposited hereunder.
(f) Indemnity. Buyer and Seller will indemnify, defend (with counsel
acceptable to the Escrow Agent) and hold the Escrow Agent harmless against any
and all losses, damages, claims and expenses, including reasonable attorneys'
fees, that may be incurred by the Escrow Agent by reason of its compliance with
the terms of this Agreement. If, as a result of any disagreement between Buyer
and/or adverse demands and claims being made by any of them upon the Escrow
Agent, the Escrow Agent shall become involved in litigation, including any
interpleader action brought by the Escrow Agent as provided for in this
Agreement, Buyer and Seller shall be liable to the Escrow Agent, on demand, for
all costs, expenses and attorneys' fees that the Escrow Agent shall incur and/or
be compelled to pay by reason of such litigation.
<PAGE>
7. REPLACEMENT OF ESCROW AGENT
In the event the Escrow Agent is or becomes unwilling or unable to
act in such capacity for any reason, Buyer and Seller shall jointly appoint a
successor.
8. MISCELLANEOUS
(a) Cooperation. Each party agrees, without further consideration,
to cooperate and diligently perform any further acts, and to execute and deliver
any documents that may be reasonably necessary or otherwise reasonably required
to consummate, evidence, confirm and/or carry out the intent and provisions of
this Agreement, all without undue delay or expense.
(b) Interpretation.
(i) Survival. All representations and warranties made by any
party in connection with any transaction contemplated by this Agreement shall,
irrespective of any investigation made by or on behalf of any other party
hereto, survive the execution and delivery of this Agreement, and the
performance or consummation of any transaction described in this Agreement.
(ii) Entire Agreement/No Collateral Representations. The parties
expressly acknowledge and agree that this Agreement, (1) is the final, complete
and exclusive statement of the agreement of the parties with respect to the
subject matter hereof and that this escrow agreement shall complete the relevant
and necessary agreement among the parties, (2) supersedes any prior or
contemporaneous agreements, proposals, commitments, guarantees, assurances,
communications, discussions, promises, representations, understandings, conduct,
acts, courses of dealing, warranties, interpretations or terms of any kind as
pertains to creation of this escrow, whether oral or written (collectively and
severally, the "prior agreements"), and that any such prior agreements are of no
force or effect except as expressly set forth herein; and (3) may not be varied,
supplemented or contradicted by evidence of prior agreements, or by evidence of
subsequent oral agreements. No prior drafts of this Agreement, and no words or
phrases from any prior drafts, shall be admissible into evidence in any action
or suit involving this Agreement.
(iii) Amendment; Waiver; Forbearance. Except as expressly
provided otherwise herein, neither this Agreement nor any of the terms,
provisions, obligations or rights contained herein, may be amended, modified,
supplemented, augmented, rescinded, discharged or terminated (other than by
performance), except by a written instrument or instruments signed by all of the
parties to this Agreement. No waiver of any breach of any term, provision or
agreement contained herein, or of the performance of any act or obligation under
this Agreement, or of any extension of time for performance of any such act or
obligation, or of any right granted under this Agreement, shall be effective and
<PAGE>
binding unless such waiver shall be in a written instrument or instruments
signed by each party claimed to have given or consented to such waiver and each
party affected by such waiver. Except to the extent that the party or parties
claimed to have given or consented to a waiver may have otherwise agreed in
writing, no such waiver shall be deemed a waiver or relinquishment of any other
term, provision, agreement, act, obligation or right granted under this
Agreement, or any preceding or subsequent breach thereof. No forbearance by a
party to seek a remedy for any noncompliance or breach by another party hereto
shall be deemed to be a waiver by such forbearing party of its rights and
remedies with respect to such noncompliance or breach, unless such waiver shall
be in a written instrument or instruments signed by the forbearing party.
(iv) Remedies Cumulative. The remedies of each party under this
Agreement are cumulative and shall not exclude any other remedies to which such
party may be lawfully entitled.
(v) Severability. If any term or provision of this Agreement or
the application thereof to any person or circumstance shall, to any extent, be
determined to be invalid, illegal or unenforceable under present or future laws,
then, and in that event: (1) the performance of the offending term or provision
(but only to the extent its application is invalid, illegal or unenforceable)
shall be excused as if it had never been incorporated into this Agreement, and,
in lieu of such excused provision, there shall be added a provision as similar
in terms and amount to such excused provision as may be possible and be legal,
valid and enforceable; and (2) the remaining part of this Agreement (including
the application of the offending term or provision to persons or circumstances
other than those as to which it is held invalid, illegal or unenforceable) shall
not be affected thereby, and shall continue in full force and effect to the
fullest extent provided by law.
(vi) Time of the Essence. It is expressly understood and agreed
that time of performance is strictly of the essence with respect to each and
every date, term, condition, obligation and provision hereof and that the
failure to timely perform any of the terms, conditions, obligations or
provisions hereof by any party shall constitute a material breach and a
noncurable (but waiveable) default under this Agreement by the party so failing
to perform.
(vii) Parties in Interest. Notwithstanding anything else to the
contrary herein, nothing in this Agreement shall confer any rights or remedies
under or by reason of this Agreement on any persons other than the parties
hereto and their respective successors and assigns, if any, as may be permitted
hereunder, nor shall anything in this Agreement relieve or discharge the
obligation or liability of any third person to any party to this Agreement, nor
shall any provision give any third person any right of subrogation or action
over or against any party to this Agreement.
<PAGE>
(viii) No Reliance Upon Prior Representation. Each party
acknowledges that: (1) no other party has made any oral representation or
promise which would induce them prior to executing this Agreement to change
their position to their detriment, to partially perform, or to part with value
in reliance upon such representation or promise; and (2) such party has not so
changed its position, performed or parted with value prior to the time of the
execution of this Agreement, or such party has taken such action at its own
risk.
(ix) Headings; References; Incorporation; "Person"; Gender;
Statutory References. The headings used in this Agreement are for convenience
and reference purposes only, and shall not be used in construing or interpreting
the scope or intent of this Agreement or any provision hereof
(c) Enforcement.
(i) Applicable Law. This Agreement and the rights and remedies of
each party arising out of or relating to this Agreement (including, without
limitation, equitable remedies) shall be solely governed by, interpreted under,
and construed and enforced in accordance with the laws (without regard to the
conflicts of law principles) of the jurisdiction as is set forth in the Stock
Purchase Agreement entered into between the parties.
(ii) Consent to Jurisdiction; Service of Process. Any "action or
proceeding" (as such term is defined below) arising out of or relating to this
Agreement shall be filed in and heard and litigated solely before the state
courts of California located within the County of Los Angeles, State of
California, United States of America. Each party generally and unconditionally
accepts the exclusive jurisdiction of such courts and venue therein; consents to
the service of process in any such action or proceeding by certified or
registered mailing of the summons and complaint in accordance with the notice
provisions of this Agreement; and waives any defense or right to object to venue
in said courts based upon the doctrine of "forum non conveniens." The term
"action or proceeding" is defined as any and all claims, suits, actions,
hearings, arbitrations or other similar proceedings, including appeals and
petitions therefrom, whether formal or informal, governmental or
non-governmental, or civil or criminal.
(iii) Recovery of Fees and Costs. If any party institutes or
should the parties otherwise become a party to any action or proceeding based
upon or arising out of this Agreement including, without limitation, to enforce
or interpret this Agreement or any provision hereof, or for damages by reason of
any alleged breach of this Agreement or any provision hereof, or for a
declaration of rights in connection herewith, or for any other relief, including
equitable relief, in connection herewith, the "prevailing party" (as such term
is defined below) in any such action or proceeding, whether or not such action
or proceeding proceeds to final judgment or determination, shall be entitled to
receive from the non-prevailing party as a cost of suit, and not as damages, all
<PAGE>
reasonable fees, costs and expenses of enforcing any right of the prevailing
party (collectively, "fees and costs"), including, without limitation: (1)
reasonable attorneys' fees and costs and expenses; (2) witness fees (including
experts engaged by the parties, but excluding shareholders, officers, employees
or partners of the parties); (3) fees, costs and expenses of accountants and
other professionals; and (4) any and all other similar fees incurred in the
prosecution or defense of the action or proceeding including, without
limitation, fees incurred in the following: (A) postjudgment motions; (B)
contempt proceedings; (C) garnishment, levy, and debtor and third party
examinations; (D) discovery; and (E) bankruptcy litigation. All of the aforesaid
fees and costs shall be deemed to have accrued upon the commencement of such
action and shall be paid whether or not such action is prosecuted to judgment.
Any judgment or order entered in such action shall contain a specific provision
providing for the recovery of the aforesaid fees, costs and expenses incurred in
enforcing such judgment and an award of prejudgment interest from the date of
the breach at the maximum rate of interest allowed by law. The term "prevailing
party" is defined as the party who is determined to prevail by the court after
its consideration of all damages and equities in the action or proceeding,
whether or not the action or proceeding proceeds to final judgment (the court
shall retain the discretion to determine that no party is the prevailing party
in which case no party shall be entitled to recover its fees and costs under
this section 9(d)).
(d) Successors and Assigns. All of the representations, warranties,
covenants, conditions and provisions of this Agreement shall be binding upon and
shall inure to the benefit of each party and such party's respective successors
and permitted assigns, spouses, heirs, executors, administrators and personal
and legal representatives.
(e) Notices. Unless otherwise specifically provided in this
Agreement, all notices, demands, requests, consents, approvals or other
communications (collectively and severally called "notices") required or
permitted to be given hereunder, or which are given with respect to this
Agreement, shall be in writing, and shall be given by: (i) personal delivery
(which form of notice shall be deemed to have been given upon delivery); (ii) by
telegraph or by private airborne/overnight delivery service (which forms of
notice shall be deemed to have been given upon confirmed delivery by the
delivery agency); (iii) by electronic or facsimile or telephonic transmission,
provided the receiving party has a compatible device or confirms receipt thereof
(which forms of notice shall be deemed delivered upon confirmed transmission or
confirmation of receipt); or (iv) by mailing in the United States mail by
registered or certified mail, return receipt requested, postage prepaid (which
forms of notice shall be deemed to have been given upon the fifth 5th business
day following the date mailed). Each party, and their respective counsel, hereby
agree that if notice is to be given hereunder by such party's counsel, such
counsel may communicate directly with all principals, as required to comply with
the foregoing notice provisions. Notices shall be addressed at the addresses
<PAGE>
hereinabove set forth in the introductory section of this Agreement or to such
other address as the receiving party shall have specified most recently by like
notice, with a copy to the other parties hereto. Any notice given to the estate
of a party shall be sufficient if addressed to the party as provided in this
section. Any party may, at any time by giving five (5) days' prior written
notice to the other parties, designate any other address in substitution of the
foregoing address to which such notice will be given.
(f) Counterparts. This Agreement may be executed in counterparts,
each of which shall be deemed an original, and all of which together shall
constitute one and the same instrument, binding on all parties hereto. Any
signature page of this Agreement may be detached from any counterpart of this
Agreement and reattached to any other counterpart of this Agreement identical in
form hereto by having attached to it one or more additional signature pages.
(g) Execution by All Parties Required to be Binding; Electronically
Transmitted Documents. This Agreement shall not be construed to be an offer and
shall have no force and effect until this Agreement is fully executed by all
parties hereto. If a copy or counterpart of this Agreement is originally
executed and such copy or counterpart is thereafter transmitted electronically
by facsimile or similar device, such facsimiled document shall for all purposes
be treated as if manually signed by the party whose facsimile signature appears.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
"BUYER"
THE HARTCOURT COMPANIES, INC.
a Utah corporation
By:
---------------------------------
Dr. Alan Phan, President
"SELLER"
FINANCIAL TELECOM LIMITED
a Hong Kong Corporation
By:
----------------------------------
Stephen Tang, Managing Director
"ESCROW AGENT"
PATRICK CHAN & CO,
Solicitors
By:
----------------------------------
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 331,057
<SECURITIES> 0
<RECEIVABLES> 671,259
<ALLOWANCES> 167,497
<INVENTORY> 127,091
<CURRENT-ASSETS> 961,910
<PP&E> 3,720,667
<DEPRECIATION> 2,905,582
<TOTAL-ASSETS> 9,537,672
<CURRENT-LIABILITIES> 7,412,185
<BONDS> 0
0
10
<COMMON> 23,833
<OTHER-SE> 831,826
<TOTAL-LIABILITY-AND-EQUITY> 9,537,472
<SALES> 378,677
<TOTAL-REVENUES> 378,677
<CGS> 71,810
<TOTAL-COSTS> 7,115,058
<OTHER-EXPENSES> 195,374
<LOSS-PROVISION> 384,013
<INTEREST-EXPENSE> 103,709
<INCOME-PRETAX> (7,491,287)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,433,899)
<DISCONTINUED> (428,569)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,862,468)
<EPS-BASIC> (0.40)
<EPS-DILUTED> (0.40)
<FN>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AUDITED
FINANCIAL STATEMENTS FOR YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FORM 10-KSB.
</FN>
</TABLE>
