U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2000
[ ] QUARTERLY REPORT PURSUANT TO SECTION 13 0R 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
Commission File Number: 001-12671
The Hartcourt Companies, Inc.
(Exact name of small business issuer as specified in its charter)
Utah
(State or other jurisdiction of incorporation or organization)
87-0400541
(IRS Employer Identification No.)
9800 Sepulveda Blvd., Suite 818, Los Angeles California 90045
(Address of principal executive offices)
(310) 410-7290
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the restraint was required to file such reports), and (2)has been
subject to such filing requirements for the past 90 days: Yes [ X ] No[ ].
As of September 30, 2000, The Hartcourt Companies, Inc. had 60,504,024 shares of
Common Stock Outstanding.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [ X ]
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THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
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Report on Form 10-QSB
For quarter ended
September 30, 2000
Page
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PART 1 FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at September 30, 2000 (Unaudited)
and December 31, 1999 F-3
Consolidated Statements of Operations for the Three Months and Nine Months ended
September 30, 2000 and 1999 (Unaudited) F-4
Consolidated Statements of Shareholders' Equity for the Nine Months ended
September 30, 2000 (Unaudited) F-5 - F-6
Consolidated Statements of Cash Flows for the Nine Months ended
September 30, 2000 and 1999 (Unaudited) F-7
Notes to the Consolidated Financial Statements F-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations F-25
PART II OTHER INFORMATION
Item 1. Legal Proceedings F-28
Item 2. Changes in Securities F-29
Item 3. Defaults upon Senior Securities F-29
Item 4. Submission of Matters to Vote of Security Holders F-29
Item 5. Other Information F-29
Item 6. Exhibits and Reports on Form 8-K F-29
Signatures F-30
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F-2
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THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Part I
Item 1
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September 30, December 31,
2000 1999
-------------- --------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 310,303 $ 331,057
Accounts receivable, net 60,184 37,626
Inventory 51,246 127,091
Notes receivable 3,800 228,800
Prepaid expenses and other 187,300 129,114
Due from related parties 260,222 108,222
------------ ------------
Total current assets 873,055 961,910
------------ ------------
Property and equipment, net 560,880 815,085
Investments and advances 7,690,627 5,554,644
Intangibles, net 2,036,338 2,206,033
------------ ------------
Total assets $ 11,160,900 $ 9,537,672
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 441,561 $ 152,709
Deferred revenue 67,973 78,477
Notes payable, current portion 74,951 649,998
Accrued expenses and other current liabilities 899,506 4,073,504
Payables to related parties 1,977,147 2,457,497
------------ ------------
Total current liabilities 3,461,138 7,412,185
Notes payable, net of current portion 578,615 608,184
------------ ------------
Total liabilities 4,039,753 8,020,369
------------ ------------
Contingencies
Minority interest 247,692 661,634
Shareholders' Equity
Preferred stock: Original preferred stock,
$0.01 par value, 1,000 authorized, issued and outstanding 10 10
Common stock, $0.001 par value, 100,000,000 shares authorized; 60,504,024
shares and 47,664,304 shares issued and outstanding at September 30, 2000
and December 31, 1999 60,504 47,666
Stock subscription receivable (10,900,000 --
Treasury stock, at cost (3,557,832 shares and 3,048,728 shares at September
30, 2000 and December 31, 1999) (1,918,635 (1,680,928
Additional paid-in capital 61,296,954 38,872,027
Accumulated deficit (41,665,378 (36,383,106
------------ ------------
Total shareholders' equity 6,873,455 855,669
------------ ------------
Total liabilities and shareholders' equity $ 11,160,900 $ 9,537,672
------------ ------------
See accompanying notes to consolidated financial statements.
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THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended September Nine Months Ended September 30,
30,
------------------------------ ----------------------------------
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2000 1999 2000 1999
------------- ------------- ------------- ---------------
Net sales $ 333,641 $ - $ 1,024,081 $ -
Cost of sales 271,448 - 503,520 -
------------- ------------- ------------- ---------------
Gross profit 62,193 - 520,561 -
------------- ------------- ------------- ---------------
Operating expenses:
Selling, general and administrative 715,863 304,710 3,612,095 959,870
Depreciation and amortization 99,980 - 307,466 -
Impairments 2,217,745 - 2,217,745 -
------------- ------------- ------------- ---------------
Total operating expenses 3,033,588 304,710 6,137,306 959,870
------------- ------------- ------------- ---------------
Loss from continuing operations (2,971,395 ) (304,710 ) (5,616,745 ) (959,870 )
Other income (expense):
Equity in earnings (loss) of affiliate 21,577 - (11,340 ) (28,298 )
Interest expense (32,999 ) (19,000 ) (114,953 ) (19,000 )
Interest income 259 - 22,214 20,095
Other 10,124 - 24,610 -
------------- ------------- ------------- ---------------
Total other income (expense) (1,039 ) (19,000 ) (79,468 ) (27,203)
------------- ------------- ------------- ---------------
Loss from continuing operations before minority
interest (2,972,434 ) (323,710 ) (5,696,213 ) (987,073 )
Less: loss in subsidiary attributed to minority
interest 241,672 - 413,942 -
------------- ------------- ------------- ---------------
Loss before income taxes (2,730,762 ) (323,710 ) (5,282,272 ) (987,073 )
Income taxes - - - 555
------------- ------------- ------------- ---------------
Net loss $(2,730,762) $ (323,710) $(5,282,272) $ (987,628 )
------------- ------------- ------------- ---------------
Basic and fully diluted loss per common share $ (0.05) $ (0.01) $ (0.10) $ (0.03 )
------------- ------------- ------------- ---------------
Weighted average number of shares outstanding 60,610,794 39,912,558 55,050,778 39,046,236
------------- ------------- ------------- ---------------
See accompanying notes to consolidated financial statements.
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THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
SEPTEMBER 30, 2000 (Unaudited)
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Additional
Common Stock Preferred Stock Paid-In
------------------------- -------------------------
Description Shares Amount Shares Amount Capital
---------------------------------------- ----------- ----------- ----------- ----------- -----------
Balance - December 31, 1999 47,664,304 $ 47,664 1,000 $ 10 $ 38,872,029
Issuance of shares for consulting
services 77,922 78 - - 103,997
Shares issued to investors 454,890 455 - - 3,529,492
Sale of shares under Regulation S 600,000 600 - - 1,199,400
Shares issued upon exercise of warrants 2,954,150 2,954 - - 98,916
Issuance of warrants for brokerage
services - - - - 203,545
Shares issued to directors in lieu of
compensation and for services 3,243,654 3,244 - - 3,557,377
Shares issued in connection with FTL
acquisition 509,104 509 - - 237,198
Cancellation of shares per court order (400,000) (400 ) - - (499,600)
Shares issued upon exercise of options 5,400,000 5,400 - - 13,994,600
Net loss - - - - -
----------- ----------- ----------- ----------- -----------
Balance - September 30, 2000 60,504,024 $ 60,504 1,000 $ 10 $ 61,296,954
=========== =========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
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F-5
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THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
SEPTEMBER 30, 2000 (Unaudited)
(Continued)
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Common
Stock Total
Subscriptions Treasury Stock Accumulated Shareholders'
------------------------
Description Receivable Shares Amount Deficit Equity
---------------------------------------- -------------- ---------- ----------- ------------- -------------
Balance - December 31, 1999 $ - 3,048,728 $ (1,680,92) $(36,383,106) $ 855,669
Issuance of shares for consulting
services - - - - 104,075
Shares issued to investors - - - - 3,529,946
Sale of shares under Regulation S - - - - 1,200,000
Shares issued upon exercise of warrants - - - - 101,870
Issuance of warrants for brokerage
services - - - - 203,545
Shares issued to directors in lieu of
compensation and for services - - - - 3,560,621
Shares issued in connection with FTL
acquisition - 509,104 (237,707) - -
Cancellation of shares per court order - - - - (500,000)
Shares issued upon exercise of options (10,900,000) - - - 3,100,000
Net loss - - - (5,282,272) (5,282,272)
-------------- ----------- ----------- ------------ -----------
Balance - September 30, 2000 $ (10,900,000) 3,557,832 $ (1,918,63) $(41,665,378) $ 6,873,455
============== ========== =========== ============ ============
See accompanying notes to consolidated financial statements.
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F-6
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THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Increase (Decrease) in Cash Nine Months Ended September 30,
--------------------------------------
2000 1999
Cash flows from operating activities: ----------------- -----------------
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Net loss $ (5,282,272 ) $ (987,628 )
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 307,466 -
Impairments 2,217,745 -
Changes in minority interest (413,942 ) -
Equity in loss of affiliate 11,340 -
Issuance of shares and warrants for services 3,661,772 342,771
Allowance for doubtful notes receivable 225,000 -
Net loss on sale of property and equipment 218,692 -
Changes in operating assets and liabilities:
Accounts receivable (22,558 ) (17,000 )
Inventory 75,845 13,083
Prepaid expenses and other (58,186 ) 17,500
Accounts payable 288,851 -
Accrued expenses and other current liabilities (3,085,144 ) 35,256
Due from related parties (152,000 ) (15,700 )
Deferred revenue (10,505 ) -
----------------- -----------------
Net cash used by operating activities (2,017,897 ) (611,718 )
----------------- -----------------
Cash flows from investing activities:
Proceeds from sale of 35% of ECS - 5,400,000
Proceeds on sale of marketable securities - 1,085,607
Increase in other assets - (500,000 )
Advances to Sino Bull for investment purposes (3,762,761 ) -
Advance towards eMPACT investment (300,000 ) -
Distribution of subsidiaries ownership to shareholders - (399,388 )
----------------- -----------------
Net cash provided by (used in) investing activities (4,062,761 ) 5,586,219
----------------- -----------------
Cash flows from financing activities:
Proceeds on sale of common stock 2,743,000 554,935
Common stock issued to directors and officers - 392,689
Common stock issued in settlement of debt - 100,000
Proceeds on exercise of options and warrants 4,401,870 -
Redemption of preferred stock - (6,405,000 )
Payments to related parties (450,000 ) -
Payments on note payable (604,616 ) -
Payments on loans from shareholders (30,350 ) -
----------------- -----------------
Net cash provided by (used in) financing activities 6,059,904 (5,357,376 )
Net increase (decrease) in cash (20,754 ) (382,875 )
Cash and cash equivalents, beginning of period 331,057 384,453
----------------- -----------------
Cash and cash equivalents, end of period $ 310,303 $ 1,578
----------------- -----------------
See accompanying notes to consolidated financial statements.
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F-7
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THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 (UNAUDITED)
Item 1
Note 1. Organization and Nature of Operations
Stardust, Inc.-Production-recording-Promotion ("Stardust"), a
corporation organized under the laws of the State of Utah in September 1983,
acquired all of the outstanding shares of Hartcourt Investments, a Nevada
corporation, pursuant to an Agreement and Plan of Reorganization dated November
5, 1994. At the time of this acquisition, Stardust was a "shell" corporation
with no assets, business or operations. Subsequent to the acquisition of
Hartcourt Investments, Stardust changed its name to "The Hartcourt Companies,
Inc."
Hartcourt Pen was organized under the laws of the State of Nevada in
October 1993 to engage in the sale of writing instruments. Hartcourt Pen entered
into an Agreement and Plan of Reorganization dated December 1, 1994 with
Hartcourt Investments, pursuant to which Hartcourt Investments acquired all of
the outstanding shares of Hartcourt Pen. Through January 1999, Hartcourt's
operations relating to writing instruments involved the assembly and
distribution of writing instruments. In January 1999, Hartcourt discontinued the
operations of Hartcourt Investments and Hartcourt Pen, and disposed of all its
pen related assets. Losses from disposition of such operations were recorded in
1998 financial statements.
In August 1996, Hartcourt entered into a Purchase and Sale Agreement
with NuOasis International, Inc. ("NuOasis"), an unaffiliated corporation
incorporated under the laws of the Commonwealth of Bahamas, for the purchase of
a commercial real estate project, consisting of three 5-7 story apartment
buildings, commonly known as the Peony Gardens Property, ("Peony Gardens")
located in the eastern part of Tongxian in Beijing, China. The purchase price
consists of a Convertible Secured Promissory Note granted to NuOasis, in the
principal amount of $12,000,000, a security interest in the property and the
greater of 10,000,000 shares of Hartcourt's common stock, or that number of
shares of Hartcourt's common stock having a market value equal to $10,000,000
immediately preceding the closing date. On August 8, 1996, an Addendum to the
Purchase and Sale Agreement was agreed to by Hartcourt and NuOasis, by which
Hartcourt's obligation to issue stock to NuOasis was reduced to 4,000,000 shares
(valued at $10,000,000) of its common stock. On March 15, 1999, Hartcourt
entered into an Exchange Agreement with Dragon King Investment Services Inc.
("Dragon King") pursuant to which Hartcourt agreed to assign its rights under
the Purchase and Sale Agreement dated August 8, 1996 of its interest in the
Peony Gardens development for investment securities valued at $10 million. Due
to restrictions on the ability to trade the investment securities received,
Hartcourt recorded an impairment of $5,000,000 as of December 31, 1998. On
August 7, 2000 pursuant to a court order, Hartcourt cancelled 200,000 common
shares (valued at $500,000) issued to Asian Infrastructure Development Company
(Gibraltar) Limited as commission paid towards Peony Gardens project.
F-8
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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"), and 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 Electronic Components and Systems,
Inc. ("ECS"). Also, American Equities agreed to pay back 1,075 the Series AB
preferred stock dividend issued by Hartcourt in 1998 and 1,000,000 shares of
Hartcourt common stock. Accordingly, all expenses relating to settlement were
recorded in the year ended December 31, 1998. Additionally, American Equities
agreed to provide working capital for ECS.
On October 3, 1997, Hartcourt purchased all of the outstanding shares
of Pego and Pego became a wholly owned subsidiary of Hartcourt. Pego, a
manufacturer's representative organization for air and gas handling equipment,
offers a full line of value added services including distribution, service and
manufacturing of custom process equipment packages. The acquisition was
accounted for using the purchase method of accounting. In connection with the
purchase, Hartcourt paid $500,000 in cash, issued 450,000 shares of restricted
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common stock, 1,500 shares of Series C redeemable preferred stock, and entered
into a non-compete agreement with Pego's majority shareholder and director. The
total value of this transaction was approximately $2,300,000.
On October 28, 1997, Hartcourt through a wholly owned subsidiary,
acquired ECS and Pruzin Technologies, Inc. ("Pruzin"), an Arizona corporation, a
related entity of ECS. ECS specializes in high technology contract manufacturing
and assembly of printed circuit boards, phone and cable wires. ECS has three
manufacturing facilities, and contracts with a maquiladora in the free trade
zone in Sonora, Mexico. The acquisition was structured as a tax-free
reorganization and was accounted for using the purchase method of accounting. In
connection with the acquisition, Hartcourt paid $250,000 in cash, issued a note
payable for $250,000, issued 3,400 shares of Series D convertible preferred
stock and 2,500,000 shares of its common stock. The total value of the
transaction was approximately $9,500,000.
On August 24, 1998, Harcourt and ECS executed an agreement and plan of
merger with Elan Manufacturing, Inc. ("Elan"), a contract manufacturer of
electronic components similar to ECS, located in the Silicon Valley, California.
Under the terms of the agreement, Elan was merged into and with ECS, thereby
ceasing Elan's existence. The merger was effective September 1, 1998, and the
purchase price of $616,240 was paid by Hartcourt issuing 724,990 of its common
shares to the three selling shareholders based on a value of $0.85 per share.
On October 21, 1998, Mr. James Pruzin, the selling shareholder and
president of ECS, formally requested a rescission of the October 28, 1997
acquisition whereby, Hartcourt through a wholly owned subsidiary acquired ECS
and Pruzin. Mr. Pruzin alleged that he was authorized to request rescission of
the original transaction based on an alleged breach of the acquisition agreement
by Hartcourt which Hartcourt denied. On November 10,1998, Hartcourt and Mr.
Pruzin entered into a memorandum of understanding whereby Mr. Pruzin could
reacquire ECS and Pruzin from Hartcourt by returning all of the Hartcourt's
common and preferred shares originally issued to Mr. Pruzin, making payment to
Hartcourt of $1,850,000 during 1999, negotiating the return of Hartcourt common
shares issued in the Elan transaction, and issued to Hartcourt a promissory note
for $400,000 amortized over five years with monthly payments beginning in 2000.
Subsequently, Mr. Pruzin was unable to meet the terms of the memorandum of
understanding and entered into new negotiations with Hartcourt. Mr. Pruzin and
Hartcourt reached an agreement whereby Mr. Pruzin agreed to return to Hartcourt
2,000,000 common shares of Hartcourt representing 80% of the amount originally
issued, and 3,400 shares of Series D preferred stock. Hartcourt agreed to assign
to Mr. Pruzin a 30% ownership interest in ECS, and has a right to purchase
500,000 shares of Hartcourt common stock held by Mr. Pruzin at $1 per share. As
of November 10,2000, Hartcourt has not exercised its right to purchase these
500,000 shares.
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 interest in
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Pego (100%) and ECS (35%)in two wholly owned subsidiaries, Pego and ECS, for
5,213,594 additional shares of common stock of Enova. On March 24, 1999,
Hartcourt entered into a Distribution Agreement pursuant to which Hartcourt
agreed to distribute to all shareholders of record on March 31, 1999, the
5,213,595 shares of common stock of Enova and to file, within a reasonable
period of time following such distribution, a Registration Statement on Form
10-SB to cause the distributed shares of Enova to be registered under the
Securities Exchange Act of 1934. Enova's Registration Statement on Form 10-SB
was filed under the Securities Exchange Act of 1934 on January 24, 2000.
As a result of the Share Purchase Agreement, the Enova Agreement and
the Distribution Agreement, each shareholder of record of Hartcourt on March 31,
1999 received one (1) share of Enova for every four (4) shares owned of
Hartcourt. Following the distribution of the Enova shares, both Hartcourt and
Enova continue to operate as separate companies.
On August 17, 1999, Hartcourt entered into a stock purchase agreement
with FTL, a Hong Kong corporation, to purchase 4,964,990 shares of common stock,
representing 58.53% of the total common stock outstanding. FTL is a financial
data bank providing real-time stock quotes and financial information of Hong
Kong listed companies as well as information on other international stock
exchanges in the U.S. and Europe to institutional and retail investors. The
purchase price was agreed to be HK $4.713 (US$ 0.604) per share for a total of
HK$23.4 million or US$3.0 million, payable 50% in cash and the remaining balance
in Hartcourt common shares. The acquisition was completed on October 4, 1999
with Hartcourt making total cash payments of $801,860, recording a payable for
$797,140 and issuing 1,500,000 shares of its common stock to FTL. The stock
purchase agreement required a post closing adjustment for any deficiency paid to
FTL in the event the final closing net worth as of the closing date amounted to
more than $5,000 over and above the net worth reported in calculating the
purchase price. As a result of the post closing adjustment, the purchase price
was revised to HK$25,563,842 or US$3,277,412. At December 31, 1999, Hartcourt
recorded the increase in purchase price as a result of the post closing
adjustment, as a note payable to FTL of $138,706 and a payable for the issue of
148,512 shares of common stock of Hartcourt. On January 18, 2000, Hartcourt
issued 254,552 additional shares of common stock to FTL in settlement of the
post closing adjustment. The 1,754,552 shares of common stock issued to FTL are
reflected as treasury shares in the accompanying financial statements since FTL
is a subsidiary of Hartcourt. As of November 10, 2000, Hartcourt has fully
settled its amounts payable to FTL for the acquisition of FTL's shares.
On March 27, 2000, FTL entered into a Memorandum of Understanding with
NiceVoice Investment Holdings Limited (NiceVoice) to form a joint venture named
Fintel Wireless Internet Limited (FWL) for the purpose of establishing and
operating a financial paging service network in Hong Kong on the FLEX
transmission protocol on a PDA receiver device. Subject to verification of total
costs to be incurred in erection of FLEX transmission network, design of
financial information broadcast system, sourcing, testing and tuning of PDA
receiver devices, etc. and signing of formal joint venture agreement, FTL will
invest cash by phases to the amount not to exceed HK$4,000,000 (approximately
US$512,800) in exchange of a total of 51% ownership in the joint venture. As of
November 10, 2000, FTL had advanced HK$927,295 towards its investment in FWL.
The transaction is currently under management review and a definitive joint
venture agreement is expected to be finalized by November 30, 2000.
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On June 20, 1999, Hartcourt entered into an agreement with Beijing UAC
Stock Trading Online Co., Ltd. ("UAC Trading") to form a joint venture company
under the laws of China. The name of the joint venture company is Beijing UAC
Stock Exchange Online Co. Ltd. ("UAC"). UAC operates the first and only
nationwide online securities trading network, UAC 162 Network, connecting
investors with their stock brokerage offices via China Pac. China Pac is the
nationwide packet switched network in China owned by China Telecom since 1991.
UAC 162 Network consists of proprietary server software and user interface,
servers, gateways and other communication hardware. Under the terms of the
agreement, for a 35% interest in UAC, Hartcourt agreed to invest $1,000,000 in
UAC, pay $1,700,000 to the owners of UAC Trading and transfer 1,000,000 common
shares of Hartcourt to UAC. 200,000 of these common shares will be transferred
to UAC Trading for an existing loan of $168,000 and 800,000 common shares are
still to be issued and will be recorded as a loan from Hartcourt to UAC upon
issuance. On August 9, 1999, Hartcourt and UAC Trading agreed to convert the
Hartcourt loan of $168,000 into an option to purchase an additional 15% interest
in UAC from UAC Trading. Hartcourt exercised its option to convert the loan to
UAC for an additional 15% interest in UAC making Hartcourt's total investment
interest in UAC up to 50%. The transaction became effective on August 31, 2000
and the accompanying financial statements reflect Hartcourt's investment in UAC
at 50% as of September 30, 2000.
On December 30, 1996, Hartcourt and American Equities entered into a
Warrant Agreement, whereby Hartcourt agreed to issue and sell to American
Equities, for the price of $100, a warrant to purchase up to 2,000,000 shares of
its common stock, $.01 par value, in connection with the consulting services
provided to Hartcourt. American Equities shall have the right to purchase at any
time and from time to time prior to December 30, 2002, up to the number of fully
paid and non-assessable shares of warrants stock, upon payment of specific
exercise price or apply the cashless exercise clause specified in the Agreement.
On September 9, 1999, pursuant to Cashless Exercise clause in the Warrant
Agreement, American Equity exercised its cashless exercise right and converted
800,000 warrants into 621,674 Hartcourt's common shares without payment of any
consideration. On December 14, 1999, American Equities filed a complaint against
Hartcourt alleging breach of Warrant Agreement, claiming damages of $30,000,000.
The case concerned dispute over whether shares issued under the Warrant
Agreement would be issued as restricted shares or free trading shares. An
agreement was reached and the litigation was settled on March 20, 2000. American
Equities was allowed to further exercise its cashless exercise right and
converted the remaining 1,200,000 warrants into 1,070,075 free trading common
shares of Hartcourt without any payment of consideration.
In November 1999, Sino Bull Group (`Group") was formed with the
intention to consolidate various related businesses acquired or expected to be
acquired by Hartcourt or Sino Bull.com Inc. ("Sino Bull"). For the purposes of
presenting these businesses under a unified structure and strong brand name, a
restructuring of the Group will result in consolidating these businesses under
Sino Bull, the holding company of the Group that was incorporated in British
Virgin Islands. The mission of the Group is to become the premier e-commerce
network service provider (providing financial information and related technology
services) to investors and financial institutions in Greater China. Hartcourt
intends to transfer its ownership interests in UAC and FTL into Sino Bull during
calendar year 2000 in exchange for certain equity interest in Sino Bull.
F-12
<PAGE>
On December 23, 1999, Hartcourt entered into an agreement with GoCall
Inc. ("GoCall"), a Delaware corporation, to form a strategic alliance for the
common interest of the respective corporations, including but not limited to the
development of GoCall's Internet related development-stage businesses and
software. GoCall agreed to give Hartcourt 1,000,000 shares of its convertible
preferred stock. Each share of convertible preferred stock is convertible into
10 shares of common stock (restricted under Rule 144 for 12 months). In return,
Hartcourt agreed to give GoCall all of the marketable securities received from
Dragon King which were 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 $1,250,000 at September 30, 2000 and
accordingly, Hartcourt has recorded an impairment of $3,946,358 against the
GoCall securities as of September 30, 2000. Hartcourt has the option to appoint
three out of the five directors of GoCall. As of November 10, 2000, Hartcourt
has not appointed any directors to the GoCall Board and has not exercised any
control on GoCall's operations.
Recent Events
No assurance can be given that all Agreements discussed herein will
result in actual agreements or that the terms of the agreements will not be
significantly changed, or that any of the financing needs to consummate the
agreements discussed below will be successfully completed. Furthermore, approval
from the Chinese regulatory authorities may be required to consummate these
agreements.
Hartcourt's partners in the joint ventures discussed below are
expecting Hartcourt to provide two key elements in these joint ventures:
Internet technology and investment capital. Hartcourt management, which has
recently hired individuals with extensive experience and expertise in relevant
industry sectors, intends to provide Internet technology by merging with or
acquiring companies already active in these businesses. On the financial side,
Hartcourt plans to raise substantial funds necessary to carry out the plans of
its venture partners by selling its own common shares to selected
investors/partners and bringing in partners whose contributions to each joint
venture will include the necessary cash contributions. If Hartcourt is not able
to raise the necessary funds indicated in the agreements, the agreements will
need to be modified or cancelled.
Beijing Innostar Hi-Tech Enterprises, Ltd. ("Innostar") - On October
20, 1999, Hartcourt signed a Joint Venture Agreement with Innostar to establish
a wireless nationwide Internet service provider network and IP phone services in
China via a Chinese satellite. The total amount of investment in the joint
venture company will be $24.0 million of which $14.0 million will be contributed
by Innostar for 65% ownership interest and $10.0 million by Hartcourt for 35%
ownership interest. The profits and losses of the joint venture company will be
distributed in accordance with their ownership interest ratios. The duration of
the Joint Venture Agreement is fifteen (15) years. The date of official
establishment of the joint venture company shall be the date the business
license is issued. As of November 10, 2000, Hartcourt is waiting for the
approval and grant of the business license. Hartcourt will need to raise the
funds needed to complete this transaction.
F-13
<PAGE>
Beijing Shangdi Net Technologies Center Co., Ltd. ("Shangdi") - On
December 18, 1999, Sino Bull signed a Term Sheet Agreement with Shangdi to form
a new corporation in Beijing. Sino Bull shall have 40% interest and Shangdi
shall have 60% interest in the new corporation. On April 12, 2000, Sino Bull
signed a Term Sheet Agreement with Shangdi revising the terms of the Term Sheet
Agreement signed on December 18, 1999. The terms of the revised agreement
required Sino Bull to pay Shangdi US$670,000 being the consideration of all
tangible and intangible assets in relation to Shangdi's computer network
information services excluding cash and debts and 33.84% shares of Hua Xia
Information Company Limited; invest US$1,000,000 to a newly formed company
Sinobull Network Inc., a corporation registered in Beijing, for its working
capital needs; 140,000 restricted common shares of Hartcourt to Shangdi and
60,000 restricted common shares of Hartcourt to Sinobull Network, Inc. In
exchange, Shangdi agreed to transfer without any pledge and debt, all tangible
and intangible assets in relation to computer network information services to
Sinobull Network, Inc.; transfer to Hartcourt 40% of the ownership interest in
Tian Di Hu Lian Technologies, Ltd, a BVI corporation, holding the interest for
the shareholders of Shangdi. After the above transfers, Shangdi shall be
entitled to own 18% of total shares of Sino Bull. Sino Bull has paid cash
consideration of $1,000,000 towards the purchase of Shangdi. The $1,000,000 was
advanced by Hartcourt to Sino Bull. These transactions have not been consummated
as of November 10, 2000.
StreamingAsia.Com Ltd. ("StreamingAsia") - On April 14, 2000, Hartcourt
announced that Sino Bull signed a Subscription and Shareholders' Agreement
("Agreement") relating to StreamingAsia, whereby Sino Bull agreed to subscribe
for 1,200,000 newly issued and outstanding fully paid shares of StreamingAsia
for HK$7,000,000 (approximately US$897,500). Upon subscription of such shares,
Sino Bull will have 50% ownership interest in StreamingAsia. The terms of
payment included HK$500,000 (approximately US$64,100) payable in cashier's check
upon signing of the Agreement; at the option of Sino Bull, HK$1,500,000
(approximately US$192,300) payable in cash or Sino Bull delivering such number
of shares of Hartcourt within 14 days after signing the Agreement; HK$500,000
(approximately US$64,100) payable in cash within 30 days from the date of the
Agreement; HK$1,000,000 (approximately US$128,200) payable in cash within 60
days from the date of the Agreement; HK$1,000,000 (approximately US$128,200)
payable in cash within 90 days of the date of the Agreement; and HK$2,500,000
(approximately US$320,600) within 120 days from the date of the Agreement. Sino
Bull will appoint two members to the Board of Directors of StreamingAsia.
Together with the existing two directors, the new board shall consist of four
directors. As of November 10, 2000, Sino Bull has advanced $660,256 towards the
purchase of StreamingAsia which was advanced by Hartcourt to Sino Bull.
Shanghai Guo Mao Science & Technology Co. Ltd. ("Guo Mao") - On
December 1, 1999, Sino Bull signed a Term Sheet Agreement with Guo Mao whereby
Guo Mao agreed to issue new shares for a total proceeds of $1,000,000 which will
represent 50% of the expanded capital of Guo Mao. Sino Bull agreed to subscribe
for all the new shares issued by Guo Mao. On May 16, 2000, Sino Bull and Hopeful
Internet Technologies Limited ("Hopeful") entered into an agreement whereby
Hopeful, an investment holding company incorporated in the British Virgin
Islands, will acquire through its wholly-owned subsidiary Shanghai Sinobull
Financial Information Company Limited, all of the operating assets and business
of Guo Mao. To finance this acquisition, Hopeful will issue new shares to Sino
Bull equal to 40% of the expanded capital of Hopeful for a total consideration
F-14
<PAGE>
of $1,000,000. The terms of payment by Sino Bull for the purchase of new shares
will be: $200,000 in cash upon signing of the agreement; $150,000 in cash within
30 days of signing of the agreement; $150,000 in cash within 60 days of signing
of the agreement; and $500,000 within 30 days after signing of the agreement in
shares of Hartcourt based on the average closing price in the last 7 trading
days before payment, or in shares of Sino Bull based upon the valuation to be
agreed on by the parties. Sino Bull will appoint not more than five directors to
the board of Guo Mao. Together with the existing five directors, the new board
shall consist of not more than ten directors. As of November 10, 2000, Sino Bull
has advanced $600,453 towards the purchase of new shares of Hopeful. The
$600,453 was advanced by Hartcourt to Sino Bull. The transaction is expected to
close by November 30, 2000.
Swartz Private Equity, LLC ("Swartz") - Swartz is an investment entity
focused on equity investments in Internet and other high technology companies.
On November 3, 1999, Hartcourt signed an Investment Agreement with Swartz.
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 acquisitions of Internet operations in China.
Hartcourt has filed a form SB-2 Registration document with SEC on August 24,
2000 to register additional common shares for issuance to Swartz. Once approved
by SEC, Swartz has the obligation to purchase these shares at the market price
less 10 percent discount during the next 24 months.
eMPACT Solutions, Inc. ("eMPACT") - On February 9, 2000, Hartcourt
entered into a Stock Purchase Agreement Term Sheet to purchase 30% of the
authorized and outstanding shares of eMPACT's new shares of common stock. The
purchase price was agreed to be $2,000,000, payable $1,000,000 in cash at the
date of closing, and the remainder $1,000,000 in cash within ninety days of
closing. In the event that eMPACT shall fail to meet the revenues projections
for the fiscal year 2000, Hartcourt shall receive an additional one percent of
the shares of eMPACT for every percent that revenue does not meet the
projections for revenue to a maximum of an additional twenty percent. As of
November 10, 2000, Hartcourt paid a consideration of $300,000 as an advance
towards the purchase price of eMPACT shares. Hartcourt is currently negotiating
to finalize the remaining investment.
Shenzhen China Cable Integrated Network Co. Ltd. ("SCIC") - On February
25, 2000, Hartcourt signed a Letter of Intent with Shenzhen Sinlan Investment
Co., Ltd. to jointly invest in SCIC. No terms have been reached, and a
definitive agreement to form a joint venture company is currently being delayed
pending the implementation of the WTO (World Trade Organization) agreement. SCIC
operates an exclusive television and cable network in the capital city of
Chengdu. SCIC is planning an expansion program to add subscribers and to
modernize the existing system and make it a showcase cable system with
interconnecting data transmission via a network of satellite and cable
transmission.
F-15
<PAGE>
Heads of Agreement: On April 8, 2000, Hartcourt entered into Heads of
Agreement ("Agreement") with DF Ltd., Loughborough Ltd., and Express Internet
Investment Ltd. (collectively, "the Management") and a fourth investor to form a
joint venture company for the commercial exploitation of the Publication Rights
of the internet and production of the content of the website in respect of the
laws of China. Hartcourt is currently having discussions with three possible
investors and is trying to recruit one of these investors to be the fourth
investor. The Agreement does not require Hartcourt to bring on board the fourth
investor and there are no guarantees that Hartcourt will be successful in
recruiting the fourth investor. Per the terms of the Agreement, both Hartcourt
and the fourth investor's obligation are to invest $2,000,000 each, in the joint
venture company for 25% ownership interest and share the responsibility in
providing funding, finance and technological support. The obligation of
Hartcourt and the fourth investor is to provide funding as working capital for
the joint venture company subject to the conditions precedent that the joint
venture company shall have entered into an agreement with the relevant parties
in China for the commercial exploitation of the Publication Rights on the
Internet and the website. Each of the investors shall within 14 days of entering
into such agreement by the joint venture company, pay $1,000,000 each for a
total sum of $2,000,000 being the 1st Tranche of the working capital; within
three (3) months thereafter pay another $1,000,000 each for a total sum of
$2,000,000 being the 2nd Tranche of the working capital for the remaining
portion of their investment. Production of the website shall commence upon the
payment in full of the 1st Tranche by the investors to the joint venture company
and the appropriate production costs being made available to the parties
responsible for production. The joint venture company is currently negotiating
agreements with the relevant parties in China and has not been granted approval
for the commercial exploitation of the Publication Rights on the Internet and
the website. Therefore, as of November 10, 2000, Hartcourt has no payment
obligations under this Agreement.
Fee Agreement for Introduction Services: On April 19, 2000, Hartcourt
entered into a Fee Agreement for Introduction Services ("Agreement") with Tang
Wai Leong and Thomas Kwok, (collectively referred to as the "Introducers")
whereby the Introducers will use their best efforts to search for, identify and
make known to Hartcourt Internet-related business and opportunities for
potential acquisition by Hartcourt. In addition, Introducers will seek out
sources of funding and search for suitable candidates for employment by
Hartcourt in its Chinese operations. Hartcourt agrees to satisfy the
Introducers' time and expense incurred, up to and including the first
acquisition by Hartcourt of an opportunity introduced or arranged by the
Introducers, by granting to the Introducers options to purchase up to 2,500,000
shares of Hartcourt common stock at a price of $5.50 per share. The option is
non-transferable and will expire unless exercised on or before the third
anniversary of the date of Agreement. Upon consummation of the introduction by
the Introducers and Hartcourt completing the acquisition, Hartcourt agreed to
register with the SEC under a Form S-8 such shares granted under the option
agreement, and shall cause such registration statement to remain effective at
all times while the Introducers holds the options.
The Introducers have introduced to Hartcourt a potential acquisition
opportunity and Hartcourt signed the necessary documents to consummate the
purchase of an entity (Shenzhen Rayes Group Limited) on April 27, 2000. The
F-16
<PAGE>
Introducers have subsequently exercised their option to acquire 2,500,000 shares
of Hartcourt common stock. On May 8, 2000, in accordance with the terms of the
Agreement, Hartcourt filed a Form S-8 to register with the Securities and
Exchange Commission the 2,500,000 options granted to the Introducers under the
Agreement. As of September 30, 2000, Hartcourt received $2,850,000 towards
exercise of 2,500,000 options into shares exercised by the Introducers. The
remaining balance of $10,900,000 is recorded as subscriptions receivable at
September 30, 2000 in the accompanying financial statements.
Shenzhen Rayes Group Limited ("Shenzhen"): On April 27, 2000, Hartcourt
signed a Stock Purchase Agreement Term Sheet with Shenzhen to form a new entity
of which Hartcourt desired to purchase fifty-one percent (51%) of the
outstanding shares of the capital stock and Shenzhen agreed to retain the
remaining forty-nine percent (49%) of the outstanding shares. Shenzhen being the
sole owner all of rights, title and interest in an operating company desired to
contribute fifty-one percent (51%) of its share to the new entity. The
transaction was expected to close no later than 45 days following the execution
of this Agreement during which time all due diligence was to be completed, which
included evaluation of the third party and the operating company by Morgan
Stanley, a legal opinion of counsel as to the acceptability of the proposed
structure of Hartcourt's acquisition of fifty-one percent (51%) of new entity,
financial reviews, et al. The purchase price was not to be less than $50,000,000
in cash and not exceeding $76,000,000 (including $50,000,000 in cash together
with marketable shares of up to $26,000,000 in value). The terms of the
Agreement required: a) Hartcourt to deposit $10,000,000 in an escrow account no
later than April 28, 2000 upon complete execution of the Agreement; b) upon
completion of all of its due diligence, including evaluation by Morgan Stanley
and confirmation by legal counsel as to acceptable structure, Hartcourt shall
deposit such additional funds as shall be determined as required in conformity
with the value established by Morgan Stanley. On April 28, 2000, Hartcourt
entered into an agreement with another third party who provided a bank guarantee
for $10,000,000 on behalf of Hartcourt. As of November 10, 2000, the terms of
the bank guarantee had expired and the parties mutually agreed to have no
obligation to each other should each of the parties decided to terminate the
Agreement. The parties agreed to further negotiate and extend the term of the
Agreement and complete the transaction to each other's satisfaction by December
31, 2000. Hartcourt is currently performing its own due diligence and plans to
complete the transaction. However, the terms of the agreement, including the
amounts involved, may be significantly modified.
Sino Bull.Com Inc. ("Sino Bull"): - On May 1, 2000, Hartcourt and Sino
Bull entered into an Exchange Agreement wherein Sino Bull agreed to accept
ownership of interests Hartcourt has in certain related businesses in exchange
for Sino Bull common stock. The terms of the Agreement required Sino Bull to
exchange forty-eight (48%) percent of its common stock for all of Hartcourt's
ownership interests in FTL (58.53%) and UAC (50%). The Agreement required Sino
Bull to form an eleven (11) member Board of Directors group with Hartcourt to
appoint six (6) members and Sino Bull to appoint five (5) members. The
transaction closed on May 1, 2000 and the parties have mutually agreed to make
it effective upon finalizing the structure of operations of Sino Bull under the
laws of China and Hong Kong by the end of November 2000. Upon completion of this
restructuring, Sino Bull will become an investment holding company and Hartcourt
will retain 48% ownership interest in Sino Bull.
F-17
<PAGE>
Koffman Securities Limited ("Koffman"): On June 12, 2000, Hartcourt
entered into a Stock Purchase Agreement Term Sheet with Koffman, a securities
brokerage firm, to purchase 30% of the expanded capital stock of Koffman for
HK$22,285,000 (approximately US$2,857,050). The transaction shall close no later
than 60 days following the execution of the Agreement during which time all due
diligence shall have been completed, which shall include but not be limited to
an evaluation of Koffman by the auditors, appraisers and legal counsel appointed
by Hartcourt for this purpose and a legal opinion of its counsel as to the
acceptability of the proposed structure of Hartcourt's acquisition of 30% of
Koffman, financial reviews, and other usual and customary due diligence. The
purchase price shall be payable as follows: 1/4 of the purchase price shall be
payable upon execution of a definitive agreement to purchase and sell by both
parties based upon completion of all of its due diligence, including evaluation
and appraisal and confirmation by legal counsel as to the acceptability of the
proposed structure of Hartcourt's acquisition of 30% of Koffman; and 3/4 of the
purchase price payable in three successive equal monthly installments. The net
asset value of Koffman of approximately HK$52 million (approximately
US$6,666,667) as at March 31, 2000 was agreed to be the benchmark. The
consideration to be paid for Koffman is subject to adjustment after the result
of an independent audit by the auditors and appraisal of the net asset value of
Koffman within the time set forth above with the adjusted net asset value of
Koffman not being greater than HK$52 million.
Hartcourt has recently completed its due diligence review and both the
parties have mutually agreed to revise the purchase price for 30% of the
expanded capital stock of Koffman to HK$14,357,143 (approximately US$1,840,659).
The net asset value of Koffman's assets was determined to be HK$33,500,000
(approximately US$4,294,872) based upon the actual valuation of assets by the
appraisers. Hartcourt's legal counsel is preparing and to finalize a definitive
agreement for the purchase of Koffman and both parties have agreed to execute
the purchase agreement prior to December 1, 2000. The transaction is expected to
close no later than January 31, 2001. As of November 10, 2000, Hartcourt has not
made any contributions towards the purchase of Koffman.
Hopeman Computer Services Corporation Limited ("Hopeman"): - On
September 7, 2000, Hartcourt signed a joint venture agreement with Hopeman to
form a joint venture in Shanghai and jointly develop and market a 24-hour
financial television program and/or provide financial data services to
existing/new financial television programs for China market. The new joint
venture is named "Haike Caijin TV" (HCTV) means Hartcourt Financial Television
(HCTV) in English. HCTV will be registered in Shanghai with a funding of $1.0
million. The agreement defines the first phase joint venture investment terms
for the period from September 2000 to December 2000. The parties agreed to
invest $150,000 by September 15, 2000 and another $50,000 by November 30, 2000.
Hartcourt agreed to invest $100,000 to receive an initial 66.7% of the HCTV
equity ownership and Hopeman agreed to invest $50,000 for the remaining 33.3% of
the HCTV equity ownership. Hopeman agreed to identify an investment/strategic
partner and commit $3 million in China as the second round investment by
December 31, 2000. If the second round fund raising agreement with a strategic
partner is signed by December 31, 2000, Hopeman will have the option to invest
an additional $50,000 and increase its equity ownership to 50% and receive the
same ownership as Hartcourt. Both the parties mutually agreed to redistribution
of equity ownership with the second round investors to be negotiated over the
course of the joint venture. As of November 10, 2000, Hartcourt and Hopeman have
contributed $100,000 and $50,000 as their respective share of the first phase of
joint venture investment.
F-18
<PAGE>
Beijing Total Solution System, Ltd. ("TSS"): On September 15, 2000
Hartcourt and TSS signed a Term Sheet Agreement to form a Joint Venture Company
(JVC) called TSS Streaming, Ltd to develop broadband enabling technology for
internet broadcasting market and develop world leading web-casting solution and
global market. Hartcourt will contribute $2.4 million for 60% ownership interest
in the JVC and TSS will contribute all of its tangible and intangible assets of
its existing operations in China for its 40% ownership interest in the JVC.
Hartcourt's contribution to the JVC will be payable as follows: a) $480,000 to
be paid in an escrow account in China within 15 days after the approval of the
due diligence and business plan to guarantee that TSS will not default. TSS
agrees to compensate Hartcourt $480,000 for damages in case of default by TSS;
b) $960,000 to be paid within 30 days after the issuance of joint venture
license by the relevant government authority. At the same time $480,000 referred
to in a) above will be transferred to the JVC as Hartcourt's investment; c)
$960,000 to be paid within 90 days after the issuance of the joint venture
license. In addition to the above $2.4 million contribution, Hartcourt agrees to
pay an additional $600,000 to four existing shareholders of TSS within six
months after the issuance of the joint venture license. One-half of the $600,000
in payable in cash and the remaining balance in either Hartcourt or
StreamingAsia stock. All other terms and conditions are to be specified by a
Definitive Agreement to be agreed and signed by both parties before October 30,
2000. Hartcourt is currently performing its due diligence of TSS operations and
plans to complete the review of business plan by November 17, 2000. As of
November 10, 2000, Hartcourt has not made any contributions towards its
investment in the JVC.
Shanghai Wind Information Company, Limited ("Wind"): On September 18,
2000, Hartcourt and Wind signed a Term Sheet Agreement and agreed to form a
Joint-venture Company to expand the financial data service business in China.
Wind agreed to transfer its entire fixed assets excluding cash and marketable
securities held at July 31, 2000 and the insurance advisory business and related
assets, and is entitled an ownership interest of sixty-six point sixty seven
percent (66.67%) in the Joint-venture Company. Hartcourt agreed to invest $3.0
million which represented thirty three point thirty three percent (33.33%)
ownership in the Joint-venture Company. Upon successful completion of due
diligence by Hartcourt, Wind will transfer all its assets except cash,
marketable securities and insurance advisory business and related assets in the
Joint-venture Company. Wind will be responsible to obtain all relevant approvals
from all governmental authorities and agencies required to facilitate the new
share structure and expanded capitalization. Wind will be responsible to have
the Joint-venture Company listed in the public stock market within 15 months
from the date of establishment of the Joint-venture Company. It is mutually
agreed that if Wind fails to list the Joint-venture Company on or before such a
time frame, Hartcourt shall have the management right for listing of the company
in the public market.
The investment from Hartcourt to Wind shall be payable as follows: a)
upon completion of the Agreement of Joint-venture Company by both parties within
15 days from the date of the Term Sheet Agreement signed, Hartcourt shall
arrange a payment to from Guo Mao as a loan to Wind in the amount of $500,000;
b) pay $1,500,000 in the temporary Joint-venture account within 15 days of the
establishment of the temporary Joint-venture Company bank account; c) pay
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<PAGE>
$1,500,000 into the Joint-venture Company no later than three months from the
date of establishment of the Joint-venture Company. Upon receipt of all
committed capital from Hartcourt, Wind will immediately pay back the $500,000
loan to Guo Mao.
Hartcourt has completed its due diligence review on the operations of
Wind and Hartcourt's affiliate Guo Mao has made a payment of $500,000 on
September 18, 2000 on behalf of Hartcourt. As of November 10, 2000, the
temporary Joint-venture Company bank account has not been opened by Wind and
therefore, no further payments have been made by Hartcourt.
Mahadev.com Inc. ("Mahadev"): On October 10, 2000, Hartcourt and
Mahadev entered into an exclusive licensing and marketing agreement for a period
of three years whereby, Hartcourt and its subsidiaries will have the exclusive
right to market Mahadev's next generation eBusiness solutions with cutting-edge
products developed for e-Business, eBanking, and security Internet
infrastructures in China and Hong Kong. Pursuant to the terms of the agreement
in the performance of its duties, Hartcourt will solicit customers and promote
the sale and stimulate interest for all of Mahadev products and services and
maintain an office in China for the purpose of efficiently conducting its duties
under the agreement. Mahadev, in turn will supply to Hartcourt all technical,
business, financial and economic information as may be necessary; make available
any such information necessary to create and maintain a presence for Mahadev in
China and Hong Kong; and participate in the maintenance of any physical premises
that Hartcourt may deem reasonable and necessary under the particular
circumstances. The parties agreed that Hartcourt will be required to maintain
sales in the amount of $1.5 million in the first year, $3.5 million in the
second year and $8.0 million in the third year. Hartcourt shall receive
compensation a sum agreeable on a project-by-project basis for such sales in
China and Hong Kong. Said compensation shall be paid to Hartcourt no later than
fifteen (15) days from the date of rendering of quarterly sales statements by
Hartcourt to Mahadev. Hartcourt is currently evaluating the business model of
Mahadev's products and service in China and Hong Kong and has not sold any of
its products or services as of November 10, 2000.
@Family Broadband Networks Ltd."(@Family"): On October 25, 2000,
Hartcourt and @Family signed a Stock Purchase Term Sheet Agreement ("Agreement")
whereby, Hartcourt agreed to purchase 25% of the authorized and outstanding
shares of the issued and outstanding capital voting stock of @Family for the
purchase price of $1.0 million. The transaction shall close no later than 45
days from the date of signing of the Agreement, obtaining governmental approval
and upon satisfactory completion of Hartcourt's due diligence which shall
include but not limited to examination of @Family's business alliances with its
affiliates and delivery of reviewed financial statements of @Family to Hartcourt
and approval of same by Hartcourt before the closing date. The purchase price of
$1.0 million in cash is payable to @Family at the date of closing. Hartcourt
will have the sole option to acquire at any time within 12 months following the
execution of the formal agreement contemplated herein to acquire an additional
15% of the issued and outstanding shares for an additional $2.0 million. On
closing, Hartcourt shall have the right to appoint new directors so as to no
less than 25% of the total members of the Board of Directors. As of November 10,
2000, Hartcourt is performing its due diligence and expects to close the
transaction on time.
F-20
<PAGE>
Note 2. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements and related
notes included in the Company's 1999 Form 10-KSB.
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (which include only normal
recurring adjustments) necessary to present fairly the balance sheets of The
Hartcourt Companies, Inc. and Subsidiaries as of September 30, 2000 and December
31, 1999, and the results of their operations and their cash flows for the nine
months ended September 30, 2000 and 1999. The financial statements for the three
months and nine months ended September 30, 2000 are consolidated to include the
accounts of The Hartcourt Companies and its 58.53% owned subsidiary Financial
Telecom Limited, and its 35% owned equity investment in Beijing UAC Stock
Exchange Online Co. Ltd. for July and August 2000, and 50% equity investment in
September 2000. The financial statements for the three months and nine months
period ended September 30, 1999 include only the accounts of The Hartcourt
Companies, Inc. The operations of Hartcourt Pen and Hartcourt Investments were
discontinued in January 1999 and Hartcourt's investment in Pego Systems, Inc.
and Electronic Components and Systems, Inc. was spun-off to Enova effective
March 1, 1999 and distributed as stock dividend.
The results of operations for the three months and nine months ended
September 30, 2000 are not necessarily indicative of the results to be expected
for the entire year.
Certain 1999 amounts have been reclassified to conform to current
period presentation. These reclassifications have no effect on previously
reported net income.
The accounting policies followed by the Company are set forth in Note A
to the Company's financial statements as stated in its report on Form 10-KSB for
the fiscal year ended December 31, 1999.
F-21
<PAGE>
Note 3. Supplemental Disclosure of Non-Cash Financing Activities
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
September 30, September 30,
2000 1999
---------------- -----------------
Cash paid for:
<S> <C> <C>
Interest $ 114,953 $ 19,000
Taxes - -
---------------- -----------------
Non-cash operating and financing activities:
Shares issued to director in liquidation of payable $ 3,560,621 $ -
Preferred stock issued for dividends - 270,000
</TABLE>
Note 4. Loss per Share
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September September September September
30, 2000 30, 1999 30, 2000 30, 1999
------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Net loss $ 2,730,762 $ 323,710 $ 5,282,272 $ 987,628
Effects of dilutive securities - - - -
------------- -------------- ------------- -------------
Weighted average shares outstanding 60,610,794 39,912,558 55,050,778 39,046,236
------------- --------------
------------- -------------
Basic and dilutive earnings per share $ (0.05) $ (0.01) $ (0.10) $ (.03)
------------- -------------- ------------- -------------
</TABLE>
At September 30, 2000 and 1999, the Company had 1,210,975 and 2,000,000
warrants and options outstanding, each exercisable into one share of common
stock. These instruments were not included in the computation of diluted
earnings per share for any of the periods presented, due to their anti-dilutive
effects based on the net loss reported for each period.
The weighted average shares outstanding reflect the retroactive effect
of the 2-for-1 stock split discussed in Note 6.
F-22
<PAGE>
Note 5. Litigations
Charles E. Hogue vs. Hartcourt, Circuit Court of the Ninth Judicial Circuit,
Orange County, Florida Case No. CIO-2190
The litigation concerns a claim filed on April 8, 2000 against
Hartcourt for breach of contract for alleged fees due to Charles Hogue
("plaintiff") for introductory services. Such fee was set as a percentage of the
transaction contemplated and a check of $40,500 for payment in full thereof was
tendered to the plaintiff which the plaintiff refused claiming sums far in
excess of those agreed to. Hartcourt's legal counsel has interposed a motion to
dismiss the suit which is pending before the court and is confident of success
in disposition of this matter.
ComericaBank of California ("Comerica") vs. Enova. Et al. Superior Court of
California, County of Los Angeles, California. Case No. BC 221 594.
This litigation concerns Hartcourt's alleged obligation as an alleged
guarantor of another entity's ("Pego") alleged obligation on a promissory note
that is asserted to be in non-financial default. The plaintiff in that matter
may be the subject of a cross-complaint by Hartcourt, which will depend on the
evidence disclosed by documents Harcourt has demanded be produced. The complaint
alleges that Harcourt executed a guarantee of obligation of Pego (approximately
$925,000) which obligation went into non-financial default. Pego expects to be
able to settle with plaintiff and such settlement will eliminate Hartcourt's
liability. The prospects for the success of those settlement negotiations, as
well as the approximately range or amount of any potential loss by Hartcourt,
are uncertain at this time.
American Equities, LLC v. Hartcourt, Los Angeles Superior Court:
American Equities alleges that they are entitled to further shares
pursuant to an anti-dilution clause contained in a warrant certificate. The
Company disputes such an assertion, and trial is scheduled for March 2001.
The Hartcourt Companies, Inc. v. American Equities, Sherman Mazur, Reid Breitman
and Corporate Financial Enterprises, Inc., Los Angeles Superior Court Case No.
BC 237 714:
The Company is seeking to rescind certain consulting agreements and
warrant agreements with American Equities, LLC., on the basis that American
Equities, LLC and its principals, Sherman Mazur and Reid Breitman, failed to
disclose Mr. Mazur's felony convictions and voluminous bankruptcies of his
former real estate limited partnership entities and therefore fraudulently
induced the Company to enter into such agreements. The Company is also seeking
to rescind various stock issuances based on the failure of American Equities,
LLC and Corporate Financial Enterprises, Inc. to pay the promissory notes upon
which such shares were issued. This litigation has only recently commenced.
F-23
<PAGE>
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 6. Shareholders' Equity - Stock split
On September 14, 2000, the Board of Directors of Hartcourt approved a
two-for-one split of the company's common stock to be distributed in the form of
a stock dividend, payable on October 23, 2000 to the shareholders of record at
the close of business on October 16, 2000. All references in the consolidated
financial statements to shares, share prices and per share amounts have been
adjusted retroactively for the split.
F-24
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
SEPTEMBER 30, 2000 (UNAUDITED)
Part I
Item 2
Currently, Hartcourt is involved in Internet joint ventures in Asia to
facilitate the expansion of China's first commercial e-trade financial network
and wireless Internet Service Provider services. Hartcourt has set as its goal
to create the premiere financial portal in the Chinese market by building a
network of Internet companies in partnership with young Chinese enterprenuers as
well as government owned entities. Its mission is to become one of the leading
Internet companies in Asia. With a a vision to create the premier financial
portal and financial information technology service provider in Asia, Sino Bull
was incorporated in the BVI in November 1999 as an investment holding company to
consolidate various related businesses acquired by Hartcourt during the period
from August 1999 to December 1999. For the purposes of presenting these
businesses under a unified and strong brandname, a restructuring exercise is
currently underway to consolidate these businesses under Sino Bull. Upon
completion of the restructuring exercise and obtaining approvals from Chinese
regulatory authorities, Sino Bull will operate a premier financial portal on the
Chinese Internet with a comprehensive Web site and supporting utilities that
will be capable of executing securities transactions on-line in a timely and
efficient manner while providing real-time quotes, research, charts and other
collateral information regarding stocks, bonds, currencies and other markets in
China and other Asian markets.
Hartcourt's future business, including expansion of its current limited
operations and acquisition plans requires additional equity and/or debt
financing, which may not be available in a timely manner on commercially
reasonable terms, or at all. Harcourt's primary objective is to acquire
established operating companies with histories of growth and profitability, in
order to diversify and create a multi-dimensional Internet service related
company.
During 1999, Hartcourt continued its previously implemented plan to
acquire operating companies that were in established industries with a history
of growth. However, as a result of continued losses, particularly at the
Company's Electronic Components and Systems, Inc. subsidiary, Hartcourt recorded
significant impairments to its goodwill in 1998. In March 1999, Hartcourt
entered into a series of agreements and transactions that in the aggregate were
designed to streamline and restructure the company while dissolving the entities
comprising of inactive assets and settle outstanding litigation. As a result of
such restructuring, Hartcourt discontinued the operations of Hartcourt Pen and
Hartcourt Investments and had a spin-off of Hartcourt's investment in Pego
(100%) and ECS (35%). Hartcourt effectively became an entity with no operations.
F-25
<PAGE>
Results of Operations:
The operations of Hartcourt for the three months and nine months ended
September 30, 2000 primarily consisted of operations of FTL and Hartcourt's
investment interest in UAC. Operations of Hartcourt Pen and Hartcourt
Investments were discontinued at the beginning of 1999, and operations of Pego
and ECS were disposed off as a result of spin-off to Enova and the subsequent
distribution of Enova as a stock dividend to Hartcourt shareholders.
Net sales and cost of sales: The Company recorded net sales of $333,641
and $1,024,081 for the three months and nine months ended September 30, 2000
compared to zero for the same periods in 1999. Net sales consisted of the sale
of financial pagers and the related Internet and telephone services. Cost of
sales amounted to $271,448 and $503,520 for the three months and nine months
ended September 30, 2000 compared to zero for the same periods in 1999. Cost of
sales for the three months ended September 30, 2000 included a write down of
$150,771 of inventory relating to the financial pagers that will become obsolete
in December 2000 as FTL switches their wireless network to a new platform.
Corporate selling, general and administrative expenses were $715,863
and $3,612,095 for the three months and nine months ended September 30, 2000
compared to $304,710 and $959,870, respectively for the same periods in 1999.
The increase is primarily attributed to additional consulting and legal costs
associated with the restructuring of Hartcourt's business, and expenses incurred
in brokerage fees in connection with the issuance of warrants raising working
capital.
Impairments: Impairments expenses during the three months ended
September 30, 2000 resulted primarily due to the write down of the investments
in Go Call of $1,250,000, write down of wireless network assets amounting to
$195,623 as FTL is switching its wireless network structure to a new platform in
the December 2000, and providing for an impairment allowance of $772,122 due to
delays in completing acquisitions in Hong Kong and China, on advances of
$3,860,608 as of September 30, 2000 extended to Sino Bull. No impairments were
identified in 1999.
Other expenses: Total other expenses net of other income, were $1,039
and $79,468 for the three months and nine months ended September 30, 2000
compared to $19,000 and $27,203, respectively for the same periods in 1999.
Liquidity and Capital Resources:
Hartcourt's principal capital requirements during the year 2000 are to
fund the acquisitions of growth oriented Internet related operating companies in
China and Asia. During the nine months ended September 30, 2000, Hartcourt has
raised necessary funds to carry out its plans of acquisitions by selling its own
common shares to selected investors and bringing in business partners whose
contributions included the necessary cash.
As shown in the accompanying financial statements, Hartcourt incurred
net losses of $5,282,272 and $987,628 for the nine months ended September 30,
2000 and 1999, respectively. Additionally, Hartcourt's current liabilities
exceeded its current assets by $2,588,083 at September 30, 2000. These factors,
F-26
<PAGE>
as well as negative cash flows from operations, Hartcourt's inability to meet
debt obligations and the need to raise additional funds to accomplish its
objectives, create substantial doubt about Hartcourt's ability to continue as a
going concern.
Hartcourt has taken certain restructuring steps, which in the
management's opinion will provide the necessary capital to continue its
operations. These steps included: 1) the settlement of certain matters of
litigation and disputes; 2) exchange of its interests in Peony Gardens for
investment securities which were subsequently exchanged for the investment in
GoCall Inc.; 3) completed a private placement with PYR Management, LLC and
received $2,743,000 on January 27, 2000; 4) signed a Investment Agreement with
Swartz Private Equity, LLC, which agreed to purchase from time to time, up to
$35,000,000 Hartcourt shares of common stock. The Investment Agreement with
Swartz is still subject to the approval of SEC; 5) raised $4,401,870 in cash
through the issuance of its 3,407,000 common shares upon exercise of an equal
number of options and warrants.
Operating activities. During the nine months ended September 30, 2000,
the Company had a net loss of $5,282,272. Net cash used by operating activities
increased to $2,017,897 during the nine months ended September 30, 2000 compared
to $611,718 during the same period in 1999. This is primarily due to the funding
of increase in losses.
Investing activities. Net cash used in investing activities during the
nine months ended September 30, 2000 was primarily due to advancing $300,000
towards the purchase of eMPACT and advances to Sino Bull for investment purposes
of $3,762,761.
Financing activities. Net cash provided by financing activities during
the nine months ended September 30, 2000 was primarily due to proceeds from sale
of common stock amounting to $2,743,000, issuance of common shares and exercise
of options and warrants amounting to $4,401,870 offset by advances to related
parties of $450,000, payments on notes payable of $604,616 and payments on loans
from shareholders amounting to $30,350.
As a result of the above activities, the company experienced a net
decrease in cash of $20,754 for the nine months ended September 30, 2000. The
ability of Hartcourt to continue as a going concern is still dependent on its
success in obtaining additional financing and fulfilling its plan of
restructuring as outlined above.
F-27
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
OTHER INFORMATION
SEPTEMBER 30, 2000 (UNAUDITED)
Part II
Item 1. LEGAL PROCEEDINGS
Charles E. Hogue vs. Hartcourt, Circuit Court of the Ninth Judicial Circuit,
Orange County, Florida Case No. CIO-2190
The litigation concerns a claim filed on April 8, 2000 against
Hartcourt for breach of contract for alleged fees due to Charles Hogue
("plaintiff") for introductory services. Such fee was set as a percentage of the
transaction contemplated and a check of $40,500 for payment in full thereof was
tendered to the plaintiff which the plaintiff refused claiming sums far in
excess of those agreed to. Hartcourt's legal counsel has interposed a motion to
dismiss the suit which is pending before the court and is confident of success
in disposition of this matter.
ComericaBank of California ("Comerica") vs. Enova. Et al. Superior Court of
California, County of Los Angeles, California. Case No. BC 221594.
This litigation concerns Hartcourt's alleged obligation as an alleged
guarantor of another entity's ("Pego") alleged obligation on a promissory note
that is asserted to be in non-financial default. The plaintiff in that matter
may be the subject of a cross-complaint by Hartcourt, which will depend on the
evidence disclosed by documents Harcourt has demanded be produced. The complaint
alleges that Harcourt executed a guarantee of obligation of Pego (approximately
$925,000) which obligation went into non-financial default. Pego expects to be
able to settle with plaintiff and such settlement will eliminate Hartcourt's
liability. The prospects for the success of those settlement negotiations, as
well as the approximately range or amount of any potential loss by Hartcourt,
are uncertain at this time.
American Equities, LLC v. Hartcourt, Los Angeles Superior Court:
American Equities alleges that they are entitled to further shares
pursuant to an anti-dilution clause contained in a warrant certificate. The
Company disputes such an assertion, and trial is scheduled for March 2001.
The Hartcourt Companies, Inc. v. American Equities, Sherman Mazur, Reid Breitman
and Corporate Financial Enterprises, Inc., Los Angeles Superior Court Case No.
BC 237 714:
The Company is seeking to rescind certain consulting agreements and
warrant agreements with American Equities, LLC., on the basis that American
Equities, LLC and its principals, Sherman Mazur and Reid Breitman, failed to
disclose Mr. Mazur's felony convictions and voluminous bankruptcies of his
former real estate limited partnership entities and therefore fraudulently
F-28
<PAGE>
induced the Company to enter into such agreements. The Company is also seeking
to rescind various stock issuances based on the failure of American Equities,
LLC and Corporate Financial Enterprises, Inc. to pay the promissory notes upon
which such shares were issued. This litigation has only recently commenced.
The Company is party to various claims and legal proceedings arising
out of the normal course of its business. These claims and legal proceedings
relate to contractual rights and obligations, employment matters, and claims of
product liability. While there can be no assurance that an adverse determination
of any such matters could not have a material adverse impact in any future
period, management does not believe, based upon information known to it, that
the final resolution of any of these matters will have a material adverse effect
upon the Company's consolidated financial position and annual results of
operations and cash flows.
Item 2. CHANGES IN SECURITIES
Not applicable
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITIES HOLDERS
None
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits - None
b) Reports on Form 8-K
o On September 28, 2000, resignation of BDO International as
Hartcourt's independent Certified Public Accountants, File No.
731300. Incorporated herein by reference.
o On September 29, 2000, appointment of KPMG as Hartcourt's
independent Certified Public Accountants, File No. 732487.
Incorporated herein by reference.
F-29
<PAGE>
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
OTHER INFORMATION
SEPTEMBER 30, 2000 (UNAUDITED)
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
has caused this report signed on its behalf by the undersigned, thereunto duly
authorized.
The Hartcourt Companies, Inc.
Date: November 28, 2000 By: /s/ Dr. Alan V. Phan
--------------------------------
Dr. Alan V. Phan
President & CEO
F-30
