Amendment to Registration of Securities of a Small-Business Issuer — Form 10-SB
Filing Table of Contents
Document/Exhibit Description Pages Size
1: 10SB12G/A Amendment to Registration of Securities of a 55 222K
Small-Business Issuer
2: EX-2 Plan of Acquisition, Reorganization, Arrangement, 20 73K
Liquidation or Succession
3: EX-3.(I) Articles of Incorporation/Organization or By-Laws 7 20K
4: EX-3.(II) Articles of Incorporation/Organization or By-Laws 8 21K
5: EX-4 Instrument Defining the Rights of Security Holders 8 24K
6: EX-10 Material Contract 59 193K
7: EX-21 Subsidiaries of the Registrant 2 7K
8: EX-27 FDS Form 10-Sb Y/E 12/31/95 & 12/31/96 1 8K
10SB12G/A — Amendment to Registration of Securities of a Small-Business Issuer
Document Table of Contents
U.S. Securities and Exchange Commission
Washington, D.C. 20549
Amendment to Form 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES OF SMALL
BUSINESS ISSUERS Under Section 12(b) or (g) of the
Securities Exchange Act of 1934
THE HARTCOURT COMPANIES, INC.
----------------------------------------------
(Name of Small Business Issuer in Its Charter)
Utah 87-0400541
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
19104 S. Norwalk Boulevard, Artesia, California 90701
----------------------------------------------- -------------
(Address of Principal Executive Offices) (Zip Code)
(310) 403-1126
--------------------------
(Issuer's Telephone Number)
Securities to be registered pursuant to 12(b) of the Act: None
Securities to be registered pursuant to 12(g) of the Act:
Common Stock $.001 Par Value
(Title of Class)
TABLE OF CONTENTS
Page
PART I
Item 1. Description of Business........................................3
Item 2. Management's Discussion and Analysis or Plan of Operation......10
Item 3. Description of Property........................................15
Item 4. Security Ownership of Certain Beneficial Owners and Management.18
Item 5. Directors, Executive Officers, Promoters and Control Persons...20
Item 6. Executive Compensation.........................................21
Item 7. Certain Relationships and Related Transactions.................22
Item 8. Description of Securities......................................23
PART II
Item 1. Market Price of and Dividends of the Registrant's Common
Equity and Other Shareholder Matters...........................25
Item 2. Legal Proceedings..............................................26
Item 3. Changes and Disagreements with Accountants.....................26
Item 4. Recent Sales of Unregistered Securities........................26
Item 5. Indemnification of Directors and Officers......................28
PART F/S
Financial Statements...........................................29
PART III
Item 1. Index to Exhibits..............................................47
Item 2. Description of Exhibits........................................47
2
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, Harcourt Investments (USA) Inc.
("Harcourt USA") and the Hartcourt Pen Factory, Inc. ("Hartcourt Pen"). All
share and per share information contained herein has been adjusted to reflect a
five-for-seven reverse split of the Company's Common Stock effected on October
6,1995, and a one-for-five reverse split of the Company'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 Harcourt USA, 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 USA, Stardust changed its name to "The Hartcourt
Companies, Inc."
Harcourt USA was organized under the laws of the State of Nevada in
April 1993, to engage in the design, manufacture and sale of writing
instruments. Harcourt USA entered into a Stock Exchange Agreement dated August
8, 1994 with Eastern Rocester Limited, a Hong Kong corporation and, pursuant
thereto, acquired Eastern Rocester 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 Harcourt USA common stock, representing 80% of the common stock of
Harcourt USA outstanding immediately subsequent to the transaction. The
remaining 40% interest in the Xinhui JV was held by Xinhui Orient Light
Industrial Corp., a Chinese government-owned company. Pursuant to an amendment
to the joint venture agreement governing the Xinhui JV entered into in October
1995, the Company's interest was reduced to a 52% interest in the Xinhui JV,
with the remaining 48% held by 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
Harcourt USA, pursuant to which Harcourt USA acquired all of the outstanding
shares of Hartcourt Pen in exchange for 38,625 shares of Harcourt USA common
stock. In connection with this transaction, 1,000 shares of Harcourt USA
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. Hartcourt Pen currently is in the business
of importing pens, markers and components from China, Germany, Taiwan and Italy
3
for assembly (often by others) in the United States. It conducts certain limited
research and development activities in the United States, but engages in no
domestic manufacturing activities.
The Hartcourt Companies, Inc. commenced limited business activities
involving the design, manufacture and sale of writing instruments in December
1994. The Company's present operations involve the assembly and distribution of
writing instruments. The Company's current primary objective is to acquire
operating companies with related products to maximize the marketing process and
expand the distribution of writing instruments. A secondary objective is to
acquire real property assets and to utilize profits from the development of the
Company's present real property assets in order to diversify and create a multi
dimensional company. The principal executive offices of the Company are located
at 19104 South Norwalk Boulevard, Artesia, California 90701. The Company's
telephone number is (310) 403-1126.
In April 1993, the Xinhui JV commenced construction of a 170,000 square
foot manufacturing plant approximately ten miles north of Xinhui City. 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 is estimated by management that
additional working capital in the amount of approximately $3,000,000 will be
required to permit the plant to operate at full capacity (300,000,000 pens
annually). There is no contractual obligation on the part of the joint venture
partners to provide this additional financing.
In April 1994, the Company entered into a Lease Agreement with
Tokai-Anza-Scripto Pen Company ("Anja"), for the use of five special ball pen
assembly machines by the Xinhui JV. The lease provides for semi-annual payments
of $25,000 over a ten-year term, subject to adjustment based on future purchases
of merchandise by the Company from the lessor. Consequently, annual lease
payments could range from zero, if annual purchases are in excess of $1,000,000,
to $100,000, if annual purchases are less than $100,000. The machinery was
delivered by Anja in June 1995. However, the machinery initially did not
function properly and therefore, the lease term did not commence until February
1996. In December 1996, the machinery was shipped by vessel back from the Xinhui
JV to the Company and arrived in January 1997. The Company and Anja have agreed
to terminate the lease upon delivery of the machinery to Anja with no further
obligation to the Company. To date, there have been no payments under this
lease.
Except for certain limited operations involving the manufacture and
distribution of writing instrument in China through the Xinhui JV and the
assembly and distribution of writing instruments in the United States through
Hartcourt Pen, the Company's activities to date primarily have consisted of
raising capital, obtaining financing, locating and acquiring equipment,
identifying prospective customers and suppliers, installing and testing
equipment and administrative activities relating to the foregoing, as well as
identifying real property for potential acquisition. The Company's future
business, including expansion of its current limited operations, requires
substantial additional equity and/or debt financing, which may not be available
in a timely manner, on commercially reasonable terms, or at all.
4
In September 1996 Hartcourt Pen was spun-off from Harcourt Investments
to Hartcourt Companies, Inc. by Harcourt Investments transferring 100% of stock
ownership in Harcourt Pen to Harcourt Companies, Inc. Pursuant to the spin-off
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 all
of the outstanding shares of the Company's wholly-owned subsidiary Harcourt
(USA), pursuant to a Purchase and Sale Agreement dated September 27, 1996, thus
replacing the Company as a joint venture partner in the Xinhui JV. Title to the
shares was transferred to CKES in return for a Secured Promissory Note in the
principal sum of $3,000,000, payable monthly, with accrued compound interest at
six percent (6%) per annum. The Company has no present contractual obligation to
the Xinhui JV.
In January 1996, the Company 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 the Company's
Preferred Stock. Pursuant to the Memorandum of Understanding, the Company
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 the
Company and Yafa, and in September 1996 the parties entered into a confidential
settlement agreement and agreed to terminate the Memorandum of Understanding.
Terms include down payments totaling $20,924.89, invoice payments of $4,075.11
and 24 monthly payments of $2,000 with the remaining balance due in full on
August 15, 1999.
Pursuant to a Purchase Contract dated March 21, 1996, between the
Company and Exceptional Specialty Products, Inc., a California corporation,
located in Laguna Hills, California, the Company acquired a complete line of
cosmetics valued at $161,250, including inventory consisting of liquid makeup in
bulk, finished product consisting of various lotions, creams, cleansers, scrubs,
liquid makeup, eye shadow, accent pencils, mascara, makeup brushes, translucent
powder, makeup bags, and mirrors, for 12,000 shares of the Company's Common
Stock. Included in this purchase is the United States trademarked brand name
Camille St. Moritz, under which the inventory will be marketed, as well as
containers, labels, packaging, stationery and promotional materials. The Company
has not sold any of the cosmetic products since the purchase and is currently
seeking overseas importers, primarily in China, to purchase the entire inventory
and market the products. The Company does not intend to distribute the cosmetics
other than to importers who will be responsible for their own marketing networks
and money collection.
In August 1996, The Company 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 city, mainland China. The purchase price consists of
a Convertible Secured Promissory Note, granting NuOasis a security interest in
5
the property, in the principal amount of $12,000,000 and the greater of
10,000,000 shares of the Company's Common Stock, or that number of shares of the
Company'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 Contract was agreed to by the Company and NuOasis, by which the Company's
obligation to issue stock to NuOasis was reduced to 4,000,000 shares (valued at
$10,000,000) of its Common Stock. The transaction was completed on September 8,
1996. As of December 1996, the apartment buildings were approximately 35%
complete, and it is anticipated by the Company that the project will be
completed by August 1997.
The Company has no obligation for construction costs or any other costs
relating to the project's completion. At completion, the Company will commence
operation of the project. It is anticipated that the Company may sell some of
the buildings, or units within the buildings, to provide initial operating
funds. There can be no assurance, however, as to when, if ever, the Company will
be successful in selling some of the buildings, or units within the buildings to
obtain operating funds, or whether, or to what extent, the project will be
profitable. See Part 1, Item 3, "Description of Property - Real Estate and
Operating Data."
In September 1996, the Company entered into a Sales Agreement with
Mandarin Overseas Investment Co., Ltd. ("Mandarin"), an unaffiliated Turks and
Caicos chartered company located in Central 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. The Company will pay $3,000,000 in shares
of its Common Stock to Mandarin for its undivided 50% interest in the mineral
lease gold lode claims, all shares to be issued pursuant to Regulation "S." The
number of shares are determined by the average price per share over a 10 day
period for the 10 days prior to the execution of this agreement. Certain
maintenance and administrative costs will be incurred to maintain the claims in
a good standing status with all regulatory agencies. The Company has agreed to
pay Mandarin fifty percent (50%) of all such administrative costs necessary to
maintain the claims in good standing, such costs not expected to exceed $2,500
annually. At the end of two years from the date of the Agreement, the Company
will pay an additional amount representing fifty percent (50%) of no less than
twenty-five thousand dollars ($25,000) in connection with the requirements of
regulatory agencies. Their is no maximum of this amount.
In September 1996, the Company 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. The
Company will pay $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 to be
issued pursuant to Regulation "S." The number of shares are determined by the
6
average price per share over a 10 day period for the 10 days prior to the
execution of this agreement. Certain maintenance and administrative costs will
be incurred to maintain the claims in good standing with all regulatory
agencies. The Company has agreed to pay Promed fifty percent (50%) of all such
costs, not to exceed $2,500 annually. At the end of two years from the date of
the Agreement, the Company will pay an additional amount representing fifty
percent (50%) of no less than twenty-five thousand dollars ($25,000) in
connection with the requirements of regulatory agencies. There is no maximum of
this additional amount.
Management intends to obtain the services of an independent geo-survey
company to prepare detailed geo-maps of the gold lode claims acquired from
Mandarin and Promed, and to evaluate existing studies, at an estimated cost of
approximately $160,000. The possibility of not raising $160,000 will prevent an
accurate value of the Alaskan Mines, however, if these studies confirm the
valuation that has been represented, the Company intends to raise sufficient
capital to fulfill the requirements of the mining project. Management does not
expect this to affect other activities in which the Company is involved. There
can be no assurance, however, as to when, if ever, the Company will obtain the
necessary capital to fulfill the requirements of the mining project, or whether,
or to what extent, the project will be profitable, should operations commence.
See Item 3. "Description of Property - Mineral Lease Gold Lode Claims."
In January 1997 the Company began ongoing negotiations with Network
Computer, Inc., a wholly-owned subsidiary of Oracle Company, to develop 500,000
network computers in Southeast Asia.
See Part I, Item 7, "Certain Relationships and Related Transactions"
for information about the interests of certain directors, executive officers and
promoters of the Company in the formation and reorganization transactions
described above involving Stardust, Harcourt USA and Hartcourt Pen.
See Part 1. Item 3, "Description of Property," for information about
the Company's facilities.
Principal Products, Distribution and Competitive Conditions
The Company's present business activities consist of the assembly and
distribution of a broad range of writing instruments, ranging from the most
commonly used and inexpensive plastic ballpoint pens to high-priced luxury and
collectible fountain pens. The Company also distributes special order stationery
items, such as daily diaries and planners, organizers and desk sets and other
desk items, manufactured by others.
Commonly used and inexpensive writing instruments ("Popular Items")
assembled and sold by the Company include a broad range of ballpoint pens,
roller pens, cosmetic pens, white board markers, water color markers, permanent
markers, highlighters, erasable ballpoint pens and magic ink pens. The Company's
Popular Items are available in various compositions and colors of plastic
barrels and in a variety of ink colors.
7
Higher priced and luxury writing instruments ("Luxury Items") sold by
the Company include ballpoint, roller and fountain pens as well as mechanical
pencils. The barrels of Luxury Items generally are composed of brass or
stainless steel with lacquer or engraved designs and have nibs (the point of the
pen that regulates ink flow) of German-made iridium, as well as gold-plated
accessories. Once the pens are produced, they are inspected for quality control
before being available for retail.
The Company's products are distributed through consignment contracts
and retail activities. The Company also advertises on airline magazines such as
Frequent Flyer, Hughes and CFO. The mail order and U.S. domestic operations are
carried out by the help of customer service representatives under supervision of
office managers. All orders whether received by phone, fax, letter or through
the Company's web site are documented and checked for reliability. Once the
payment is processed or invoiced, the shipment proceeds through the mail order
and Internet service. The Company has established a large distribution network
available to customers worldwide.
Management believes that the materials and equipment used in the
assembly of the Company's products generally are available from multiple sources
on competitive terms. Therefore, the Company does not anticipate any significant
delays in the acquisition of, or shortages of, either materials or equipment.
The Company believes that the markets for its broad range of writing
instruments are relatively fragmented and highly competitive. There are many
local, national and multinational importers of writing instruments in the United
States and elsewhere, and the Company's ability to compete successfully will be
dependent upon numerous factors, including its ability to obtain necessary
financing in a timely manner and on commercially acceptable terms, as well as
upon the design, quality and price of its products and its customer service.
Many of the Company's competitors have greater experience and far greater
financial and other resources than the Company, which is in the development
stage. There can be no assurance that the Company will be able to compete
successfully in its markets.
Doing Business in China
GENERAL. Because the Company's Peony Gardens project is in China and
China is among the possible markets targeted by the Company for future
acquisitions, as well as a market for the purchase of its cosmetic products
inventory, China is important to the Company's success. The operation of
facilities in China involves certain risks and special considerations not
typically associated with operations in the United States.
These risks generally relate 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
8
the future could have a significant effect on economic conditions in China. Such
actions, and resultant changes in the Chinese economy, could significantly
aversely affect, limit or eliminate opportunities for foreign investment, the
prospects of private sector enterprises operating in China and the value of the
Company's investments in China.
RESTRICTIONS ON FOREIGN CURRENCY EXCHANGE. In order to meet foreign
currency obligations and remit dividends to foreign owners, a joint venture
operating in China must convert a portion of its funds from the Chinese
currency, the Chinese Renminbi (the "RMB"), to other currencies. Because China
controls its foreign currency reserves, RMB earnings within China can not freely
be converted into foreign currencies, except with government permission and at
rates which are determined in part by supply and demand at authorized financial
institutions, such as the People's Bank of China or at government-regulated
foreign exchange swap centers established by the State Administration of
Exchange Control. In the event of shortages of foreign currencies, the Company
may be unable to convert sufficient RMBs into foreign currencies to enable it to
comply with foreign currency payment obligations or to make distributions to
equity holders located outside of China.
VOLATILITY OF EXCHANGE RATES. There has not been significant volatility
in the exchange rates of RMBs to U.S. Dollars in the recent past but future
exchange rates may experience significant volatility.
ENVIRONMENTAL REGULATION. The Company's Chinese operations are
subject to central, provincial and local environmental protection laws and
regulations. The costs and effects of compliance with environmental laws and
regulations in the United States (federal, state and local) and China (central,
provincial and local) have not been material in the past and are not anticipated
to be material in the future.
Employees
The Company currently employs four full-time and three-part-time
employees at its principal executive offices in the United States. Hartcourt Pen
is located at this headquarters location, which also is the site for certain
research and development activities. The Company does not expect any significant
changes in the number of employees during the next twelve months.
Research and Development
The Company currently conducts limited research and development
activities involving the creation of ink formulas, as well as the engineering
design of pens and materials used for components of writing instruments. During
the fiscal years ended December 31, 1993, 1994 and 1995, $110,650,
$180,440 and $38,205 respectively, was expended in connection with such
activities. During the 12 month period ended December 31, 1996 no expense was
incurred in connection with research and development activities. Management
anticipates that research and development costs as a percentage of sales will
not increase materially from current levels.
9
Item 2. Management's Discussion and Analysis or Plan of Operation
The Company assembles and imports writing instruments for sale in the
U.S. During 1995 and 1996, the Company entered into negotiations involving
various transactions intended to increase the Company's inventory and ability to
manufacture, assemble and import writing instruments. None of these transactions
were completed. See Part F/S, "Consolidated Financial Statements, Years Ended
December 31, 1996 and 1995 -- Notes to Financial Statements," Item H.
"Commitments and Contingencies."
During the first quarter of 1996, the Company acquired a complete line
of cosmetics and the United States trademarked name Camille St. Moritz, under
which the cosmetics will be marketed. The Company does not intend to market the
products in the United States, and is currently seeking overseas importers,
primarily in China, to purchase the inventory and market the products. There
have been no sales of the cosmetic products since the Company acquired the line,
and there can be no assurance that the Company will find importers to purchase
its cosmetic product inventory. See Item 1. "Description of Business --
General."
During the third quarter of 1996, the Company acquired Peony Gardens, a
commercial real estate project in the eastern part of Tongxian in Beijing city,
mainland China, commonly known as the Peony Gardens property. The project, when
completed, will be comprised of three 5-7 story apartment buildings. The
buildings are scheduled for completion in the third quarter of 1997. The Company
has no obligation for construction costs, or any costs relating to the project's
completion and will not assume operating costs until full completion of the
project. Upon the full completion of the project, it is anticipated by
Management that the Company may sell some of the buildings, or units within the
buildings, to provide initial operating funds. Any sale or lease of the
buildings, or of units within the buildings, by real estate brokers in China is
subject to a 5% commission. It is the Company's intent to have the properties
managed by a real estate management company, local to the area, whose services
will be compensated, if possible, through the issuance of the Company's common
Stock. Real estate company management fees for the area are 4% of total rents
collected. There can be no assurance as to when, if ever, the Company will
obtain these initial, or future, operating funds, or whether, or to what extent,
the project will be profitable. See Item 2. "Description of Property - Real
Estate and Operating Data."
During the third quarter of 1996, the Company purchased, in two
separate transactions, an undivided 50% interest in a total of 68 mineral lease
gold lode claims, 34 from each transaction respectively, located in the
Melozitna mining district near Tanana, in southern Alaska. Until such time as an
independent geo-survey company has prepared detailed geo-maps of the area, and
an evaluation of existing studies has been performed on the properties, the
Company does not intend to enter into any mining activities on these claims. The
Company estimates that the cost for the geo-survey service will be approximately
$160,000. Management is establishing a program to finance the administrative and
developmental needs of the gold claims. There can be no assurance, however, as
to when, if ever, the Company will obtain the necessary capital to fulfill the
10
requirements of the mining project, or whether, or to what extent, the project
will be profitable, should operations commence. See Item 2. "Description of
Property -- Mineral Lease Gold Lode Claims."
In the fourth quarter of 1996, the Company sold Harcourt Investments,
its wholly-owned subsidiary and owner of 52% of the Xinhui JV, to CKES Inc. for
$3,000,000. The Company received a $3,000,000 promissory note which is payable
in installments of $50,000 per month for 60 months starting October 1, 1998.
Interest accrues a 6% per annum and is payable in full at the end of the loan
period. The note is secured by all assets of CKES, Inc.
Also in the fourth quarter of 1996 the Company entered into a
consulting agreement with American Equities, LLC, a California limited liability
company to provide consultation and assistance in finding, acquiring, managing
and developing a real estate portfolio which will include office, commercial,
industrial, residential and raw land. As a minimum the consultant is expected to
increase assets and/or market capitalization of the Company by at least
$50,000,000 by the end of 1997.
RESULTS OF OPERATIONS
The Company's domestic U.S. sales activity commenced, on a limited
basis, during the fourth quarter of 1994 and its Chinese facilities were not
completed and in full operation until the beginning of the third quarter of
1995. In 1996, as discussed previously the Company made some fundamental
changes, including the sale of its interest in the Xinhui JV. Because of the
nature of activities in 1996 as compared to 1995 it is not relevant to attempt a
comparison. The following discussion relates to the twelve months ended December
31, 1996 followed by a discussion of the twelve months ended December 31, 1995.
1996
During 1996, the Company's domestic operations were limited due to the
lack of a comprehensive marketing program and the refocus of Company objectives
and direction. Domestic sales during the year were approximately $272,000 which
included the sale, at auction, of outdated pen inventory for approximately
$92,000. Other domestic sales were primarily from mail order and some over the
counter retail sales. Total revenues of $511,000 include the sales activity of
the Xinhui JV for the first nine months of l996 which was approximately
$238,000. This is an improvement over 1995 due to an increase in their marketing
efforts, however, sales continued to lag behind projections which is reflective
of the slow economic climate in China at this time.
Cost of sales for the year ended December 31, 1996 was $797,667
compared to $159,797 for 1995, representing an increase of 499% over 1995. Cost
of sales for 1996 was very high due the liquidation at auction of outdated
inventory items received from the Xinhui JV. The Company received approximately
30 cents on the dollar. The total loss from this liquidation was approximately
$320,000. This is, of course, a one-time occurrence and the Company expects the
gross margin to be around 50% in the future.
11
General and administrative expenses were $1,242,756 during 1996,
compared to $1,558,256 in 1995, a decrease of 25%. This decrease reflects an
effort by the Company to cut costs extensively, and also due to the fact that
general and administrative expenses of the Xin Hui JV were not included during
the fourth quarter of 1996. Further, the Company incurred interest expenses of
$360,744 from the Xin Hui JV's indebtedness. This expense from Xin Hui JV will
not occur in 1997 since the Company has sold its interest.
1995
During the 12 months ended December 31, 1995, consolidated sales were
$354,000, compared to $475,000 for 1994, representing a decrease of 25% in 1995
from 1994, due to a decrease in the mail order market. The Company's sales
during the 12 months ended December 31, 1995 consisted of $250,000 by the Xinhui
JV to customers within China and $104,000 from domestic U.S. sales. Sales in
1994 were exclusively from U.S. domestic operations, which consisted primarily
of mail order activities.
Cost of sales for the year ended December 31, 1995, was $160,000, compared
to $32,000 for 1994, representing an increase of 400% over 1994. This increase
was primarily due to the Cornpany's increased sales of low cost pens, resulting
in a lower profit margin.
The gross profit margin for the year ended December 31, 1995 was 54.8%,
compared to 57.3% for 1994. The reduction in gross profit during 1995 is
attributable to competitive pressures to lower prices and pricing decisions by
management intended to increase the Company's market share.
General and administrative expenses were $1,558,000 during 1995,
compared to $429,000 in 1994, an increase of 263%. This substantial increase was
due to expansion of the Company's marketing efforts both domestically and in
China, through the addition of personnel and related costs. Administrative
expenses of the Xinhui JV increased substantially during 1995, as construction
activities were completed and manufacturing operations commenced. In particular,
the commencement of manufacturing operations required the hiring of additional
sales and administrative personnel. In addition, during 1995 the Company
incurred interest expense in the amount of $851,000 in connection with loans in
the aggregate amount $4,900,152, of which $1,227,325 was obtained during 1995 to
finance equipment for the Xinhui JV factory.
Foreign Currency
The Xinhui JV reports its operating results and financial condition in
the local currency, the Chinese Renminbi (the "RMB"). The effect of changes in
foreign currency exchange rates had minimal effect on the sales and cost of
sales of the Xinhui JV during the period in which the Company was joint venture
partner, since it operates almost exclusively within China and engages in
minimal importing or exporting activities. For the international operations,
assets and liabilities are translated into U.S. dollars at year-end exchange
12
rates and revenues and expenses are translated at average exchange rates
prevailing during the year. Translation adjustments, resulting from fluctuations
in exchange rates, are recorded as a separate component of shareholder's equity.
Liquidity and Capital Resources
1996
The Company's current ratio improved significantly, at the end of 1996
over 1995 due to the sale of the Company's interest in the Xinhui JV because of
the heavy debt incurred by the Joint Venture. Despite the sale of the Xinhui JV,
total assets almost doubled at the end of 1996 over 1995. This was due to the
various investments made by the Company during 1996 as has been previously
discussed. These investments were financed primarily from the issuance of the
Company's common stock.
During 1996 the Company experienced a deficit in cash flows from
operations due primarily to the sale of the Company's interest in the Xinhui JV
and because the Joint Venture had an extremely high overhead compared to sales
and was unable to generate sufficient sales to cover general and administrative
costs. With the sale of the Company's interest in the Xinhui JV cash flows are
expected to improve. The cash flow deficiency from US operations was minimal
and, with the projected increase in sales, the Company should have a positive
cash flow from operations in the future.
In December 1996 the Company retained the services of a consultant to
develop a $50 million real estate portfolio for the Company. It is planned to
finance the purchase of this portfolio through a combination of debt and the
issuance of the Company's common stock. The real estate portfolio is expected to
produce cash flow for the Company. As part of the agreement with the consultant,
the Company advanced to the consultant $1,500,000 for consulting fees plus
another $150,000 for expenses. The Company paid these amounts by issuing the
consultant shares of the Company's common stock. One million shares were issued
at $1.50 per share and 300,000 shares at $0.50 per share.
The Company also has a stock subscription agreement with foreign
investors that will provide the Company with up to $20,000 per month during the
twelve month period beginning November 1996. The Agreement provides for the sale
of up to 480,000 shares of the Cornpany's common stock for $0.50 per share,
however, the Company is not obligated to sell any of the shares and in its sole
discretion can determine the amount sold.
Prepaid expenses increased by $828,000 or 1,115% to $900,000 on
December 31, 1996 from $72,000 on December 31, 1995. The primary reason was the
consulting fees to American Equities to develop a real estate portfolio for the
Company. In addition, there was a current portion of $133,764 of notes
receivable, totaling $2,526,779, resulting from various loans giving to
companies and private parties.
13
Property, plant and equipment decreased by $8,985,692, or 99.5% as
the Company sold its interest in the Xin Hui JV company. On December 31, 1996,
total property, plant and equipment was only $44,809. The decrease in property
and equipment is due to the sale of the Company's interest in the Xinhui JV. The
sale of the interest was also the reason why current liabilities decreased by
$6,176,578, or 94% to $388,503 on December 31, 1996 comparing to $6,565,081 on
December 31, 1995. At December 31, 1996 the Company had a capital lease with
Anja Engineering, in the amount of $576,615, that relates to equipment that was
purchased for the Xinhui JV. The Company is currently in dispute with Anja
Engineering over the amount of the note because the equipment has not performed
in accordance with expectations. The Company expects to work out a settlement
that will cancel the capital lease and result in a substantial forgiveness of
debt.
The Company believes that, with the sale of the interest in the
Xinhui JV and the anticipated settlement of the Note and capital lease with Anja
Engineering, the Company will be well positioned in 1997 to pursue the planned
investment program of sound real estate projects and profitable, cash producing
businesses.
1995
Changes in cash flows resulting from the Company's operating
activities for the year ended December 31, 1995 as compared to the prior year
were due to the commencement of full operations of the Xinhui JV during the
third quarter of 1995. Accounts receivable increased by $59,000, or 616%, to
$69,000 at December 31, 1995 from $10,000 at December 31, 1994, and inventories
increased by $294,000, or 40.8%, to approximately $1,011,000 at December 31,
1995 from $718,000 at December 31, 1994 primarily as a result of the
commencement of operations by the Xinhui JV. Domestic operations also showed
modest increases in accounts receivable and inventories for the same reasons.
At December 31, 1995 the Company was experiencing a deficiency in
operating cash flow. This deficiency was primarily the result of the operations
of the Xinhui JV and, to a lesser extent, to U.S. domestic operations. In China,
it is customary commercial practice to provide customers purchasing "on account'
with substantially more liberal payment terms than are generally available with
the U.S., with terms of net 120 or even 180 days commonplace.
Prepaid expenses decreased by $128,000, or 63.9%. to $72,000 at
December 31, 1995 from $200,000 at December 31,1994, due to the transfer of
amounts from prepaid expenses and construction in progress to property, plant
and equipment during 1995. In addition, Common Stock subscriptions receivable
decreased in recognition of receipt, by the Company, of the proceeds of Common
Stock subscription agreements fulfilled prior to December 31, 1995.
Property, plant and equipment increased by $1,906,000, or 26.8%, to
$9,031,000 at December 31, 1995 from $7,125,000 at December 31,1994, and
deposits and other assets decreased by $595,000, or 96.3%, to $23,000 at
December 31, 1995 from $618,000 at December 31, 1994, as a result of the
transfer of certain amounts to property, plant and equipment from construction
14
in progress in connection with completion of the Xinhui JV plant and from
deposits in connection with equipment on order at the end of 1994 and delivered
during 1995.
Current liabilities increased by $3,092,000, or 82.6%, to $6,837,000
at December 31, 1995 from $3,745,000 at December 31, 1994, because of the
transfer of long-term debt to current debt and due to additional borrowing by
the Xinhui JV to meet cash flow needs for completion of construction of the
manufacturing facilities and to finance operations while sales and marketing
programs are implemented within China. Long-term debt decreased by approximately
$480,000, or 48.9%, to approximately $502,000 at December 31, 1995 from $982,000
at December 31, 1994, due to transfer of a portion thereof to current debt.
At December 31, 1995, $773,000 of the Company's debt was attributable
to 12 loans from various banks and companies within China to the Xinhui JV.
These loans have various maturity dates during calendar year 1996, and currently
bear interest at various rates ranging from 11.7% to 22.8%. One of these loans,
in the principal amount of $682,600, is secured by machinery and equipment, and
the remaining amounts are unsecured.
The Company's indebtedness at December 31, 1995, made up of primarily
Xinhui JV debt, included several loans that were in default and therefore, were
classified as due with one year for financial statement reporting purposes.
Item 3. Description of Property
Principal Plants and Other Property
The Company's principal executive offices are located at 19104 South
Norwalk Boulevard, Artesia, California 90701. Hartcourt Pen is located at this
headquarters site, which also is the site of certain limited research and
development activities. The premises, which are leased from an unaffiliated
party, consist of 5,200 square feet, approximately 2,000 square feet of which is
used for warehousing, approximately 2,000 square feet for assembly of writing
instruments, and approximately 1,200 square feet for executive and clerical
offices. Monthly rent is $1,230 until May 31, 1997, $1,640 from June 1,1997
through May 31,1998 and $2,050 for the remainder of the lease term, through May
31, 2001; provided, however, that no rent will be due for the months of June
1999 and June 2000.
See Part I, Item 1, "Description of Business--General" for information
about the manufacturing facilities of the Xinhui JV.
The Company believes that its property and equipment are adequate for
its present activities as a development stage company. See Part I, Item 1,
"Description of Business--Proposed Activities." and Part I, Item 2,
"Management's Discussion and Analysis or Plan of Operation--Liquidity and
Capital Resources."
15
Investment Policies
The Company has placed no limitation on the percentage of assets which
may be invested in any one investment. This policy may be changed by the
Company's Board of Directors and without a vote of the Company's security
holders. It is the Company's policy to acquire assets primarily to add to its
equity base and for income.
Real Estate Investments
The Company's investments in real estate are not restricted to
developed or undeveloped properties, or properties of any specific type or
location. It is the present intent of Management to acquire commercial
properties that can be operated by outside management and do not require the
Company's hands-on operation. With the exception of the Peony Gardens Project
(See Item 1. "Description of Business - General"), it is the present intent of
Management that real estate will be purchased, free and clear of any mortgage,
with shares of the Company's Common Stock. Any necessary management services in
connection with the Peony Gardens Project, and any future acquisitions, will be
compensated, if possible, through the issuance of the Company's Common Stock.
Real Estate and Operating Data
On September 8, 1996, the Company completed the purchase of a
commercial real estate project, commonly known as the Peony Gardens Project
("Peony Gardens"), located in mainland China. See Part I, Item 1, "Description
of Business." The land use right of the property has been granted to
Beijing Grand Canal Real Estate Development Co. Ltd., the project's developer,
for a term of seventy (70) years, commencing from May 3,1994. NuOasis, the
seller, holds the Company's Convertible Secured Promissory Note in the principal
amount of $12,000,000, granting NuOasis a security interest in the property,
which is otherwise free of any mortgages, liens or encumbrances. Peony Gardens,
upon its anticipated completion, will be comprised of three 5-7 story apartment
buildings located at the eastern part of Tongxian of Beijing city. The property
is connected to a network of highways and roads, and is located in one of the
city's strategic areas for outward expansion, with a relatively good transport
system consisting of public buses and taxicabs between the city center and the
development.
As of December 1996, the development is approximately 35% complete, and
it is anticipated that it will be fully developed by August 1997. The Company
has no obligation for construction costs, or any other costs relating to the
project's completion, and will not assume operating costs until full completion
of the project. It is the opinion of the Company's management that present
insurance coverage is adequate. Upon completion of the project, it is the intent
of the Company to acquire, if possible, the services of an independent real
estate management company for the properties through the issuance of the
Company's Common Stock. At present, real estate management company fees in China
are 4% of total rents collected. It is estimated that the total annual rental
income, after completion of the project's three residential apartment buildings,
will be $5,764,00 at 70% occupancy. Management estimates expenses to be
16
approximately $1,441,000 annually. Depreciation is based on twenty years, which
is standard depreciation for apartment buildings. Real estate and governmental
taxes in connection with the Peony Gardens purchase are the obligation of the
developer and were included in the purchase price. All rental taxes will be paid
by the tenants included in their monthly rent. Management estimates that leases
will be for a minimum period of two years, which is the standard lease term for
the area. The property is not, at present, subject to the usual competitive
conditions associated with rental or leased residential apartment property,
since the apartment buildings have been mandated by the Chinese government as a
special project for the use of foreigners. However, should the government
rescind that mandate, or should conditions occur which would cause the Chinese
government to expel foreigners, the apartments would be subject to extremely
competitive lease and sale pricing. See Part I, Item 1, "Description of
Business--Doing Business in China."
Mineral Lease Gold Lode Claims
In September 1996, the Company, through separate transactions with
Mandarin Overseas Investment Co., Ltd. ("Mandarin") and Promed International,
Ltd. ("Promed"), acquired an undivided 50% interest in a total of 68 (34 from
each transaction) mineral lease gold lode claims, consisting of 160 acres each,
all located in the Melozitna mining district near Tanana, Alaska, some 300
air-kilometers west of the City of Fairbanks, Alaska. A gravel landing strip
near Golden Creek, about 12 kilometers north of the Yukon River, can be used to
access and service the area during snow-free months. Aircraft up to the size of
a DC-3 can land on this strip to supply fuel and other supplies to mining camps
in the area. Scheduled passenger flights from Fairbanks west to points along the
Yukon River can be used to provide passenger service to and from the Golden
Creek landing strip. Larger equipment and fuel supplies can be barged down the
Yukon River to several points where tractor roads lead into the mineral lease
area.
Certain maintenance and administrative costs will be incurred by the
Company to maintain the claims in a good standing status with all regulatory
agencies. Pursuant to the Sales Agreements, with Mandarin and Promed, the
Company has agreed to pay fifty percent (50%) of all such administrative costs
necessary to maintain the claims in good standing, such costs not expected to
exceed a total of $5,000 annually, which are payable to Mandarin and Promed in
the amount of $2,500 each, respectively. At the end of two years from the date
of the Agreements, the Company will pay an additional amount representing fifty
percent (50%) of no less than twenty-five thousand dollars ($25,000) to
Mandarin, and an additional amount representing fifty percent (50%) of no less
than twenty-five thousand dollars ($25,000) to Promed, in connection with the
requirements of regulatory agencies. See Item 1., "Description of Business --
General."
Recent exploration activity in Alaska has been stimulated by the
discovery of low-grade bulk tonnage gold mineralization at the Fort Knox
deposit, near Fairbanks. The gold is associated with high concentrations of
tungsten and bismuth. Unaffiliated companies, with gold lode claims in areas
17
adjacent to the Company's gold lode claims, commenced field work on a portion of
the adjacent area in July and August 1996. However, the Company does not expect
to enter into any mining operations on its gold lode claims until such time as
detailed geo-maps and evaluation of existing studies of the gold lode claims are
obtained from an independent geo-survey company, at an estimated cost of
$160,000. If these studies confirm the valuation that has been represented, the
Company intends to raise sufficient capital to fulfill the requirements of the
mining project. There can be no assurance, however, as to when, if ever, the
Company will obtain the necessary capital to fulfill the requirements of the
mining project, or whether, or to what extent, the project will be profitable,
should operations commence.
Item 4. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information as of December 31, 1996
with respect to persons known to the Company 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 the Company and by all directors and
executive officers of the Company as a group.
Name and Address of Amount and Nature of Percent of
Beneficial Owner Beneficial Ownership (1)(2) Common Stock
Dr. Alan V. Phan 1,478,878 (3) 14.0%
19104 South Norwalk Boulevard
Artesia, California 90701
Frederic Cohn 1,609 *
19104 South Norwalk Boulevard
Artesia, CA 90701
Michael L. Caruana 1,609 *
19104 South Norwalk Boulevard
Artesia, CA 90701
James De Rosa 1,609 *
19104 South Norwalk Boulevard
Artesia, CA 90701
Philadep & Co. 617,989 (8) 5.8%
P.O. Box 15891
Philadelphia, PA 19103-0891
CEDE & Co. 536,351 (7) 5.1%
55 Water Street 2SL
New York, NY 10041
Tiana Corporation 1,022,949 (4) (5) 9.7%
Kai Tak Commercial Building
Room 704A
317 Des Voeux Road Central
Hong Kong, China
18
NuOasis International, Inc. 4,000,000 (6) 37.8%
2 Park Plaza, Suite 470
Irvine, California 92714
All officers and directors
as a group 1,483,705 14.1%
_____________________
* Less than 1%
(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) Except as otherwise indicated, shares held are Common Stock.
(3) Includes (i) an aggregate of 1,000,000 shares issuable upon conversion
of 1,000 shares of Original Preferred Stock and (ii) an aggregate of
171,718 shares held by two sons who reside with Dr. Phan when not
attending college and law school, respectively. 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 the Company's Board
of Directors.
(4) As the owner of 20,000 shares of stock in Tiana corporation, Dr. Alan
V. Phan's son, Art Phan, holds a 20% interest in Tiana Corporation. Dr.
Phan disclaims any beneficial ownership in these shares.
(5) Tiana Corporation is a British Virgin Islands corporation owned 20% by
Art Phan,80% by Tan Goek Ser in Singapore and various Asian business
groups located in Hong Kong, Singapore, Malaysia, and Indonesia.
(6) In August 1996 the Company 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
occupance is received. NuOasis is a non-affiliate of the Company.
(7) CEDE & Co. Is a deposit trust corporation (stock brokerage company).
(8) Philadep & Co. is a deposit trust corporation (stock brokerage
company).
The Company is not aware of any arrangement which might result in a change in
control in the future.
19
Item 5. Directors, Executive Officers, Promoters and Control Persons
The following table sets forth certain information about the directors
and executive officers of the Company.
Name Age Position
---- --- --------
Dr. Alan V. Phan 51 Chairman of the Board, President,
Chief Executive Officer and Chief
Financial Officer
Frederic Cohn 57 Secretary, Treasurer and Director
Kenneth Silva 70 Vice-President Marketing and Sales
and Director
Michael L. Caruana 53 Director
James De Rosa 65 Director
Dr. Alan V. Phan is the founder of the Company and has been Chairman,
President, Chief Executive Officer and Chief Financial Officer since November
1993. He also is the founder of Harcourt USA and Hartcourt Pen. See Part I, Item
1, "Description of Business--General." From 1986 through October 1993, Dr. Phan
was the owner of Hartcourt Consulting, an export management firm and, from 1980
to 1986, he was the Executive Vice President of EM Kay Group (which owned Magic
Marker Industries). In addition to his activities in the export and writing
instrument business, Dr. Phan has been involved in gold mining operations, as
manager in the Philippines (1971-1972) for Eisenberg Group, a company located in
Israel. He was active in the real estate industry from 1976 until 1982 as owner
of Alpha Development, a California real estate company. Dr. Phan received his
academic training and degrees at Pennsylvania State University (1967), and
Sussex College of Technology, Sussex England (1975).
Frederic Cohn has been a director and Secretary Since November 1993. He
is responsible for all financial, tax, accounting, personnel, management
information system and administrative functions. From 1990 to 1993, Mr. Cohn was
the President and Chief Executive Officer of Aladdin Enterprises, Inc., an
entertainment equipment leasing firm, located in Santa Monica, California. Mr.
Cohn is a graduate of New York Law School (1978).
Kenneth Silva has been Vice President, Sales and Marketing and a
director, since January 1996. Prior to joining the Company, Mr. Silva was a Vice
President and a Manager for a number of banks, including Capital National Bank
(two years), Bank of Downey (four years), Interstate Bank (10 years), and 22
years at Wells Fargo Bank where he served as Vice President of Business
Development. Mr. Silva holds a B.A.
20
degree in accounting and banking from Armstrong College in San Francisco,
California (1964), and attended graduate courses at American Institute of
Banking.
Michael L. Caruana has been a director since June 1994. Mr. Caruana is
a graduate of California State University at Long Beach (1972) with a degree in
engineering. He currently is the President, Chief Executive Officer and majority
owner of Pego Systems, Inc., an engineering and industrial equipment
manufacturing company, and has held various positions with Pego since 1975. See
Part I, Item 1, "Description of Business--General" and Part I, Item 7, "Certain
Relationships and Related Transactions."
James De Rosa has been a director of the Company since September 1996.
A graduate of Tufts College (1960), and Suffolk Law School, Boston,
Massachusetts (1963), Mr. DeRosa is a Real Estate investor and developer and has
been active in the real estate business since 1974. Mr. De Rosa is President of
De Rosa Properties, Inc. 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 the Company 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 the Company.
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
the Company's Board of Directors, whereas the holders of the outstanding shares
of Common Stock are entitled to elect 2/5 of that number. See Part I, Item 8,
"Description of Securities" for more information about the rights of the Common,
and Original Preferred stockholders.
By virtue of his activities in founding and organizing the Company, as
well as his beneficial ownership of its voting securities, Dr. Phan may be
deemed to be a "promoter" of the Company.
Item 6. Executive Compensation
The following summary compensation table sets forth certain information
regarding compensation paid during each of the three fiscal years ended December
31, 1996, 1995 and 1994 to the person serving as the Company's Chief Executive
Officer during the years ended December 31, 1996. No annual compensation in
excess of $100,000 was awarded to, earned by or paid to any director of
executive officer of the Company for services rendered in any/all capacity/ies
in any of the fiscal years indicated.
Name and Principal Fiscal Annual
Position Year Salary
------------------ ------ ------
Dr. Alan V. Phan, 1996 $100,000
Chief Executive Officer 1995 $70,000
1994 $35,000
21
There is no employment agreement with any executive officer. There are
no salary, bonus or incentive plans covering cash or securities except the
Company'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 the
Company. Vested options lapse one year after the death or disability of an
option holder. No options have been granted under the Plan.
Item 7. Certain Relationships and Related Transactions
Dr. Alan Phan, a director, executive officer and promoter of the
Company, acquired ten shares of Harcourt USA for nominal consideration upon its
organization in April 1993. Pursuant to a stock Exchange agreement dated August
8, 1994 with eastern Rocester Limited, Harcourt USA acquired a 60% interest in
the Xinhui JV in exchange for 250,000 shares of Harcourt USA common stock,
representing 80% of the common stock of Harcourt USA outstanding immediately
subsequent to the transaction. After giving effect to this transaction, Harcourt
USA was held 80% by Eastern Rocester Limited, 2% by Dr. Phan and 18% by Pacific
Rim Capital. See Part I, Item 1, "Description of Business--General" and Part I,
Item 5, "Directors, Executive Officers, Promoters and control Persons."
The Company acquired all of the outstanding shares of Harcourt USA in
exchange for 6,110,337 shares of the Company's Common Stock pursuant to an
Agreement and Plan of Reorganization dated November 5,1994. In connection with
this transaction, Dr. Phan received 38,625 of such shares. Michael Caruana, who
currently serves as a director of the Company, was Vice President of the Company
at the time of this transaction. See Part I, Item 1, "Description of
business--General" and Part I. Item 5, "Directors, Executive Officers, Promoters
and Control Persons."
Dr. Phan acquired ten shares of Hartcourt Pen for nominal consideration
upon its organization in October 1993. All of the outstanding shares of
Hartcourt Pen were acquired by the Company pursuant to an Agreement and Plan of
Reorganization dated December 1,1994. As the sole stockholder of Hartcourt Pen,
Dr. Phan received all 38,625 shares of the Company's Common Stock and 1,000
shares of Original Preferred Stock issued by the Company in connection with this
transaction. See Part I. Item 1, "Description of Business--General" and Part I,
Item 5, "Directors, Executive Officers, Promoters and Control Persons."
During 1994 and 1995, the Company made advances in the aggregate amount
of $168,575 to the Company's joint venture partner in the Xinhui JV. All of
these advances are non-interest bearing and due on demand. These advances were
additional monies lent to Xin Hui which converted to capital contributions.
During 1994 and 1995, Pacific Rim Capital ("Pacific Rim"), a
non-affiliated financier for the Company advanced a total of $272,416 to the
Company. The advance was unsecured, bearing interest at the rate of 24% per
22
annum and subject to no fixed repayment terms. On September 30, 1996, Pacific
Rim agreed to convert this loan for 425,000 shares at $0.50 per share of the
Company's common stock.
In June 1995, the Company entered into an Agreement and Plan of
Reorganization with Pego Systems, Inc. to acquire all of the outstanding
shares of Pego common stock in exchange for 1,500,000 shares of the Company's
Class A Preferred stock. The transaction was terminated prior to its completion.
The owner of Pego, Michael L. Caruana is a current director of the Company. See
Part III, F/S, "Consolidated Financial Statements, Years Ended December 31, 1996
and 1995 -Notes to Financial Statements," Item H. "Commitments and
Contingencies."
In August 1996 the Company purchased an apartment complex located near
Beijing, China for $22 million from Nuoasis International, Inc. (a wholly owned
subsidiary of Nona Morell'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 occupance is received. Nuoasis is a non-affiliate of the Company.
Under the deposit method of accounting in accordance with Financial Accounting
Standards No. 66 the promissory note for $12,000,000 is currently being deferred
until the complete consummation of the Peony Gardens sale. Also the 4 million
shares of common stock is recorded as a deposit at December 31, 1996.
Item 8. Description of Securities
The authorized capital stock of the Company consists of 110,001,000
shares of capital stock, composed of 100,000,000 shares of common stock, par
value $0.001 per share ("Common Stock"), 1,000 shares of Preferred stock, par
value $.01 per share ("Original Preferred Stock"), and 10,000,000 shares of
Preferred Stock, par value $.01 per share ("Class A Preferred Stock"). At
present, there are no shares of Class A Preferred Stock outstanding.
Common Stock
VOTING RIGHTS. Subject to the voting rights of holders of Original
Preferred Stock described below, each holder of shares of Common Stock is
entitled to one vote for each share of Common Stock for the election of
directors and on each other matter submitted to a vote of the stockholders of
the Company. Until December 31, 2010, holders of Common Stock, are entitled to
elect two fifths (2/5) of the authorized number of members of the board of
Directors. The holders of Common Stock have exclusive voting power on all
matters at any time no Preferred Stock with superior voting rights is issued and
outstanding.
LIQUIDATION RIGHTS. Upon liquidation, dissolution or winding up of the
Company, holders of shares of Common Stock are entitled to share ratably in
distributions of any assets after payment in full or provision for all amounts
due creditors and provision for any liquidation preference of any other class or
series of stock of the Company then outstanding.
23
DIVIDENDS. Dividends may be declared by the Board of Directors and paid
from time to time to the holders of Common Stock in cash, stock, or otherwise,
as may be determined by the Board of Directors, out of the net profits or
surplus of the Company.
OPTIONS. Under the Company's 1995 Stock Option Plan (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
the grant. Excepting the case of the death or disability of an option holder,
vested options lapse 90 days following termination of continuous employment by
the Company. Vested options lapse one year after the death or disability of an
option holder. No options have been granted under the Plan.
WARRANTS. None.
Original Preferred Stock
VOTING RIGHTS. The holders of Original Preferred Stock are not entitled
to vote on any matters except those affecting the Original Preferred Stock, the
election of directors (to the extent described below) and as otherwise required
by law. Until December 31, 2010, holders of Original Preferred Stock, voting as
a single class, are entitled to elect three-fifths (3/5) of the authorized
number of members of the Board of Directors.
LIQUIDATION RIGHTS. In the event of any liquidation, dissolution or
winding up of the Company, holders of Original Preferred stock are entitled to
be paid the full par value of the Original Preferred Stock, $.01 per share.
CONVERSION RIGHTS. The holders of shares of Original Preferred Stock
are entitled to convert each share, at the holders option, of Original Preferred
Stock into 1,000 shares of fully paid and non-assessable Common Stock.
DIVIDENDS. The holders of shares of Original Preferred Stock will be
entitled to receive annual dividends at the rate of $0.08 per share, payable in
additional shares of Series A Preferred Stock. The holders of Series A Preferred
Stock otherwise will not be entitled to receive any dividends.
CONVERSION RIGHTS. The holder(s) of shares of Series A Preferred Stock
will be entitled to convert their shares into shares of Common Stock at the rate
of one share of Series A Preferred Stock for one share of Common Stock.
REDEMPTION RIGHTS. The Series A Preferred Stock will be redeemable by
the Company. During the two year period commencing with the date of issuance the
redemption price will be $1.00 per share and, thereafter, the redemption price
will be increased by 5% per annum.
WARRANTS. None.
24
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 if 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. No options have been granted under this plan as of
December 31, 1995. One million shares of common stock options were granted as of
December 31, 1996.
PART II
Item 1. Market Price of and Dividends on the Registrant's Common Equity and
Other Shareholder Matters
Market Information
There is no established trading market for shares of the Company's
Common Stock, although there have been limited or sporadic quotations in the
over-the-counter market, and there is no assurance that any such trading market
will develop in the future. However, at such time, if any, as the Company
satisfies applicable entry or listing criteria, the Company may seek to include
or list its Common Stock on The NASDAQ Stock Market or a securities exchange.
All of the Company's issued stock is has been issued pursuant to Rule 144 of the
Securities Act and could come into any market which exists under Rule 144.
Approximately 800,000 outstanding 144 shares exist at December 31, 1996 held by
principals and directors.
Holders
As of December 31, 1996 there were 401 holders of the Company's Common
Stock.
Dividends
In September 1995 the Company declared a 3% stock dividend on its
Common Stock. Certain holders of shares of the Common Stock of the Company
waived their rights to receive this dividend. As a result, on October 31,1995,
the Company issued a dividend of an aggregate of 108,765 shares of Common Stock
to holders of 3,565,052 shares of the Company's Common Stock.
25
In May 1996, the Company declared a 3% stock dividend on its Common
Stock. As a result, on May 3, 1996, the Company issued a dividend of an
aggregate of 417,872 shares of Common Stock to holders of 13,929,066 shares of
the Company's Common Stock.
In June 1996, the Company declared a 3% stock dividend on its Common
Stock. As a result, on July 31, 1996, the Company issued a dividend of an
aggregate of 431,386 shares of Common Stock to holders of 14,379,533 shares of
the Company's Common Stock. The Company does not anticipate payment of any other
stock or cash dividends in the foreseeable future.
Item 2. Legal Proceedings
Neither the Company nor any of its subsidiaries currently is a party
to, or owns property subject to, any pending or threatened legal proceedings
which, in the opinion of management, are likely to have a material adverse
impact on the financial condition of the Company.
Item 3. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
Item 4. Recent Sales of Unregistered Securities
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 matter to be able to evaluate the merits and risks of the
investment and were allowed access to the books and records of the company.
Pursuant to a Stock Exchange Agreement dated August 8, 1994, Harcourt
USA issued 250,000 shares of its common stock (representing 80% of its common
stock outstanding immediately subsequent to the transaction) to Eastern Rocester
Limited, a Hong Kong corporation, in exchange for a 60% interest in the Xinhui
JV. After the transaction, Harcourt USA was held 80% by Eastern Rocester
Limited, 2% by Dr. Alan Phan, a director, executive officer and promoter of the
Company, and 18% by Pacific Rim Capital. All of the outstanding common stock of
Eastern Rocester Limited subsequently was sold to Tiana Corporation, of which
Dr. Phan beneficially owns 20% of the common stock.
26
Dr. Phan acquired ten Harcourt USA shares in April 1993 for nominal
consideration.
The Company acquired all of the outstanding Harcourt USA shares for
6,110,337 shares of the Company's Common Stock pursuant to an Agreement and Plan
of Reorganization dated November 5,1994. Dr. Phan received 291,500 of such
shares in exchange for his Harcourt USA shares.
Pursuant to an Agreement and Plan of Reorganization dated December 1,
1994, the Company acquired all of the outstanding shares of Harcourt Pen from
Dr. Phan for 38,625 shares of the Company's Common Stock and 1,000 shares of its
Original Preferred Stock.
On February 28, 1996, the Company issued 27,000 shares of its Common
Stock to former attorney Kevin Quinn for $466,560.
On March 27, 1996, the Company acquired a complete line of cosmetics,
including inventory, valued at $161,250 and marketed under a brand name, for
12,000 shares of the Company's Common Stock.
On June 3, 1996, the Company issued 5,000 shares of the Company's
Common Stock to Cavaform, Inc. for outstanding liabilities, in the amount of
$106,775, on behalf of the Xinhui JV. These payments were to increase our invest
in Xin Hui and to expedite completion of molds.
On June 3, 1996, the Company issued a total of 1,267 shares of its
Common Stock for the purchase of inventory valued at $37,164 to Kenneth Johnson,
Marvin Lieberman and Edmund Murray in the amount of 667 shares and 600 shares
respectively. Inventory consists primarily of beauty products and pen
accessories.
On June 11, 1996, the Company issued 112 shares of the Company's Common
Stock to Idea International, Inc. in settlement of $2,813.75 in accounts
payable.
Pursuant to a Sales Agreement dated September 17, 1996, the Company
acquired a fifty percent (50%) interest in thirty four gold lode claims, valued
at $3,000,000, from Promed International, Ltd. for 649,350 shares of the
Company's Common Stock.
Pursuant to a Sales Agreement dated September 17, 1996, the Company
acquired a fifty percent (50%) interest in thirty four gold lode claims, valued
at $3,000,000 from Mandarin Overseas Investment Co., Ltd. For 649,350 shares of
the Company's Common Stock.
Pursuant to a Purchase and Sale Agreement dated September 27, 1996,
CKES Acquisitions, Inc., a Nevada corporation, acquired all of the outstanding
25,000 shares of the Company's wholly-owned subsidiary Harcourt USA for a
27
Secured Promissory Note in the principal sum of $3,000,000, with accrued
compound interest at six percent (6%) per annum.
On September 30, 1996, pursuant to a Purchase and Sale agreement dated
July 8, 1996, and its Addendum dated August 8, 1996, the Company acquired a
commercial real estate project, commonly known as the Peony Gardens Property,
located in mainland China, for 4,000,000 shares at $2.50 per share of the
Company's Common Stock, and a Convertible Secured Promissory Note. On September
30, 1996, Pacific Rim Capital received 400,000 shares at $5.00 per share of the
Company's Common Stock and Philip Cavana received 200,000 shares at $5.00 per
share of the Company's Common Stock for $3,000,000 in brokerage fees in
connection with this purchase.
On September 30, 1996, pursuant to a Resolution of the Company's Board
of Directors, the Company issued 425,000 shares at $0.50 per share of the
Company's Common Stock to Pacific Rim Capital on account of funds advanced in
the amount of $272,416 for working capital during the January 1, 1996 to
September 30, 1996 period.
Item 5. Indemnification of Directors and Officers
Under Article VII of the Company's Bylaws, the Company is preparing an
amendment to provide for indemnification of officers and directors to the
fullest extent permitted by the provisions of the Utah Business Corporation Act
(the "Utah Act").
Under Section 16-10a-902 of the Utah Act, a corporation may indemnify a
past or present director against liability incurred in a proceeding if (1) the
director conducted himself in good faith, (2) the director reasonably believed
that his conduct was in, or not opposed to, the corporation's best interest, and
(3) in the case of any criminal proceeding, the director had no reasonable cause
to believe his conduct was unlawful; provided, however, that a corporation may
not indemnify a director (I) in connection with a proceeding by or in the right
of the corporation in which the director is adjudged liable to the corporation,
or (ii) in connection with any other proceeding charging improper personal
benefit to him in which he is adjudged liable on the basis that personal benefit
was improperly received by him.
In addition, pursuant to Section 16-10a-903 of the Utah Act, unless
limited by the articles of incorporation, a corporation shall indemnify a
director who is wholly successful, on the merits or otherwise, in the defense of
any proceeding to which he is party because he is or was a director against
reasonable expenses incurred by him in connection with the proceeding.
Under 16-10a-905 of the Utah Act, an officer is entitled to the benefit
of the same indemnification provisions as apply to directors, but in addition a
corporation may indemnify and advance expenses to an officer who is not a
director to the extent, consistent with public policy, provided by the
corporation's articles of incorporation, the corporation's bylaws, general or
specific action of the board of directors, or contract. Unless the corporation's
28
articles of incorporation provide otherwise, Section 16-10a-905 of the Utah Act
permits a court in certain circumstances to order the payment of indemnification
to a director, whether or not he met the applicable standard of conduct, if the
director is fairly and reasonably entitled to indemnification in view of all the
relevant circumstances.
PART F/S
The following financial statements are filed as part of this
registration statement on form 10-SB:
29
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES:
We have audited the accompanying consolidated balance sheets of The Hartcourt
Companies, Inc. (a Utah corporation) and Subsidiaries as of December 31, 1996,
and the related consolidated statements of operations, shareholders' equity, and
cash flows for the year then ended. 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. The consolidated
financial statements of the Hartcourt Companies, Inc. and Subsidiaries as of
December 31, 1995, were audited by other auditors whose report dated May 6,
1996, expressed an unqualified opinion on those statements.
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 this 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, 1996, and the results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
Harlan & Boettger LLP
San Diego, California
March 18, 1997
30
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
1996 1995
----------- -----------
ASSETS
CURRENT ASSETS
Cash $ 822 $ 142,047
Accounts receivable net of allowance for
doubtful accounts of $19,034 and $116,490
in 1996 and 1995, respectively 19,034 69,119
Trade dollar receivables 72,054 -
Accrued interest receivable 3,877 -
Note receivable, current portion (Note F) 133,764 -
Inventory, net 311,424 1,011,332
Prepaid expense 150,000 72,051
Prepaid consulting fees (Note H) 750,000 -
Due from related party 32,356 168,575
----------- -----------
TOTAL CURRENT ASSETS 1,473,331 1,463,124
PROPERTY AND EQUIPMENT, net (Note D) 44,809 9,030,501
INVESTMENTS (Note B) 17,906,520 -
NOTES RECEIVABLE, net (Note F) 1,190,795 -
DEPOSITS AND OTHER ASSETS 7,550 23,181
INTANGIBLE ASSETS - 715,658
----------- -----------
$20,623,005 $11,232,464
The accompanying notes are an integral part of these financial statements.
31
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
December 31, December 31,
1996 1995
------------ -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 148,569 $ 502,653
Accrued expenses 133,747 1,539,012
Bank overdrafts 5,691 -
Other loans - 2,468,302
Notes payable - current portion (Note E) 56,396 1,930,114
Capital lease obligations - current portion - 125,000
Subscription deposits received (Note N) 45,000 -
------------ -----------
TOTAL CURRENT LIABILITIES 389,403 6,565,081
RELATED PARTY PAYABLE - 272,416
MINORITY INTEREST - 1,913,361
NOTES PAYABLE, net of current portion (Note E) 524,369 501,736
CAPITAL LEASE OBLIGATIONS,
net of current portion - 575,000
------------ -----------
TOTAL LIABILITIES 913,772 9,827,594
COMMITMENTS AND CONTINGENCIES (Note H) - -
SHAREHOLDERS' EQUITY
Original preferred stock, $0.01 par value
1,000 shares authorized, issued and
outstanding 10 10
Common stock, $0.001 par value, 50,000,000
(10,000,000 in 1995) shares authorized;
10,560,352 shares outstanding at
December 31, 1996, and 2,745,803 shares
issued and outstanding at December 31, 1995 10,560 2,746
Treasury stock, at cost (24,364 shares in 1996) (279,928) -
Additional paid-in capital 23,204,260 3,424,662
Retained deficit (3,225,669) (2,135,892)
Foreign currency translation adjustment - 113,344
------------ -----------
TOTAL SHAREHOLDERS' EQUITY 19,709,233 1,404,870
------------ -----------
$20,623,005 $11,232,464
The accompanying notes are an integral part of these financial statements.
32
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31,
1996 1995
----------- -----------
REVENUES
Product sales $ 510,692 $ 353,674
----------- -----------
TOTAL REVENUES 510,692 353,674
COST OF SALES 797,667 159,797
----------- -----------
Gross profit (loss) (286,975) 193,877
OPERATING EXPENSES
General and administrative 570,774 1,006,828
Depreciation and amortization 671,982 551,428
----------- -----------
TOTAL OPERATING EXPENSES 1,242,756 1,558,256
----------- -----------
LOSS FROM OPERATIONS (1,529,731) (1,364,379)
SALE OF SUBSIDIARY (Note B) - -
OTHER INCOME (EXPENSES)
Minority interest - 564,261
Interest expense (443,042) (851,076)
Forgiveness of debt (Note O) 384,735 -
Interest income 10,100 2,351
Exchange gain (loss) - 54,952
----------- -----------
TOTAL OTHER INCOME (EXPENSE) (48,207) (229,512)
----------- -----------
NET LOSS BEFORE INCOME TAXES (1,577,938) (1,593,891)
Income taxes (Note G) 1,800 -
----------- -----------
NET LOSS $(1,579,738) $(1,593,891)
=========== ===========
NET LOSS PER COMMON SHARE $ (.33) $ (.62)
=========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 4,814,303 2,565,098
=========== ===========
The accompanying notes are an integral part of these financial statements.
33
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
[Enlarge/Download Table]
Common Stock Preferred Stock Additional Common Stock
-------------------------- ------------------------- Paid-in Subscription
Shares Amount Shares Amount Capital Receivable
----------- ----------- ----------- ----------- ----------- ----------
Balance, December 31, 1994 2,735,952 $2,736 1,000 $10 $3,289,672 $(700,000)
Shares issued to attorney
for legal fees 9,851 10 -- -- 64,990 --
Capital contribution -
officer's compensation -- -- -- -- 70,000 --
Cash paid on common stock
subscription -- -- -- -- -- 700,000
Foreign currency translation
adjustment -- -- -- -- -- --
Net loss -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1995 2,745,803 $2,746 1,000 $10 $3,424,662 $--
=========== =========== =========== =========== =========== ===========
Shares issued to attorney 27,000 27 -- -- 466,533 --
Shares issued for Xin Hui 5,000 5 -- -- 106,770 --
Shares issued for inventory 13,267 13 -- -- 191,382 --
Shares issued for settlement
of payables 94 -- -- -- 2,813 --
Shares issued for Peony
Gardens deposit 4,600,000 4,600 -- -- 11,927,900 --
Shares issued for consulting
agreement 1,300,000 1,300 -- -- 898,700 --
Shares issued for Alaska mines 1,298,700 1,299 -- -- 5,972,721 --
Shares issued to convert debt
to equity 425,000 425 -- -- 212,075 --
Stock dividends 169,852 170 -- -- 679 --
Treasury stock acquired (24,364) (25) -- -- 25 --
Sale of Harcourt Investments -- -- -- -- -- --
Net loss -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1996 10,560,352 $10,560 1,000 $10 $23,204,260 $--
=========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
34
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(continued)
[Enlarge/Download Table]
Foreign
Treasury Stock Currency Total
--------------------------- Retained Translation Shareholders'
Shares Amount Deficit Adjustment Equity
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1994 -- -- $(542,001) $(915) $2,049,502
Shares issued to attorney
for legal fees -- -- -- -- 65,000
Capital contribution -
officer's compensation -- -- -- -- 70,000
Cash paid on common stock
subscription -- -- -- -- 700,000
Foreign currency translation
adjustment -- -- -- 114,259 114,259
Net loss -- -- (1,593,891 -- (1,593,891)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1995 -- -- $(2,135,892) $113,344 $1,404,870
============ ============ ============ ============ ============
Shares issued to attorney -- -- -- -- 466,560
Shares issued for Xin Hui -- -- -- -- 106,775
Shares issued for inventory -- -- -- -- 191,395
Shares issued for settlement
of payables -- -- -- -- 2,813
Shares issued for Peony
Gardens deposit -- -- -- -- 11,932,500
Shares issued for consulting
agreement -- -- -- -- 900,000
Shares issued for Alaska mines -- -- -- -- 5,974,020
Shares issued to convert debt
to equity -- -- -- -- 212,500
Stock dividends -- -- (849) -- --
Treasury stock acquired 24,364 (279,928) -- -- (279,928)
Sale of Harcourt Investments -- -- 490,810 (113,344) 377,466
Net loss -- -- (1,579,738) -- (1,579,738)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1996 24,364 $(279,928) $(3,225,669) -- $19,709,233
============ ============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
35
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
1996 1995
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,579,738) $(1,593,891)
Adjustments to reconcile net income
to net cash
used in operating activities:
Minority interest in loss of jointventure (1,339,225) (564,261)
Write off of intangible assets 698,039 --
Depreciation and amortization 671,982 551,428
Allowance for doubtful accounts (97,456) 116,490
Forgiveness of debt (384,735) -
Accrued interest income (8,871) -
Stock dividends 849 -
Sale of Harcourt Investments 489,961 -
Changes in operating assets and liabilities:
Increase in:
Accounts receivable 132,342 (175,958)
Inventory 647,256 (293,697)
Prepaid expenses (9,863) 127,512
Note receivables and other receivables (347,824) 603,159
Accounts payable and accrued expenses 341,912 1,363,056
----------- -----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (785,371) 133,838
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (427,454) (259,919)
Construction in progress - (2,169,550)
Purchase of other assets (574) (36,851)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (428,028) (2,466,320)
----------- -----------
The accompanying notes are an integral part of these financial statements.
36
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
Year ended December 31,
1996 1995
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Bank overdraft 5,691 --
Common stock subscriptions 45,000 200,000
Loan from Bank of China 507,801 849,535
Loans from shareholders 177,485 205,984
Issuance of common stock 186,632 835,000
Other loans 149,565 171,806
Additional contributions by foreign partner -- 15,634
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,072,174 2,277,959
----------- -----------
NET DECREASE IN CASH (141,225) (54,523)
CASH, BEGINNING OF PERIOD 142,047 196,570
----------- -----------
CASH, END OF PERIOD $ 822 $ 142,047
=========== ===========
The accompanying notes are an integral part of these financial statements.
37
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Summary of Significant Accounting Policies:
Organization and Nature of Operations
Hartcourt Investments (USA), Inc., (Harcourt Investments) was
incorporated on April 23, 1993. Principal business activities are the
design, manufacture and sale of writing instruments. During its first
two years of operation, Harcourt Nevada used foreign contract
manufacturers to produce various types of pens and markers which were
then imported for sale in the U.S. market. In August 1994, Harcourt
Investments acquired a 60% interest in the Xinhui Harchy Modern Pens,
Ltd. Joint Venture (Xinhui JV) owned by a Hong Kong corporation for
common stock valued at $2,149,200. The Xinhui JV is located in the
Guangdong Province of China. Pursuant to an amendment to the joint
venture agreement governing the Xinhui JV entered into in October 1995,
the Company's interest was reduced to a 52% interest in the Xinhui JV.
In November 1994, Stardust, Inc., Production-Recording-Promotion
(Stardust) acquired 100% of the outstanding shares of Harcourt
Investments for 8,280,000 shares of its common stock in a transaction
accounted for as a recapitalization of Harcourt Investments with
Harcourt Investments as the acquirer (reverse acquisition). Therefore,
the historic cost of assets and liabilities were carried forward to the
consolidated entity. In 1996, a reverse stock split changed the number
of shares issued and outstanding to 2,735,952. The consolidated
financial statements were restated to reflect this capital stock
transaction. Stardust's name was changed to the "Hartcourt Companies,
Inc."
Hartcourt Pen Factory, Inc. (Hartcourt Pen) was incorporated in October
1993. Principal business activities are the sale of writing instruments.
In December 1994, Harcourt Investments acquired 100% of the outstanding
shares of the common stock of Hartcourt Pen for 52,500 shares of its
common stock and 1,000 shares of its original preferred stock in a
transaction accounted for similar to a pooling of interests. In 1995,
stock dividends and a reverse stock split changed the number of shares
issued to 38,625 to acquire Hartcourt Pen. The consolidated financial
statements were restated to reflect these capital stock transactions.
In August 1996, Hartcourt Companies, Inc. (Company) entered into a
purchase and sale agreement with NuOasis International, Inc.
("NuOasis"), a corporation incorporated under the laws of the
Commonwealth of the Bahamas, for the purchase of a commercial real
estate project, consisting of three 5-7 story apartment buildings,
commonly known as the Peony Gardens Property ("Peony Gardens"), located
in the eastern part of Tongxian in Beijing city, mainland China. The
Company issued 4,000,000 shares of its common stock with respect to this
purchase (Note B).
38
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
A. Summary of Significant Accounting Policies (continued):
In September 1996 Hartcourt Pen was spun-off from Harcourt Investments
to Hartcourt Companies, Inc. by Harcourt Investments transferring 100%
of stock ownership in Hartcourt Pen to Hartcourt Companies, Inc.
Pursuant to the spin-off in September 1996 the Company sold Harcourt
Investments to CKES, Inc. of Sunnyvale, California (Note B).
In September 1996, the Company entered into a sales agreement with
Mandarin Overseas Investment Co., Ltd. (Mandarin) and Promed
International Ltd. ("Promed"), both unaffiliated Turks and Caicos
chartered companies, for the purchase of their 50% interest in
sixty-eight mineral lease gold lode claims in the state of Alaska, known
as Lodestar claims 1-68 and consisting of 320 acres. All claims are
located in the Melozitna mining district near Tanana, Alaska. The
Company issued 1,298,700 shares of its common stock with respect to this
purchase (Note B).
Basis of Accounting
The Company's policy is to use the accrual method of accounting and to
prepare and present financial statements which conform to generally
accepted accounting principles.
Cash
Cash includes cash on hand and cash in checking and savings accounts.
Inventory
Inventory is stated at the lower of cost or market, cost being
determined on the first-in, first-out (FIFO) method.
Plant and Equipment
Plant and equipment are stated at cost, and substantially all balances
relate to Xinhui JV in 1995. Depreciation is provided over the estimated
useful lives of the respective assets on the straight-line basis ranging
from five to twenty years.
All direct and attributable costs relating to the acquisition or
construction of the plant facilities, machinery and molds (including
interest and exchange differences on related borrowings during the
construction period) were capitalized as construction-in-progress.
Construction-in-progress was reclassified to property and equipment upon
completion in 1995.
39
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
A. Summary of Significant Accounting Policies (continued):
Chinese Joint Venture
Xinhui JV is a joint venture between Xin Hui Orient Light Industry,
Ltd., a Chinese government-owned company with an anticipated 48%
interest, and Harcourt Investments with an anticipated 52% interest. The
ownership interest of each investor has not been finalized. Xinhui JV
was incorporated in November 1992 as a limited liability Chinese-foreign
equity joint venture. No material transactions occurred until April 1993
when construction began on the plant facilities. Limited manufacturing
commenced in December 1994; and by July 1995 the manufacturing plant was
fully operational. All sales are domestic in China in 1995 and 1994. The
joint venture had approximately $40,000 of export sales in 1996.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of The Hartcourt Companies, Inc. and its wholly-owned subsidiaries:
Harcourt Investments, which includes the accounts of majority-owned
Xinhui JV and Hartcourt Pen. For purposes of these consolidated
financial statements, the Hartcourt Companies, Inc. and its subsidiaries
will be referred to collectively as "the Company." All material
intercompany transactions and balances have been eliminated. In
accordance with generally accepted accounting principles, all of the
assets, liabilities and operations of Xinhui JV are reflected on the
consolidated financial statements. The interest of the joint venture
partner in the net assets and net loss of the joint venture are reported
as "Minority Interest" on the consolidated balance sheets and statements
of operations.
Foreign Currencies (Xinhui JV)
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 China (RMB) into U.S. dollars.
Transaction gains and losses resulting from changes in the exchange rate
are included in the determination of the net loss for the period.
Translation gains and losses are excluded from the consolidated
statements of operations and are credited or charged directly to a
separate component of shareholders' equity.
40
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
A. Summary of Significant Accounting Policies (continued):
Income Taxes
Income taxes, are provided for using the liability method of accounting
in accordance with Statement of Financial Accounting Standards No. 109
(SFAS 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.
Investments
Investments are provided for using the deposit method of accounting in
accordance with Statement of Financial Accounting Standards No. 66 (SFAS
66), "Accounting for Sales of Real Estate." The deposit method of
accounting shall be used until a sale has been consummated.
"Consummation" usually requires that all conditions precedent to closing
have been performed, including that the buildings, in the Peony Gardens
acquisition, be certified for occupancy and that the geological survey
of the Lodestar claims in Alaska have a minimum value of $6,000,000
(Note B).
Loss Per Share
Net loss per share has been calculated by dividing the net loss for each
period presented by the average number of common shares outstanding for
the respective period. Common stock equivalents, such as the preferred
stock outstanding, have not been considered in the calculation since
their effect would be anti-dilutive. The number of common shares issued
under the stock subscription agreement as well as the number of shares
issued to the Company's attorney for legal fees were included in the
calculation since these shares were issued in July 1995.
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 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.
Fair Value
The Company has cash, receivables and accounts payable for which the
carrying value approximates fair value due to the short-term nature of
these instruments.
41
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
B. Investments:
Sale of Harcourt Investments, Inc.
In September 1996 the Company sold its wholly-owned subsidiary, Harcourt
Investments (USA), Inc., (Harcourt Investments) to CKES, Inc. located in
Sunnyvale, California. Harcourt Investments owned a 52% interest in Xin
Hui Harcy Modern Pens, Ltd., a joint venture in the Peoples Republic of
China. All of the outstanding shares of Harcourt Investments were sold
for a $3 million dollar note receivable which is payable in 60 equal
monthly installments of $50,000 each, beginning October 1, 1998.
Interest accrues at 6% per annum and is payable in full at the end of
the loan period. The note receivable is secured by a security agreement.
This agreement allows the Company to have a security interest in all
assets of CKES, Inc.
General accepted accounting principles require the recording of the note
receivable at its fair value when the face amount does not reasonably
represent the value of consideration received. Under Accounting
Principles Board No. 21 the note receivable is discounted ($753,985) to
its approximate fair value at December 31, 1996. Per Financial
Accounting Standards No.114, the note receivable was considered impaired
at December 31, 1996 due to the present operating condition of Xin Hui
plant and the length of time before payment begins by CKES, Inc. The
Company has decided to reserve a substantial portion ($1,202,220) of the
receivable due to payments being deferred to a later period.
Investment in Peony Gardens
In August 1996 the Company purchased an apartment complex located near
Beijing, China for $22 million from NuOasis International, Inc. 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. Under the deposit method of
accounting in accordance with Financial Accounting Standards No. 66 the
promissory note for $12,000,000 is currently being deferred until the
complete consummation of the Peony Gardens sale. Also the 4 million
shares of common stock is recorded as a deposit at December 31, 1996.
42
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
B. Investments: (continued)
Investment in Alaskan Gold Claims
In September 1996 the Company purchased several 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
Financial Accounting Standards No. 66, the 1,298,700 shares of common
stock is recorded as a deposit at December 31, 1996.
C. Inventories:
Inventories consist of the following:
December 31, December 31,
1996 1995
--------- ----------
Raw materials $ - $ 265,847
Work in process - 30,693
Finished goods 311,424 714,792
--------- ----------
$ 311,424 $1,011,332
========= ==========
The majority of inventory in 1995 is related to the Xin Hui JV, thus the
sale of Xin Hui JV has significantly reduced inventory at December 31,
1996.
43
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
D. Property and Equipment:
Property and equipment are summarized as follows:
December 31, December 31,
1996 1995
------- ----------
Furniture and fixtures $28,600 $3,479,275
Leasehold improvements 6,197 264,108
Office equipment 34,926 5,520,301
Lab equipment 1,500 68,987
Vehicles - 123,791
------- ----------
71,223 9,456,462
Less accumulated depreciation 26,414 425,961
------- ----------
Property and equipment, net $44,809 $9,030,501
======= ==========
The majority of property and equipment in 1995 is related to the Xin Hui
JV, thus the sale of Xin Hui JV has significantly reduced property and
equipment at December 31, 1996.
E. Notes Payable:
Notes payable are summarized as follows:
December 31, December 31,
1996 1995
----------- -----------
Loan payable, Bank of China, maturity in
March 1997 with interest at a floating
rate (17.3% at December 31, 1995) and
repayment terms specified by the Bank
of China. $ - $ 1,901,265
44
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
E. Notes Payable: (continued)
December 31, December 31,
1996 1995
---------- ----------
Loan payable, vendor, with interest at 12%
and monthly payments of principal and
interest of $15,253 through March 1998 - 429,585
Loan payable, shareholder, with interest
at 6% and monthly payments of principal
and interest of $4,000 through Mid 1995 - 40,000
Loan payable, vendor, with interest at 10%
and monthly payments of principal of
$5,000 through November 1996. The
$4,150 balance was paid in full in 1997 4,150 61,000
Loan payable, Anja Engineering, with
interest at 8.5% and monthly principal
and interest payments of $12,075
beginning May 1, 1997 through April
2002. 576,615 -
---------- ----------
580,765 2,431,850
Less current portion 56,396 1,930,114
---------- ----------
$ 524,369 $ 501,736
========== ==========
The Company is currently negotiating with Anja Engineering to settle the
loan payable with regards to the cancellation of the capital lease.
45
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
E. Notes Payable: (continued)
The following is a summary of principal maturities of long-term debt:
Year ending December 31,
-----------------------
1997 $ 56,396
1998 104,329
1999 113,551
2000 123,588
2001 134,512
Thereafter 48,389
--------
Total $580,765
========
F. Notes Receivable:
Notes receivable at December 31, 1996 and 1995, consisted of the
following:
1996 1995
---------- ----------
Note receivable from former attorney
Kevin Quinn, interest at 8%,
balance due December 31, 1997,
secured by real estate $ 109,764 $ -
Note receivable from CKES, Inc., $3,000,000
face amount, 6% interest per annum, due
in monthly installments of principal
only of $50,000 beginning October 1,
1998, interest and unpaid principal due
and payable on October 1, 2003, (less
unamortized discount based on 12%
imputed interest of $753,985 and
$1,202,220 of loan impairment) $1,043,795 -
46
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
F. Notes Receivable: (continued)
1996 1995
---------- ----------
Note receivable from Yafa, Inc., 9%
interest per annum, due in monthly
installments of $2,000, accrued
interest and unpaid principal due
and payable on or before August 15,
1999. 171,000 -
---------- ----------
Total 1,324,559 -
Less current portion 133,764 -
---------- ----------
$1,190,795 $ -
========== ==========
G. Income Taxes:
As discussed in Note A, the Company accounts for income taxes in
accordance with SFAS 109. The provision for income taxes for the year
ended December 31, 1996 consists of the $800 minimum California
franchise tax and $100 minimum Utah tax for both 1996 and 1995.
Provisions for income taxes are summarized as follows:
Year ended
--------------------------
December 31, December 31,
1996 1995
----------- -----------
Current income taxes $1,800 $ -
Deferred income taxes - -
------ ------
Provision for income taxes $1,800 $ -
====== ======
47
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
G. Income Taxes (continued):
As a result of adopting SFAS 109, the Company has recognized deferred tax
assets for the tax effects of temporary differences for the years ended
December 31, 1996 and 1995 as follows:
1996 1995
--------- ---------
Deferred tax assets:
Net operating losses $ 569,592 $ 248,000
--------- ---------
Gross deferred tax assets 569,592 248,000
Valuation adjustment (569,592) (248,000)
--------- ----------
Net deferred tax assets $ - $ -
========= =========
The Company has net operating loss carryforwards remaining of
approximately $2,344,000. The regular net operating loss carryforwards,
which are approximately the same as the alternative net operating loss
carryforwards, if not utilized, will expire in varying amounts through
2011.
H. Commitments and Contingencies:
Operating Leases
The Company leases its facilities under an operating lease agreement from
Larry M. Mitobe which expires in May, 2001. Rental expense for the year
ended December 31, 1996 was $27,732.
Minimum future rental payments under the operating lease are as follows:
December 31, Amount
------------- --------
1997 $ 17,220
1998 22,140
1999 24,600
2000 24,600
2001 10,250
--------
Total future rental payments $ 98,810
========
48
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
H. Commitments and Contingencies:(continued)
Consulting Agreement
On December 30, 1996 the Company has entered into a consulting agreement
with American Equities, LLC (American Equities), a California Limited
Liability Company. The Company intends to acquire, manage and develop a
real estate portfolio including office, retail, industrial and
multi-family properties and raw land. The consulting period expires on
December 31, 2001. The minimum performance requirements of the
consulting agreement will increase assets and/or market capitalization
of Harcourt Companies, Inc. by at least $50,000,000 by December 31,
1997.
Pursuant to the terms of the agreement the Company issued 1,000,000
shares at $1.50 per share as an advance against future fees to be earned
by American Equities. The Company also advanced 300,000 shares at $0.50
per share to American Equities for future operating expenses. Both
transactions have been discounted due to the restriction on the shares
issued.
I. Supplemental Cash Flow Information:
1996 1995
---------- ---------
Cash paid for interest and income
taxes:
Interest $ - $ 9,524
Income taxes $ 900 $ -
Noncash investing and financing
activities:
Common stock issued for inventory $ 191,414 -
Common stock issued for interest
in gold claims $5,974,020 -
Treasury stock acquired $ 418,618 -
Common stock issued to settle
liabilities $ 109,589 -
Common stock issued for purchase of
Peony Gardens $9,920,000 -
Common stock issued for brokerage fees $2,012,500 -
Common stock issued for converting
debt to equity $ 212,500 -
Common stock issued for prepayment of
Consulting fees $ 900,000 -
Note received for sale of subsidiary $1,043,795 -
49
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
J. Capital Stock:
In April 1995, the Company's Articles of Incorporation (Articles) were
amended to authorize the issuance of preferred stock. As amended, 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).
Original Preferred Stock
Until December 31, 2010, with respect to the election of directors,
holders of Original Preferred Stock shall be entitled to elect that
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 shares of Original Preferred Stock shall not be entitled
to receive any dividends.
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.
In the event of liquidation, dissolution, or winding up of the affairs
of the Company whether voluntary of involuntary, the holders of record
shall be entitled to be paid the full par value of Original Preferred
Stock, and no more.
J. Capital Stock: (continued)
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. To date, only
one series has been authorized with defined rights and privileges
(Series B Preferred Stock). No shares have been issued.
On August 2, 1996 the Company effectuated a one for five (1:5) reverse
stock split. The effect of this event has been restated retroactively on
the statement of stockholders' equity.
50
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
K. 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. No options have been granted under
this plan as of December 31, 1995. One million shares of common stock
options were granted to an officer of Hartcourt Companies, at $0.50 per
share as of December 31, 1996.
These options expire December 31, 2004.
L. Warrants:
As of December 31, 1996 there are 2,000,000 outstanding warrants to
purchase 2,000,000 shares of $.001 par value common stock at $0.30 -
$2.10 per share. No warrants have been exercised as of December 31,
1996.
M. Foreign Operations:
Selected financial data for the Company's foreign operations is as
follows:
September 27, 1996 December 31, 1995
------------------ -----------------
Revenues $ 458,236 $ 249,784
Operating loss $(2,132,168) $(1,499,598)
Total assets $ 9,228,255 $10,366,707
N. Stock Subscription Agreements:
In October 1996 the Company entered into two stock subscription
agreements. Terms of the agreement include that the subscribers can
purchase up to 20,000 common shares of Hartcourt Companies, Inc. per
month for 12 months at $0.50 per share.
51
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
O. Forgiveness of Debt:
During 1996 the Company recognized debt forgiveness of $367,983 relating
to several notes owed to three vendors and $16,752 in accounts payable
owed to one additional vendor, which were forgiven.
P. Subsequent Events:
On April 8, 1997 the Company entered into a preliminary stock purchase
agreement with Michael V. Caruana, officer and owner of Pego Systems,
Inc. The Company intends to acquire all outstanding shares of Pego
Systems, Inc. The parties are negotiating final terms of this agreement
and estimates completion of the transaction mid- year 1997.
52
PART III
Item 1. Index to Exhibits
The following list describes the exhibits filed as part of this
registration statement on Form 10-SB:
Exhibit
No. Description of Document Page No.
------- ----------------------- -------
2.01 Agreement and Plan of Reorganization, dated November 5,
1994 among Stardust, Inc.-Production-Recording-Promotion,
Hartcourt Investments (USA) Inc. ("Harcourt USA") and the
shareholders of Harcourt USA. 56
2.02 Agreement and Plan or Reorganization dated December 1,
1994 Among Harcourt USA. The Hartcourt Pen Factory, Inc.
("Hartcourt Pen") and the Hartcourt Pen shareholder. 66
3.01 Articles of Incorporation of the Company, as amended. 76
3.02 Bylaws of the Company. 83
3.03 Amendment to the Bylaws of the Company. 90
4.01 Articles of Amendment to Articles of Incorporation of the
Company Regarding the Creation of Preferred stock and the
Statement of Rights and Preferences of Common Stock,
Original Preferred Stock and Class A Preferred Stock. 91
10.01 Lease between the Company and Larry M. Mitobe for the
Company's headquarters facility, dated April 9, 1996. 99
10.02 Equipment Lease between Harcourt USA and Anja Engineering
Corporation, dated April 4, 1994. 104
10.03 Stock Exchange Agreement between Harcourt USA and Eastern
Rocester, dated August 8, 1994. 110
10.04 1995 Stock Option Plan. 112
10.05 Purchase Contract between The Hartcourt Companies, Inc.
and Exceptional Specialty Products, Inc., dated March 21,
1996. 122
53
Exhibit
No. Description of Document Page No.
------- ----------------------- -------
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. 125
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. 140
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. 144
10.09 Sales Agreement, dated September 17, 1996, between The
Hartcourt Companies, Inc. and Promed International Ltd. 148
10.10 Sales Agreement, dated September 17, 1996, between The
Hartcourt Companies, Inc. and Mandarin Overseas
Investment Co., Ltd. 150
10.11 Purchase and Sale Agreement, dated September 27, 1996,
between The Hartcourt Companies, Inc. and CKES
Acquisitions, Inc. 152
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. 155
21.01 Subsidiaries of the Company. 158
23.01 Consent of Independent Certified Public Accountants. 159
27.01 Financial Data Schedule. 160
54
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SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized.
THE HARTCOURT COMPANIES, INC.
Date: June 24, 1997 By:/s/ Alan V. Phan
---------------- ----------------
Alan V. Phan, Chairman of the Board,
President, Chief Executive Officer
and Chief Financial Officer
55
Dates Referenced Herein and Documents Incorporated by Reference
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