Registration of Securities of a Small-Business Issuer — Form 10-SB
Filing Table of Contents
Document/Exhibit Description Pages Size
1: 10SB12B Registration of Securities of a Small-Business 64 240K
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 20K
5: EX-4 Instrument Defining the Rights of Security Holders 8 24K
6: EX-10 Material Contract 59 187K
7: EX-21 Subsidiaries of the Registrant 1 5K
8: EX-27 Art.5 FDS for 3rd Quarter and Year End-Form 10-Sb 1 7K
10SB12B — Registration of Securities of a Small-Business Issuer
Document Table of Contents
U.S. Securities and Exchange Commission
Washington, D.C. 20549
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 of Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
19104 S. Norwalk Boulevard, Artesia, California 90701
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(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.......... 9
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................................................. 25
Item 3. Changes and Disagreements with Accountants........................ 26
Item 4. Recent Sales of Unregistered Securities........................... 26
Item 5. Indemnification of Directors and Officers......................... 27
PART F/S
Financial Statements.............................................. 28
PART III
Item 1. Index to Exhibits................................................. 62
Item 2. Description of Exhibits........................................... 62
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
3
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 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 is scheduled to arrive 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.
CKES Acquisitions Inc. ("CKES"), a corporation organized under the laws
of the State of Nevada in September 1996, and 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
4
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 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, 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.
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 $310,815, 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 60,000 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
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 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
5
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." 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 and, 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.
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." 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, and 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.
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. 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."
During 1994 and 1995, the Company entered into various negotiations
involving transactions relating to the manufacture and sale of writing
instruments. None of these transactions were
6
completed. See Part III., F/S, "Consolidated Financial Statements, Years Ended
December 31, 1995 and 1994 -- Notes to Financial Statements," Item 13.
"Commitments."
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. Since the
Company is in the development stage, it is subject to all the risks inherent in
undertaking a new business venture. See Part I, Item 2, "Management's Discussion
and Analysis or Plan of Operation."
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.
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.
7
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
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
8
foreign currency payment obligations or to make distributions to equity holders
located outside of China.
VOLATILITY OF EXCHANGE RATES. There has been significant volatility in
the exchange rates of RMBs to U.S. Dollars in the recent past and future
exchange rates may also 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 9 month period ended September 30, 1996 approximately $20,000 was expended
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.
Item 2. Management's Discussion and Analysis or Plan of Operation
The Company is a development stage company that assembles and
imports writing instruments for sale in the U.S. During 1994 and 1995, 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, 1995 and 1994
-Notes to Financial Statements," Item 13. "Commitments."
9
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 3.
"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 geosurvey 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
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."
Results of Operations
Fiscal Years 1995 and 1994
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
10
beginning of the third quarter of 1995. Because the Company had no operations at
all during the first half of 1994 and only limited operations during that latter
half of that year, comparison of results for 1994 and 1995 (during which the
Company had operations for the full year) are not meaningful. Consequently, the
following discussion primarily relates to the 12 months ended December 31,1995.
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 Company'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. Management expects
these factors to continue to affect pricing in the future, and to result in
substantial additional reductions in gross margins.
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 of $1,227,325 obtained during 1995 to finance equipment for
the Xinhui JV factory. The Company incurred no interest expense during 1994.
Management currently is engaged in negotiations to convert accrued interest on
these loans to principal and to permit the Company to repay these loans over a
longer term, thereby lowering monthly outlays for debt service. See "--Liquidity
and Capital Resources."
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. Further, changes in the foreign
currency exchange rate
11
have had no direct effect on the Company's consolidated results of operations,
because exchange gains and losses are not included in the Company's net income
(loss), in accordance with Statement of Financial Accounting Standard No. 52.
Liquidity and Capital Resources
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 operation 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.
The Company's cash flow deficiency from U.S. domestic operations is
attributable to the Company's development stage. Management anticipates that, as
domestic sales increase, the domestic cash flow deficiency should diminish and,
eventually, disappear.
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
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
12
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 current 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, as of December 31, 1995, also included the
following loans, all of which were in default the at that date and, therefore,
are classified as due within one year for financial statement reporting
purposes.
Principal
Amount Interest Rate Terms and Maturity
---------- ------------- ------------------
$1,901,000 17.3% at Single payment due in March 1997.
12/31/95 (1)
$430,000 (2) 12% Monthly payments of principal and interest in
the amount of $15,253 due through March 1998.
$40,000 (2) 6% Monthly payments of principal and interest in
the amount of $4,000 due through June 1995.
$61,000 (2) 10% Monthly payments of principal and interest in
the amount of $5,000 due through November
1996.
(1) The interest rate is a floating rate.
(2) The loans associated with note (2) were in default at December 31, 1995
and, therefore, were classified as current in the Company's financial
statements as of that date.
Interim Periods Ended September 30, 1996 and 1995
During the 9 months ended September 30, 1996, consolidated sales were
$374,367, compared to $220,840 at September 30, 1995, representing an increase
of 70% in 1996 over 1995. The Company's sales during the 9 months ended
September 30, 1996 consisted entirely of domestic U.S.
sales.
Cost of sales during the 9 months ended September 30, 1996 was $556,684
compared to $142,326 at September 30, 1995, representing an increase of
approximately 291.13% over 1995.
13
This increase was primarily due to the liquidation at auction of outdated, old
inventory items received from the Xinhui JV upon the sale of the Company's
interest. Another factor was the Company's increased sales of low cost pens.
The gross loss of $(182,317) for the period ended September 30, 1996
represented a decrease of $(260,831) compared with the approximately 55.16%
gross profit margin for the same period in 1995. The gross loss during the 9
months ended September 30, 1996 is attributable to the increased cost of sales
and competitive pressures to lower prices. Management does not expect inventory
liquidation to continue to affect the gross profit margin, since no additional
liquidation of inventory is anticipated. However, Management expects competitive
pressures to lower prices to continue to affect pricing in the future and to
result in substantial additional reductions in gross margins.
General and administrative expenses were $388,853 at September 30,
1996, compared to $633,355 for the same period in 1995. This reduction was due
to the Company's efforts to reduce overhead and because the Xinhui JV general
and administrative expense is not included. The Company sold its interest in the
Xinhui JV and has no further obligation for loans in the aggregate amount of
$1,227,325 obtained during 1995 to finance equipment for the Xinhui JV factory.
See Part I, Item 1, "Description of Business."
Foreign Currency
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 a joint venture partner. Further, changes in the foreign currency exchange
rate have had no direct effect on the Company's consolidated results of
operations. See Part I, Item 2, "Management's Discussion and Analysis or Plan of
Operation," -- "Results of Operations -- Fiscal Years 1995 and 1994."
Liquidity and Capital Resources
Changes in cash flows resulting from the Company's operating activities
for the 9 months ended September 30, 1996 as compared to the same period for the
prior year were due to the commencement of full operation of the Xinhui JV in
the third quarter of 1995. Accounts receivable increased by $467,297, to
$624,019 at September 30, 1996 from $156,722 at September 30, 1995, and
inventories decreased by $431,274, or approximately 50% from $844,293 at
September 30, 1995, to $413,019 at September 30, 1996, primarily as a result of
the sale of the Company's interest in the Xinhui JV during September 1996.
Currently, the Company is experiencing a deficiency in operating cash
flow. This deficiency is primarily the result of the operations of the Xinhui JV
during the period prior to the Company's sale of its interest in the joint
venture, and to a lesser extent, to U.S. domestic operations.
The Company's current cash flow deficiency from U.S. domestic
operations is attributable to the Company's development stage. Management
anticipates that, as domestic sales increase, the
14
domestic cash flow deficiency should diminish and, eventually, disappear. In
addition, the Company anticipates that it will undertake a public offering of
its securities, designed to raise a minimum of $1,000,000 in net proceeds,
during the first half of 1997. There can be no assurance, however, as to when,
if ever, such an offering will be completed.
Prepaid expenses decreased by $89,238 to $0.00 at September 30, 1996
from $89,238 at September 30, 1995, due to the Company's sale of its interest in
the Xinhui JV.
Property, plant and equipment decreased by $5,974,463 to $41,827 at
September 30, 1996 from $6,016,290 at September 30, 1995, primarily due to the
Company's sale of its interest in the Xinhui JV.
Current liabilities decreased by $3,644,620, to $1,408,953 at September
30, 1996 from $5,053,573 at September 30, 1995 because of the sale of the
Company's interest in the Xinhui JV.
Long-term debt increased approximately $11,088,803, from $1,050,594 at
September 30, 1995 to $12,139,397 at September 30, 1996 due to the Company's
purchase of Peony Gardens, offset by approximately $1,000,000 relating to the
Xinhui JV.
The Company's other indebtedness, as of September 30, 1996, included
the following loans:
Principal
Amount Interest Rate Terms and Maturity
---------- ------------- ------------------
$2,946 11.75% Monthly payments of principal of
$113.31, plus interest, through
November 1998.
$8,300 No Interest Monthly payments of $4,150 through
November 1996.
The Company does not expect to make any significant future capital
expenditures that would require additional financing or leasing arrangements.
Management anticipates that future expansion and acquisition activities, if any,
will be effected through the issuance of additional debt or equity securities.
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
15
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."
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 412,000,000, granting NuOasis a security interest in the property, which is
otherwise free of any mortgages, liens or encumbrances.
16
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 four residential
apartment buildings, will be $5,764,00 at 70% occupancy. Management estimates
expenses to be 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. 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 persuaded 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
17
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, 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
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 October 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.
Amount and Nature
Name and Address of Of Beneficial Percent of
Beneficial Owner Ownership (1)(2) Common Stock
----------------------------- ----------------- ------------
Dr. Alan V. Phan 1,636,071 (3) 17.6%
19104 South Norwalk Boulevard
Artesia, California 90701
Frederic Cohn 1,609 *
19104 South Norwalk Boulevard
Artesia, California 90701
18
Michael L. Caruana 1,609 *
19104 South Norwalk Boulevard
Artesia, California 90701
James De Rosa 1,609 *
19104 South Norwalk Boulevard
Artesia, California 90701
Tiana Corporation 1,022,949 (4) (5) 11.0%
Kai Tak Commercial Building
Room 704A
317 Des Voeux Road Central
Hong Kong, China
NuOasis International, Inc. 4,000,000 43.1%
2 Park Plaza, Suite 470
Irvine, California 92714
All officers and directors
as a group 1,640,898 17.7%
* 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
312,124 shares held by two sons who reside with Dr. Phan when not
attending college and law school, respectively. 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. See Part I, Item 8, "Description of Securities."
(4) As the owner of 204,589 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 by
various Asian business groups located in Hong Kong, Singapore,
Malaysia, and Indonesia.
19
The Company is not aware of any arrangement which might result in a
change in control in the future.
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).
20
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. 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
21
compensation paid during each of the three fiscal years ended December 31, 1995,
1994 and 1993 to the person serving as the Company's Chief Executive Officer
during the years ended December 31, 1995. 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, 1995 $70,000
Chief Executive Officer 1994 $35,000
1993 -0-
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 an
unaffiliated person. 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."
22
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.
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
annum and subject to no fixed repayment terms. On September 30, 1996, Pacific
Rim agreed to convert this loan for 425,000 shares 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, 1995 and
1994 -Notes to Financial Statements," Item 13. "Commitments."
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
23
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.
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 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.
24
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.
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.
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.
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.
25
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.
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 an unaffiliated person. All of the outstanding common stock
of Eastern Rocester Limited subsequently was transferred to Tiana Corporation,
of which Dr. Phan beneficially owns 20% of the common stock.
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.
26
On February 28, 1996, the Company issued 135,000 shares of its Common
Stock to Kevin Quinn as full compensation for $64,000 in legal fees incurred by
the Company.
On March 27, 1996, the Company acquired a complete line of cosmetics,
including inventory, valued at $310,815 and marketed under a brand name, for
60,000 shares of the Company's Common Stock.
On June 3, 1996, the Company issued 25,000 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.
On June 3, 1996, the Company issued a total of 6,335 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 3,335 shares and 3,000
shares respectively.
On June 11, 1996, the Company issued 560 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
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 of the Company's Common Stock,
and a Convertible Secured Promissory Note. On September 30, 1996, Pacific Rim
Capital received 400,000 shares of the Company's Common Stock and Philip Cavana
received 200,000 shares of the Company's Common Stock for $1,000,000 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 of the Company's Common Stock to
Pacific Rim Capital on account of funds advanced in the amount of $272,416
during the January 1, 1996 to September 30, 1996 period.
27
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
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:
28
The Hartcourt
Companies, Inc.
and Subsidiaries
Consolidated Financial Statements
Years Ended December 31, 1995 and 1994
F-1
29
The Hartcourt Companies, Inc. and Subsidiaries
Contents
Report of Independent Certified Public Accountants F-3
Consolidated financial statements
Balance sheets at December 31, 1995 and 1994 F-4-5
Statements of operations for the years ended
December 31, 1995 and 1994 F-6
Statements of shareholders' equity for the years
ended December 31, 1995 and 1994 F-7
Statements of cash flows for the years ended
December 31, 1995 and 1994 F-8-9
Summary of accounting policies F-10-13
Notes to financial statements F-14-25
F-2
30
Report of Independent Certified Public Accountants
The Hartcourt Companies, Inc.
Cerritos, California
We have audited the accompanying consolidated balance sheets of The Hartcourt
Companies, Inc. and Subsidiaries (the "Company") as of December 31, 1995 and
1994, and the related consolidated statements of operations, shareholders'
equity and cash flows for the years 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide 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 at December 31, 1995 and 1994, and the results
of their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements at December 31, 1995, the Company has
accumulated over $2.0 million in losses, has negative working capital of
approximately $5,400,000 and is delinquent in making certain required loan
payments. As a result, substantial doubt exits about the Company's ability to
continue as a going concern. Management's plans to deal with this issue are also
discussed in Note 1. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
BDO Seidman, LLP
Los Angeles, California
May 6, 1996
F-3
31
The Hartcourt Companies, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31,
1995 1994
----------- ----------
Assets
Current
Cash $ 142,047 $ 196,570
Accounts receivable, net of allowance for
doubtful accounts of $116,490 in 1995 69,119 9,651
Inventories (Note 2) 1,011,332 717,634
Prepaid expenses 72,051 199,563
Due from related party (Note 16) 168,575 102,143
Common stock subscriptions receivable (Note 8) - 200,000
----------- ----------
Total current assets 1,463,124 1,425,561
----------- ----------
Plant and equipment, net of
accumulated depreciation (Notes 3, 5 and 9) 9,030,501 7,125,106
Deposits and other assets 23,181 617,583
Intangible assets, net (Note 4) 715,658 714,919
----------- ----------
Total assets $11,232,464 $9,883,169
=========== ==========
F-4
32
The Hartcourt Companies, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31,
1995 1994
----------- ----------
Liabilities and Stockholders' Equity
Current liabilities
Bank loans (Note 5) $ 772,753 $ 356,819
Current portion of obligations under
capital lease (Note 9) 125,000 55,000
Current portion of long-term debt (Note 6) 1,930,114 600,441
Other loans (Note 5) 1,695,549 1,939,677
Accounts payable and accrued expenses 2,041,665 792,868
Due to related party (Note 16) 272,416 -
----------- ----------
Total current liabilities 6,837,497 3,744,805
Obligations under capital lease, less
current portion (Note 9) 575,000 645,000
Long-term debt, less current portion (Note 6) 501,736 981,874
Minority interest 1,913,361 2,461,988
Commitments and contingencies (Note 13)
Shareholders' equity
Original preferred stock - $0.01 par value;
1,000 shares authorized, issued and
outstanding 10 10
Class A preferred stock - $0.01 par value;
10,000,000 shares authorized; no shares
issued and outstanding - -
Common stock - $0.001 par value;
100 million shares authorized;
13,729,018 (13,679,672 in 1994) shares
issued and outstanding 13,729 13,680
Additional paid-in capital 3,413,679 3,278,728
Common stock subscriptions receivable (Note 8) - (700,000)
Accumulated deficit (2,135,892) (542,001)
Foreign currency translation adjustment 113,344 (915)
----------- ----------
Total shareholders' equity 1,404,870 2,049,502
----------- ----------
Total liabilities and shareholders' equity $11,232,464 $9,883,169
=========== ==========
See accompanying summary of accounting policies and notes to
consolidated financial statements.
F-5
33
The Hartcourt Companies, Inc. and Subsidiaries
Consolidated Statements of Operations
Year ended December 31,
1995 1994
----------- ----------
Sales $ 353,674 $ 74,510
Cost of sales 159,797 31,559
----------- ----------
Gross profit 193,877 42,951
Selling, general and administrative 1,558,256 428,989
----------- ----------
Operating loss (1,364,379) (386,038)
----------- ----------
Other income (expense)
Interest expense (851,076) -
Exchange gain 54,952 1,103
Other 2,351 -
----------- ----------
(793,773) 1,103
----------- ----------
Net loss before minority interest (2,158,152) (384,935)
Minority interest 564,261 39,140
----------- ----------
Net loss $(1,593,891) $(345,795)
=========== ==========
Net loss per share $ (.12) ($.03)
=========== ==========
Weighted average number of shares
outstanding 12,825,497 11,921,976
=========== ==========
See accompanying summary of accounting policies and notes to
consolidated financial statements.
F-6
34
The Hartcourt Companies, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
[Enlarge/Download Table]
Common Foreign
Preferred Stock Common Stock Additional Stock Currency
--------------- ---------------- Paid-in Subscriptions Accumulated Translation
Shares Amount Shares Amount Capital Receivable Deficit Adjustment Total
-----------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 1994 -- $-- 6,110,337 $ 6,110 $ 101,858 -- $ (196,206) -- $ (88,238)
Shares issued in finding
public shell company -- -- 189,446 189 61 -- -- -- 250
Shares issued in connection
with acquisition of 60%
interest in Xinhui JV on
August 8, 1994 -- -- 4,825,782 4,826 2,144,374 -- -- -- 2,149,200
Share issued in connection with
acquisition of The Hartcourt
Pen Factory, Inc.
on December 1, 1994 1,000 10 38,625 39 (49) -- -- -- --
Shares issued in connection
with private placement on
December 21, 1994 (Note 8) -- -- 1,757,786 1,758 998,242 (1,000,000) -- -- --
Shares issued to underwriter
for issuance costs -- -- 757,786 758 (758) -- -- -- --
Cash paid on common stock
subscriptions receivable
(Note 8) -- -- -- -- -- 300,000 -- -- 300,000
Capital contribution -
officer's compensation -- -- -- -- 35,000 -- -- -- 35,000
Foreign currency translation
adjustment -- -- -- -- -- -- -- (915) (915)
Net loss -- -- -- -- -- -- (345,795) -- (345,795)
-----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 1,000 10 13,679,762 13,680 3,278,728 (700,000) (542,001) (915) 2,049,502
Shares issued to attorney
for legal fees -- -- 49,256 49 64,951 -- -- -- 65,000
Capital contribution -
officer's compensation -- -- -- -- 70,000 -- -- -- 70,000
Cash paid on common stock
subscription -- -- -- -- -- 700,000 -- -- 700,000
Foreign currency translation
adjustment -- -- -- -- -- -- -- 114,259 114,259
Net loss -- -- -- -- -- -- (1,593,894) -- (1,593,891)
-----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 1,000 $10 13,729,018 $13,729 $3,413,679 -- $(2,135,892) $113,344 $1,404,870
===================================================================================================================================
See accompanying summary of accounting policies and notes to
consolidated financial statements.
F-7
35
The Hartcourt Companies, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Year ended December 31,
Increase (Decrease) in Cash 1995 1994
----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,593,981) $(345,795)
Adjustments to reconcile net loss to
net cash provided by (used in) operating activities:
Minority interest in losses of joint venture (564,261) (39,140)
Depreciation and amortization 551,428 3,577
Allowance for doubtful accounts 116,490 -
Changes in operating assets and liabilities:
Accounts receivable (175,958) (9,651)
Inventories (293,697) (714,583)
Prepaid expenses 127,512 (4,051)
Deposits 603,159 -
Amount due from shareholder - (102,143)
Accounts payable and accrued expenses 1,363,146 1,223,688
----------- ----------
Total adjustments 1,727,819 357,697
----------- ----------
Net cash provided by (used in) operating activities 133,838 11,902
----------- ----------
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of plant and equipment (259,919) (223,407)
Construction in progress (2,169,550) (66,029)
Purchase of other assets (36,851) (8,009)
Net cash used in investing activities (2,466,320) (297,445)
----------- ----------
F-8
36
The Hartcourt Companies, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Year ended December 31,
Increase (Decrease) in Cash 1995 1994
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock 835,000 300,000
Common stock subscriptions 200,000 (200,000)
Loan from Bank of China 849,535 560,657
Loans from shareholders 205,984 -
Other loans 171,806 (343,671)
Additional contributions by foreign partner 15,634 -
---------- ----------
Net cash provided by financing activities 2,277,959 316,986
---------- ----------
Net increase (decrease) in cash (54,523) 31,443
Cash, beginning of year 196,570 165,127
---------- ----------
Cash, end of year $ 142,047 $ 196,570
========== ==========
See accompanying summary of accounting policies and notes to
consolidated financial statements.
F-9
37
The Hartcourt Companies, Inc. and Subsidiaries
Summary of Accounting Policies
The Company
Harcourt Investments (USA), Inc., (Harcourt Nevada) was established 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
Nevada 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.
In November 1994, Stardust, Inc., Production-Recording-Promotion (Stardust)
acquired 100% of the outstanding shares of Harcourt Nevada for 8,280,000 shares
of its common stock in a transaction accounted for as a recapitalization of
Harcourt Nevada with Harcourt Nevada as the acquirer (reverse acquisition).
Therefore, the historic cost of assets and liabilities were carried forward to
the consolidated entity. In 1995, stock dividends and a reverse stock split
changed the number of shares issued and outstanding to 6,110,337. The
consolidated financial statements were restated to reflect these capital stock
transactions. The historical financial statements are those of Harcourt Nevada
and include the accounts of Stardust on a manner similar to a pooling of
interest basis. Stardust's name was changed to the "Hartcourt Companies, Inc."
Hartcourt Pen Factory, Inc. (Hartcourt Pen) was established in October 1993.
Principal business activities are the sale of writing instruments. In December
1994, Harcourt Nevada 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.
F-10
38
The Hartcourt Companies, Inc. and Subsidiaries
Summary of Accounting Policies
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
Nevada 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.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of The
Hartcourt Companies, Inc. and its wholly-owned subsidiaries: Harcourt Nevada,
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.
Inventories
Inventories are stated at the lower of cost (first in - first out) or net
realizable value, substantially all pertains to Xinhui JV.
F-11
39
The Hartcourt Companies, Inc. and Subsidiaries
Summary of Accounting Policies
Plant and Equipment
Plant and equipment are stated at cost, and substantially all balances related
to Xinhui JV. 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.
Intangible Assets
(Xinhui JV)
Intangible assets represent costs incurred for technical services which include
product designs, process and materials specifications and technical materials.
Such costs are being amortized on the straight-line basis over ten years
beginning July 1, 1995 (date of normal commercial production). The Company will
continually evaluate the recoverability of intangible assets based on projected,
undiscounted net cash flows.
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 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.
Earnings 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 in the reverse acquisition of
Harcourt Nevada and the acquisition of Hartcourt Pen are assumed to be
outstanding for all periods presented since both acquisitions were accounted for
in a manner similar to a pooling of interests. 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.
F-12
40
The Hartcourt Companies, Inc. and Subsidiaries
Summary of Accounting Policies
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, liabilities,
revenues and expenses at the date and for the periods that the consolidated
financial statements are prepared. Actual results could differ from those
estimates.
Reclassification of Amounts
Certain 1994 amounts have been reclassified to conform with the 1995
presentation.
New Accounting Pronouncements
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of"
(SFAS No. 121) issued by the Financial Accounting Standards Board (FASB) is
effective for financial statements for fiscal years beginning after December 15,
1995. SFAS No. 121 establishes new guidelines regarding when impairment losses
on long-lived assets, which include plant and equipment, and certain
identifiable intangible assets, should be recognized and how impairment losses
should be measured. The Company does not expect adoption of SFAS No. 121 to have
a material affect on its financial position or results of operations.
Statements of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS No. 123) issued by the Financial Accounting
Standards Board (FASB) is effective for specific transactions entered into after
December 15, 1995, while the disclosure requirements of SFAS No. 123 are
effective for financial statements for fiscal years beginning no later than
December 15, 1995. The new standard establishes a fair value method of
accounting for stock-based compensation plans and for transactions in which an
entity acquires goods or services from nonemployees in exchange for equity
instruments. At the present time, the Company has not determined if it will
change its accounting policy for stock based compensation or only provide the
required financial statement disclosures. As such, the impact on the Company's
financial position and results of operations is currently unknown.
F-13
41
The Hartcourt Companies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Going Concern
and Management's Plans
From 1993 to 1995 the Company was engaged primarily in building a pen
manufacturing plant in China. In July 1995 the plant was fully operational and
production commenced. However, operations were insufficient to compensate for
the interest on debt incurred to pay for construction of the plant. In addition,
only 20% of the plants capacity was used. As a result, during 1995 the Company
incurred a loss of approximately $1,600,000, had a negative working capital of
approximately $5,400,000 at December 31, 1995 and is delinquent in making
certain required loan payments. These conditions raise substantial doubt about
the continuation of the business. Accordingly, the Company's continuation as a
going concern, the realization of the carrying amounts of its assets, and the
amount and classification of its liabilities are dependent upon the Company's
ability to achieve and maintain profitable operations and generate sufficient
cash flows to meet its obligations on a timely basis.
Management believes the Company will be able to generate additional cash flows
through an anticipated public offering of convertible debentures in the fall of
1996 as well as from additional funding from the foreign minority shareholder of
the Xinhui JV. In addition, management is currently negotiating with one of its
lenders to convert approximately $900,000 of debt to equity.
The accompanying financial statements do not include any adjustments that might
be necessary should the Company be unable to continue in existence.
2. Inventories
Inventories consist of the following:
December 31,
1995 1994
-------------------------
Raw materials $ 265,847 $595,098
Work-in-process 30,693 -
Finished goods 714,792 122,536
---------- --------
$1,011,332 $717,634
---------- --------
F-14
42
The Hartcourt Companies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
3. Plant and Equipment
Plant and equipment consist of the following:
December 31, Useful
1995 1994 Lives
-------------------------------------------
Building $3,479,275 $ - 20 years
Leasehold improvements 264,108 255,036 10 years
Machinery and molds 5,520,301 - 10 years
Construction in progress - 6,714,527 -
Office furniture and equipment 68,987 38,102 6 years
Vehicles 123,791 122,031 5 years
-------------------------------------------
9,456,462 7,129,696
Less accumulated depreciation 425,961 4,590
-------------------------------------------
Net plant and equipment $9,030,501 $7,125,106
-------------------------------------------
During 1995, capitalized costs of additions to plant and equipment included
approximately $600,000 relating to deposits made in 1994 toward the acquisition
of plant and equipment. These deposits are included as a component of "Deposits
and other assets" on the consolidated balance sheet as of December 31, 1994.
4. Intangible Assets
Intangible assets of $715,658 (net of accumulated amortization of $37,666) as of
December 31, 1995 relate to Xinhui JV and consist of purchased training services
and technology transfer costs.
5. Short-term Loans
At December 31, 1995, short-term loans relate to Xinhui JV and consist of twelve
separate loans from various banks and companies within the People's Republic of
China. The loans have maturity dates in 1996 and bear interest at various rates
ranging from 11.7% to 22.8%. One of the loans for $682,600 is collateralized by
machinery and equipment. The other loans are not collateralized. At December 31,
1995, the credit lines were fully utilized.
F-15
43
The Hartcourt Companies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
6. Long-term Debt
December 31,
1995 1994
-------------------------
Loan payable, Bank of China, maturing 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 $1,582,315
Loan payable, vendor, with interest at
12% and monthly payments of principal
and interest of $15,253 through March,
1998(a) 429,585 -
Loans payable, shareholder, with interest
at 6% and monthly payments of principal
and interest of $4,000 through
mid-1995(a) 40,000 -
Loan payable, vendor, with interest at
10% and monthly payments of principal
of $5,000 through November, 1996(a) 61,000 -
---------- ----------
2,431,850 1,582,315
Less current portion 1,930,114 600,441
---------- ----------
$ 501,736 $ 981,874
========== ==========
(a) The Company has not made all of the required payments under these loans due
to a shortage of cash. As a result, these loans are in default and are
classified as due within the next year in these consolidated financial
statements. See Note 1 for a description of management's plans to obtain
additional debt and equity funding to satisfy the Company's obligations while
the Company develops a sufficient revenue base to achieve and sustain profitable
operations.
F-16
44
The Hartcourt Companies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
6. Long-term Debt
(Continued)
Annual maturities of long-term debt are as follows: Amount
----------
1996 $1,930,114
1997 501,736
---------
$2,431,850
==========
7. Income Taxes
Since inception, the Company has reported losses for income tax and financial
reporting purposes. Accordingly, no provisions for Federal or state income taxes
were provided. The Company has a $248,000 deferred tax asset resulting from net
operating loss carryforwards. A 100% valuation allowance was provided at
December 31, 1995 and 1994 since management could not determine that it was more
likely than not that the net deferred tax asset would be realized.
At December 31, 1995, the Company has available net operating loss carryforwards
of approximately $670,000 for income tax purposes, subject to certain
limitations, which expire in varying amounts through 2010. Income from the
Xinhui JV will not be taxed in the United States until such income is
distributed by the foreign company and brought into the United States.
Under the laws of The People's Republic of China, income earned by Xinhui JV
during the first two years of operations are tax free, and the next three years
are taxed at 50% of the normal tax rates. Xinhui JV has no provision for
deferred income taxes because there are no temporary differences.
F-17
45
The Hartcourt Companies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
8. Subscription Agreement for
the Sale of Common Stock
In December 1994, the Company entered into a private placement for the sale of
1,000,000 shares of the Company's common stock at a price of $1 per share. In
1995, stock dividends and a reverse stock split changed the number of shares
issued to 757,786. In January 1996, the Company issued an additional 1,000,000
shares to the original shareholders for no consideration. The consolidated
financial statements have been restated to reflect these transactions. Although
the Company issued these shares, the shares were not released until the money
was received. At December 31, 1994 the Company received $100,000 and released
100,000 shares of its common stock in connection with this agreement. In
addition, the Company received $200,000 during the first three months of 1995
and has reflected this amount as receivable under the subscription agreement at
December 31, 1994. In 1995, the remaining $700,000 was received.
9. Obligation Under Capital Lease
In April 1994, Harcourt Nevada entered into a lease agreement with Tokai-
Anja-Scripto Pen Company (Anja) for a special ball pen assembly machine for use
by Xinhui JV. This equipment was capitalized at its fair market value of
$700,000 and is included in machinery and molds within "Plant and equipment" on
the consolidated balance sheet at December 31, 1995. Related accumulated
depreciation at December 31, 1995 was $35,000. The lease provides for
semi-annual payments of $25,000 over a ten year period. Under the terms of the
lease, however, the annual lease payment may be increased or decreased, each
year, based on future purchases of Anja merchandise by Harcourt Nevada.
F-18
46
The Hartcourt Companies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
9. Obligation Under Capital Lease
(Continued)
The following shows the calculation of the annual lease payment based on the
value of merchandise purchased each year during the life of the lease:
Increase/ Base Total
(Decrease) Annual Annual
Value of Purchases in Annual Lease Lease
During Each Year Lease Payment Payment
--------------------------------------------------------------------------------
$ -0- - 100,000 $ 50,000 $50,000 $100,000
$100,001 - 200,000 $ 40,000 $50,000 $ 90,000
$200,001 - 300,000 $ 30,000 $50,000 $ 80,000
$300,001 - 400,000 $ 20,000 $50,000 $ 70,000
$400,001 - 500,000 $ 10,000 $50,000 $ 60,000
$500,001 - 700,000 $ -0- $50,000 $ 50,000
$700,001 - 1,000,000 $(25,000) $50,000 $ 25,000
$1,000,001 and over $(50,000) $50,000 $ -0-
Harcourt Nevada anticipates that minimum purchases each year from the lessor
will be in excess of $500,000. If this level of purchases each year is
sustained, then the total of lease payments over the next five years will be
$250,000. However, based on the above schedule, total lease payments over the
next five years could be as high as $500,000 or as little as zero, depending on
the value of total purchases each year by Harcourt Nevada from Anja. As of
December 31, 1995, the Company has made no payments under this lease. Included
in current liabilities at December 31, 1995 is $125,000 related to this lease.
F-19
47
The Hartcourt Companies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
10. 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.
11. Foreign Operations
Financial data for the Company's foreign operations is as follows:
Year ended December 31,
1995 1994
----------------------------------
Revenues $ 249,794 $ 22,612
Operating loss $(1,499,598) $ (81,541)
Identifiable assets $10,366,707 $8,896,784
12. Amended Articles of
Incorporation and Original
Preferred 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 (Common Stock); 1,000 shares of Preferred Stock, having
a par value of $.01 per share (the Original Preferred Stock); and 10,000,000
shares of Preferred Stock, having a par value of $.01 per share (the Class A
Preferred Stock).
F-20
48
The Hartcourt Companies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
12. Amended Articles of Incorporation
and Original Preferred Stock
(Continued)
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 or involuntary, the holders of record shall be
entitled to be paid the full par value of Original Preferred Stock, and no more.
Class A Preferred Stock
The 10,000,000 shares of authorized and unissued Class A Preferred Stock may be
issued 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.
F-21
49
The Hartcourt Companies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
13. Commitments
On June 23, 1995, the Company entered into an Agreement and Plan of
Reorganization with Pego Systems, Inc. (Pego) and the shareholders of Pego
pursuant to which the Company agreed 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, which is convertible into common stock, and a promissory note
in the amount of $500,000 payable in two equal installments. The first
installment is due 60 days after the approval by the Securities and Exchange
Commission of a $5,000,000 public offering, and the second installment is due 60
days thereafter. The transaction is expected to close upon receipt of the
audited financial statements of Pego. Neither of the above two events are
currently in process. The owner of Pego is a current director of the Company.
See Note 17.
The Company has issued a letter of intent dated June 10, 1995 to acquire Abel
Pen Company (Abel), a California corporation located in San Francisco,
California. Abel has been in business for the last twenty years and is a
wholesaler of writing instruments and other office supplies. In 1994, Abel's
sales were approximately $2 million with a net income of $50,000. The purchase
price for this acquisition is to be $450,000, $200,000 cash and $250,000 of the
Company's Preferred Stock.
In January 1995, the Company entered into a preliminary agreement with Alfa Pen
Company to set up a joint venture in Slovakia (Slovakia JV). Upon receipt of the
necessary financing, the Company intends to contribute $2,000,000 for 51% of the
equity of the Slovakia JV. If the Slovakia JV is successfully established, a new
factory will be set up outside of the Province of Slovakia and it will be custom
designed for the production of writing instruments. Consummation of this
acquisition is subject to raising the necessary financing.
F-22
50
The Hartcourt Companies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
13. Commitments
(Continued)
In June 1994, the Company signed a preliminary agreement to create a joint
venture (Shanghai JV) with the largest ball pen manufacturing company in China,
the Shanghai Ball Pen Company. The agreement calls for a total investment of
Hartcourt of $4 million to obtain a 55% share in the joint venture. This
agreement was executed subject to the Company obtaining adequate funding for the
$4 million from outside investors and receipt of government approvals. The
Company is seeking to raise the $4 million through a private placement effort to
be undertaken by a financial institution in Hong Kong and/or in combination with
the public offering discussed in the following paragraph.
The Company intends to finance the acquisition of the Shanghai JV, Pego and Abel
through bank financing and a public offering of convertible debentures. The
Company has received a letter of intent from an underwriter with respect to a
$5,000,000 offering which is expected to be filed with the Securities and
Exchange Commission in August 1996. The offering, which is on a "best efforts"
basis, is expected to commence in August 1996.
14. 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.
The carrying value of notes payable and long-term debt approximates fair value
at December 31, 1995 and 1994 since these notes substantially bear interest at
floating rates based upon the lenders' "prime" rate. The fair value of debt
bearing fixed interest rates cannot be estimated due to the present default
status. The fair value of amounts due to/from minority shareholder cannot be
estimated due to their related party nature.
15. Supplemental Disclosure of
Cash Flow Information
During 1995, $9,524 of interest payments were made. In 1994, no interest
payments were made. No income tax payments were made during 1995 and 1994.
Interest totaling $167,261 was capitalized to property and equipment in 1995
and $323,840 was capitalized to construction in progress in 1994.
F-23
51
The Hartcourt Companies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
15. Supplemental Disclosure of
Cash Flow Information
(Continued)
The Company entered into a capital lease for new equipment with a fair value of
$700,000 in 1994.
During 1994, the Company acquired a 60% interest in Xinhui JV in a transaction
valued at $2,149,200. The acquisition was recorded under the purchase method of
accounting. The fair values of Xinhui JV's assets and liabilities at the date of
acquisition are presented below:
Cash $137,824
Inventories 3,051
Prepaid expenses and deposits 801,380
Property, plant and equipment 179,043
Construction in progress 5,711,913
Intangibles 714,919
Accounts payable and accrued expenses (362,351)
Capital lease obligation (700,000)
Bank loans (1,378,477)
Other loans (1,525,302)
-----------
Net assets 3,582,000
Acquired interest 60.00%
-----------
$2,149,200
===========
16. Related Party Transactions
During the past two years, the Company made advances amounting to $168,575 to a
related party. All these advances were unsecured, non-interest bearing, due on
demand and outstanding as of December 31, 1995.
In addition, a related party loaned the Company $272,416. This loan bears
interest at 24%, has no underlying collateral or defined repayment terms and is
outstanding as of December 31, 1995.
F-24
52
The Hartcourt Companies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
17. Subsequent Events
In January 1996, the Company signed a memorandum of understanding with Yafa Pen
Company, Inc. (Yafa) in which the Company agreed to (1) lend Yafa $200,000
(Note) which will be collateralized by a pledge of all of the outstanding shares
of the common stock of Yafa, plus a personal guarantee by Yafa's President; (2)
acquire all of the issued and outstanding shares of Yafa for $285,000; and (3)
reduce the purchase price by offsetting the total amount of principal and
interest due under the Note on the date the transaction is consummated. Yafa's
President shall receive shares of restricted common stock of the Company in an
amount equal to $175,000. The price per share shall be the average price per the
ten trading days prior to the date the acquisition of the Yafa stock is
consummated. The Company will buy back $75,000 of the restricted shares of
common stock within twelve months of the date of the closing of the Yafa
transaction. The price per share for the repurchase shall be determined by the
same formula noted above. In addition, the Company would have an option to
purchase the building in which Yafa operates in exchange for 100,000 shares of
the Company's Series D Preferred Stock (Series D). The rights and preferences of
Series D have not yet been defined.
The Company entered into a series of equity-related transactions, the most
significant of which occurred in March 1996. On March 21, 1996, the Company
entered into a purchase contract with a third party which resulted in the
issuance of 60,000 shares of common stock in exchange for a complete line of
cosmetics, including inventory marketed under a brand name, which was valued at
$310,815. The Company intends to ship the line of cosmetics to China for resale.
As indicated in Note 13, the Company entered into an Agreement and Plan of
Reorganization ("Agreement") with Pego and the shareholders of Pego 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. On April 30, 1996, the
Agreement was amended so that the Company would issue 1,740,000 shares of its
$.01 par value Series B Preferred Stock with specified rights and privileges.
F-25
53
THE HARTCOURT COMPANIES, INC.
AND SUBSIDIARIES
Consolidated Financial Statements
(Unaudited)
Quarter Ended September 30, 1996
54
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Unaudited
September 30,
1996 1995
----------- -----------
ASSETS
Current assets:
Cash $ 7,430 $ 92,800
Accounts Receivable 624,019 156,722
Inventories 413,019 844,293
Prepaid expenses 89,238
Amount due from shareholder 114,671
Common stock subscriptions receivable 300,000
----------- -----------
Total current assets 1,044,468 1,597,724
Property, plant and equipment, net of
accumulated depreciation 41,827 6,016,290
Construction in progress 2,846,107
Investments 33,999,994
Other assets 339,848 225,028
Intangible assets, net of amortization 753,324
----------- -----------
TOTAL ASSETS $35,426,137 $11,438,473
=========== ===========
55
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Unaudited
September 30,
1996 1995
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 697,707 $ 811,821
Bank loans 776,629
Current portion of obligations under
capital lease 700,000 114,950
Current portion of long-term debt 1,430,288
Other loans 11,246 1,919,885
----------- -----------
Total current liabilities 1,408,953 5,053,573
Obligations under capital lease, less
current portion 585,050
Long-term debt, less current portion 12,139,397 1,050,594
Loan from shareholder
Minority interest 2,360,257
Commitments and contingencies
Shareholders' equity:
Original preferred stock - $0.001 par value:
1,000 shares authorized, issued and
outstanding 10 10
Common stock - $0.001 par value; 50 million
(100 million in 1995) shares authorized;
9,284,718 shares (13,729,018 in 1995)
issued and outstanding 21,129 16,127
Additional paid in capital 23,587,205 3,328,781
Treasury stock (341,218)
Deficit accumulated during the
development stage (1,389,339) (1,094,387)
Foreign currency translation adjustment 138,468
----------- -----------
Total shareholders' equity 21,877,787 2,388,999
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $35,426,137 $11,438,473
=========== ===========
See accompanying note to consolidated financial statements
56
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Unaudited
Nine months ended
September 30,
1996 1995
---------- ----------
Sales $ 374,367 $ 220,840
Cost of sales 556,684 142,326
---------- ----------
Gross profit (loss) (182,317) 78,514
Other income (loss)) (36,510) 2,455
---------- ----------
Net revenues (218,827) 80,969
General and administrative expenses 388,853 633,355
---------- ----------
Net loss $(607,680) $(552,386)
========== ==========
See accompanying note to consolidated condensed financial statement.
57
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Unaudited
Nine months ended
September 30,
Increase (Decrease) in Cash 1996 1995
------------ -----------
Cash flows from operating activities:
Net loss $ (607,680) $ (552,388)
------------ -----------
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 4,280
Changes in:
Accounts receivable (554,900) (147,071)
Inventories 598,313 (126,658)
Prepaid expenses 72,051 110,325
Amount due from joint venture partner 168,575 (12,528)
Loan from shareholder (272,416)
Common stock subscriptions receivable (100,000)
Accounts payable and accrued expenses (1,343,958) 18,953
------------ -----------
Total adjustments (1,328,055) (256,980)
------------ -----------
Net cash used in operating activities (1,935,735) (809,366)
------------ -----------
Cash flows from investing activities:
Purchase of property, plant and equipment (5,605,711)
Construction in progress 3,868,420
Investments (29,370,830)
Deposits 392,555
Purchase of other assets (316,667) (38,405)
------------ -----------
Net cash used in investing activities (29,687,497) (1,383,141)
------------ -----------
Cash flows from financing activities
Issuance of common stock for investments
and to pay off debt 19,839,708
Loan from bank of China 419,810
Loans from banks and others 11,648,907 878,775
Decrease in minority interest (101,731)
Additional paid-in capital 52,500
Receipts on common stock subscriptions 700,000
------------ -----------
Net cash provided by financing activities 31,488,615 1,949,354
------------ -----------
Effect of exchange rate changes on cash 139,383
Net increase (decrease) in cash (134,617) (103,770)
Cash, beginning of year 142,047 196,570
------------ -----------
Cash, September 30 $ 7,430 $ 92,800
============ ===========
See accompanying note to consolidated condensed financial statements.
58
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1995
Unaudited
[Enlarge/Download Table]
Foreign
Additional Currency
Preferred Stock Common Stock Paid in Accumulated Translation Treasury
Shares Amount Shares Amount Capital Deficit Adjustment Stock Total
------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 1,000 $10 13,729,018 $13,729 $ 3,413,679 ($2,135,892) $113,344 $1,404,870
Shares issued to attorney for
work on private placement
and obtaining public shell 135,000 135 527,715 527,850
Return of 47,746 shares by
attorney and held in
treasury (341,218) (341,218)
Shares issued in payment of
outstanding liabilities on
behalf of Xin Hui joint
venture 25,000 25 106,730 106,755
Shares issued in connection
with purchase of
inventories 66,335 66 330,099 330,165
Shares issued in settlement
of accounts payable 560 2,813 2,813
3% stock dividend as of -
5/3/96 417,872 418 (418)
3% stock dividend as of
7/31/96 431,386 431 (431) -
One for five reverse stock
split as of 8/1/96 (11,844,154) -
Shares issued to acquire
certain investments 5,898,700 5,899 18,994,095 18,999,994
Shares issued in conversion
of debt to equity 425,000 426 212,074 212,500
Sale of Harcourt Investments
(USA), Inc. 1,355,082 (113,344) 1,241,738
Net loss (607,680) (607,680)
------------------------------------------------------------------------------------------------------------------------------------
Balances, September 30, 1996 1,000 $10 9,284,717 $21,129 $23,587,205 ($1,389,339) - ($341,218) $21,877,787
=======================================================================================================
See accompanying note to consolidated condensed financial statement.
59
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
1. Basis of Presentation
The accompanying unaudited consolidated financial statements for The
Hartcourt Companies, Inc. and Subsidiaries (the "Company") as of September
30, 1996 and for the nine month periods ended September 30, 1996 and 1995
have been prepared in accordance with generally accepted accounting
principles for interim financial information. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments, consisting of normal recurring adjustments,
considered necessary for a fair presentation have been included. These
results have been determined on the basis of generally accepted accounting
principles and practices applied consistently with those used in the
preparation of the Company's 1995 Annual Report.
These consolidated condensed financial statements should be read in
conjunction with the consolidated financial statements and footnotes thereto
incorporated by reference to the Company's Annual Report for the year ended
December 31, 1995.
The results of operations for the nine months ended September 30, 1996 are
not necessarily indicative of the results to be expected for any other period
or for the full year.
2. Sale of Harcourt Investments, Inc.
In September 1996 the Company sold its wholly-owned subsidiary, Harcourt
Investments, Inc., to CKES, a Nevada Corporation. Harcourt Investments owned
a 52% interest in XinHui Harchy Modern Pens, Ltd., a joint venture in the
Peoples Republic of China. The shares of Harcourt Investments were sold for
$3 million which is payable in 60 equal monthly installments of $50,000 each,
beginning October 1, 1999. Interest accrues at 6% per annum and is payable at
the end of the loan period.
Remaining on the Company's financial statements, related to the Chinese joint
venture, is an account receivable of approximately $544,000 and a capitalized
lease of $700,000.
60
3. Investment in Beijing Apartment Complex
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.
4. 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.
The value of the purchase was supported by a current appraisal.
5. Purchase of Cosmetic Inventory
In March 1996 the Company purchased a line of cosmetics and related supplies
from Camille St. Moritz for $300,000. The purchase was made by the issuance
of 60,000 shares of common stock.
61
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
------- ------------------------------------------------------------ -----
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. 65
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. 75
3.01 Articles of Incorporation of the Company, as amended. 85
3.02 Bylaws of the Company. 92
3.03 Amendment to the Bylaws of the Company. 99
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. 100
10.01 Lease between the Company and Larry M. Mitobe for the
Company's headquarters facility, dated April 9, 1996. 108
10.02 Equipment Lease between Harcourt USA and Anja Engineering
Corporation, dated April 4,1994. 113
10.03 Stock Exchange Agreement between Harcourt USA and Eastern
Rocester, dated August 8, 1994. 119
62
Exhibit
No. Description of Document Page
------- ------------------------------------------------------------ -----
10.04 1995 Stock Option Plan. 121
10.05 Purchase Contract between The Hartcourt Companies, Inc.
and Exceptional Specialty Products, Inc., dated March 21,
1996. 131
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. 134
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. 149
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. 153
10.09 Sales Agreement, dated September 17, 1996, between The
Hartcourt Companies, Inc. and Promed International Ltd. 157
10.10 Sales Agreement, dated September 17, 1996, between The
Hartcourt Companies, Inc. and Mandarin Overseas Investment
Co., Ltd. 159
10.11 Purchase and Sale Agreement, dated September 27, 1996,
between The Hartcourt Companies, Inc. and CKES
Acquisitions, Inc. 161
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. 164
21.01 Subsidiaries of the Company. 167
27.01 Financial Data Schedule. 168
63
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: January 14, 1997 By:/s/ Alan V. Phan
----------------------- -------------------------------------
Alan V. Phan, Chairman of the Board,
President, Chief Executive Officer and
Chief Financial Officer
64
Dates Referenced Herein and Documents Incorporated by Reference
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