Old report on HRCT via RB....
Growth Through Acquisition
The Hartcourt Companies, Inc. (OTCBB: HRCT) started as a distributor of writing instruments. The company owned manufacturing operations in China; its $11 million 160,000-square-foot state-of-the-art factory in the Province of Guangdong. The total production capacity of the factory was 400 million pens and markers a year. Its American relative, Hartcourt Pen Factory, is an administrative facility in Artesia, California. This facility was also used to assemble imported pens, markers, and components for distribution in the United States. In October 1996, Hartcourt sold its percentage of the China-based factory as part of a management initiative to diversify its operations.
Hartcourt's new international growth strategy was twofold. First, the company focused on acquiring companies in electronics, industrial distribution, and the communications industries, with a special interest in developing markets in Asia. Second, once a business was acquired, Hartcourt assisted in the growth of the subsidiary by providing management with support, capital infusion, and strategic alliances. In addition, the decision to divest itself of the China facility provided the company with a firm asset base and cash flow to support the company's expansion plans. Using these strategies, Hartcourt has evolved from a struggling company with revenues of $74,000 in 1994 to a flourishing growth company with pro forma revenues of over $20,000,000 in 1997. During this time, the capital base rose from $2,000,000 to $37,000,000. Sales revenue for 1998 should exceed $23 million.
Since the sale of the China facility, and with the recent acquisitions of Pego Systems, Inc. and the joint company of Electronic Components and Systems, Inc. (ESC)/Pruzin Technologies, Inc., Hartcourt has become an impressive holding company combining several small companies in the high-tech industry into one company large enough to be competitive.
American Holdings
Hartcourt's initial acquisition, Pego, is a 27-year-old corporation that manufactures and distributes environmental and filtration control equipment. This company, which dominates the California, Arizona, and Nevada regions, gets its revenues from three areas of operations: distribution of environmental and filtration control equipment, custom-designed air and gas processing systems, and equipment service for existing clients.
In 1997, Pego generated $6.6 million in sales and showed more than $400,000 in profit. The company, which enjoys a competitive advantage in its marketplace, has been growing at an annual rate of 10 percent. This established corporation has exclusive distribution agreements with some of the country's leading Fortune 500 companies, including the Coca-Cola Company, Procter & Gamble, Mobil, and Arco, as well as government installations such as Air Force bases and several local municipalities.
Hartcourt's second acquisition, Electronic Components and Systems, Inc. (ECS)/Pruzin Technologies, had merged operations in 1988 for greater operating efficiency. The combined company has grown in revenue from $300,000 to over $14 million in 1997.
Pruzin pioneered the technology of ball-grid array connection for integrated circuits, which dramatically improves the efficiency of most printed circuit boards. ECS specializes in high-tech manufacturing and assembly of printed circuit boards, telephone cable wires, and plastic injection. In addition, it has become the leading manufacturer of cable reception and channel switching boxes for the cable television industry as a result of its contract with General Instruments. Other major customers include Intel and Motorola.
To further enhance the twofold focus of the company and to strengthen the holdings of its shareholders, Dr. Alan Phan, president of Hartcourt, has announced a separation of the company's U.S. and foreign interests and the creation of a new publicly held company. The Nevada-based Evova Holdings Inc. (ENVA) will hold, develop, and seek additional business opportunities in the United States. Evova shares will be distributed to all existing Hartcourt shareholders--what amounts to a stock split. According to Dr. Phan, Hartcourt, the parent company, will seek additional opportunities and acquisitions in China.
Hartcourt and China's Internet
The number of Internet users in China will reach 2.2 million by the end of June 1999, according to a survey conducted by Computer Network Information Centre--almost triple the 620,000 users in October 1998. Only a small fraction of China's 1.25 billion people currently have access to the Internet, but growth in Internet use has been explosive and industry analysts say the number of surfers could reach seven million by 2001. In the coming millennium, this growth momentum may hit more than 100 percent per year, Qian Hualin, vice president of China Daily, noted in March 1999.
Hartcourt has entered into serious negotiations with a major Internet service provider in China. The negotiation process is complicated due to the high sensitivity of the Chinese government on matters which have political impact. However, with Hartcourt's past record on Chinese investments, the government has extended great flexibility toward the company and the pending agreement. This Chinese Internet service provider has more than 100,000 subscribers and has generated about $16 million in revenues for fiscal 1998. Its subscribers' base is expected to increase to one million by 2001.
The reason for this prediction of rapid growth is the expectation that the Chinese government will soon abolish much of the red tape now surrounding the application for an Internet connection. If this subscriber target is met, CIH revenues should grow to an estimated $95 million, with a net of $14 million by December 2001.
This anticipated acquisition by Hartcourt allows the company to have an exclusive opportunity in the new but rapidly expanding commercial Internet business in China. The Chinese Internet market historically has been very hard to break into; many leading American and European Internet companies have tried unsuccessfully. The open-door policy initiated by the Chinese government 25 years ago has created a situation where new opportunities emerge almost daily. Yet, this is the first time that a foreign company will actually be allowed to participate in state-owned assets, and could be the foundation of the first time in China that there is a privately operated nationwide Internet business.
"Subject to our ability to commit the necessary resources and depending on the group's ability to market and attract a high percentage of China's current population of 200 million potential customers, the Chinese joint venture can buy out the government's position and effectively convert the venture into a privately owned company and become Asia's largest Internet provider," stated Phan. China is, and will continue to be, an enormous and lucrative market for foreign businesses and investors alike.
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