Here's the other:
The Company
The Hartcourt Companies, Inc., headquartered in Los Angeles, was formed in 1994 to act as a platform for acquiring high growth, privately held businesses in industries that are fragmented and prime targets for consolidation. Hartcourt's growth strategy is two fold. First, the Company is focused on acquiring companies in highly fragmented and specialized industries. Second, once a business is acquired, Hartcourt assists in the expansion and growth of the acquired subsidiary by providing management support, capital infusion for vertical acquisitions, and strategic alliances. Beginning in the summer of 1997, the Company changed its direction, divesting its interests in Asia and selected three core industries to begin its vertical acquisition & consolidation campaign. Hartcourt currently operates wholly owned subsidiaries in the following markets: ECS Division - High-Technology Contract Manufacturing; Pego Division - Environmental & Filtration Control Equipment & Systems; and EmKay - Aircraft & Aviation Equipment Leasing (letter of intent signed for acquisition to be complete in summer of 1998).
Hartcourt Rapid Growth Through Acquisition Strategy: Hartcourt aggressively continues to seek acquisitions in its core markets. Management's concept of combining several small companies in the same industry into one competitive and more efficient and synergetic company is proving to be a successful strategy. Using this strategy, the Company has evolved from a struggling concern with revenues of $74,000 in 1994 to a flourishing growth company with revenues of over $20 million in 1997. During this time the capital base has expanded from $2 million to $37.8 million as of 12-31-97. Hartcourt has acquired 3 companies in 1998, all in its core markets, and has 3-new core market acquisitions planned for the remainder of 1998 which, if executed, will increase revenues by an additional $70 million in 1998, bringing total expected 1998 revenues to almost $100 million.
Hartcourt's "Vertical Expansion and Acquisition" campaign incorporates classic management strategies used by some of the most successful Merger & Acquisition firms on Wall Street, including Kolberg, Kravis, and Roberts (KKR) which is credited with starting the merger mania in the late 1980's with their RJR (NYSE: RN) deal. KKR financed most of its deals with private pension fund money, allowing public valuation to remain low, until the Company was ready to "spin-off" operating divisions of RJR. Hartcourt plans to use public equity (ie. Common stock & convertible debentures) to finance most of its acquisitions prior to evaluating "spinning-off" divisions into the public market (always retaining a majority interest in the holding). The Company will immediately increase shareholder value many times that of the late 1980's deals, due to the public valuation of its stock which will be based upon the valuation of its wholly owned operating subsidiaries. In addition, once an operating division is partially sold into the public market via an IPO (initial public offering), shareholder value will increase once again.
1994 - 1997: The Company purchased manufacturing operations in China in 1994 and in 1996 expanded its Asian interest with the acquisition of a Chinese real estate development. In addition, the Company entered into a Sales Agreement in 1996 to purchase 68 Alaskan mineral lease gold lode claims. In the summer of 1997, due to the uncertainties in Asia and problems with geological surveys for the Alaskan venture, management decided to change direction. As of summer 1997, Hartcourt had divested all interests in China, and had voided its Sales Agreement for the Alaskan gold lode claims. For the next few years the Company plans to focus its acquisition strategy only on companies that are synergetic with its three core operating divisions, ECS, Pego, and EmKay.
Operating Divisions - Hartcourt Wholly Owned Subsidiaries
Pego Systems, Inc., Acquired October, 1997
Pego systems, incorporated in 1970, has been operating for over 27 years and is the largest distributor and manufacturer of Environmental and Filtration Control Equipment & Systems in the Southwestern U.S. Pego is the exclusive distributor in California, Arizona, Nevada, and the Pacific Northwest for one of the world's largest commercial blower and pump manufacturers, Gardener Dickinson (NYSE: BDX). The Company's revenues are derived from three areas of operations: Manufacturing and distribution of environmental and filtration control equipment; custom designed air and gas processing systems, and equipment service for existing clients. Pego's systems are used in many industries including pharmaceuticals, high technology manufacturing, food conveyance, petrochemical refineries, municipal wastewater treatment, and many more. Several Fortune 500 companies are existing Pego clients including Proctor & Gamble (NYSE: , Coca-Cola, Arco, Bechtel as well as the U.S. Air Force and several municipalities. Pego's operations are based in Long Beach, California, with facilities in Rancho Cucamonga, California, and Northern California. Pego's top executive and operations management, Mike Caruana and Rich Griener, have agreed to continue to manage Pego in conjunction with Hartcourt's executive management. Pego generated $6.6 million in revenue in 1997 with a net after-tax profit of over $400,000 (6.6%). With recent acquisitions and restructuring at Pego, Hartcourt expects to nearly double these margins within 12-months.
Acquisitions 1998
Early in the third quarter of 1998, Hartcourt began acquiring Pacific Pneumatic (Rancho Cucamonga, CA), a small competitor of Pego's and is merging it into the Company when it closes in Q3/98. Pacific Pneumatic had sales of nearly $2 million in 1997 and will add substantially to both revenue and earnings for Hartcourt in 1998. Pego Systems management believes that the acquisition will add approximately $3 million in revenue in 1998, while the synergies of the merger will increase operating margins to almost 12% initially, further increasing to as much as 15% in the next 2-years. Pego Systems was acquired as a purchase (cash), and the last $250,000 payment (on Preferred convertible to cash stock) will be made in Q3/98.
Hartcourt/Pego is near signing a letter of intent with HBS Equipment, a large privately owned competitor of Pego Systems, and will likely complete the acquisition by the end of September 1998. HBS Equipment had sales of $20 million in 1997 and produced a net profit of approximately $4 million. This acquisition is extremely synergetic for Pego, adding sales to existing clients through the expansion of its core product line. HBS Equipment provides systems used in clean room manufacturing and plating equipment for high-technology industrial applications including hard disk drive and CD-ROM manufacturers. The deal will be a stock swap merger, with Hartcourt providing additional working capital to fund the rapidly expanding merged companies.
Products and Markets / Pego's product lines include:
1. Petrochemical Clean-Up Equipment: For use by refineries and plastics manufacturers. These industrial applications utilize Pego's steam turbine, blower, and PIG launcher systems. The Company's clients include Arco, Mobil, Bechtel, and OEMs that sell to Dow Chemicals.
2. Industrial Waste Filtration Systems: Used primarily by municipalities for sewage and land fill applications. Pego has several large and medium municipalities which use its gas compression systems which pressurize waste water lines, vacuuming dangerous gases then filtering them, and pumping them into engines to be burned as fuel. Pego's systems are also used by Waste Management (NYSE: WMX), at some of its facilities in Asia.
3. Pharmaceutical, Food, Chemical, and Plastics Conveyance Systems: Move material through piping systems and clean products such as pills, canned foods, and other products with an "Air-Knife System". The Company provides these systems to Proctor & Gamble, Coca-Cola and many other large national companies.
4. High-Technology Air Knife System, which is, used by circuit board and other high-tech products manufacturers.
5. Cement Manufacturing and Pumping Equipment: Gas compression systems, which clean the conveyance systems for product delivery.
Market Positioning
Hartcourt, through its subsidiary Pego Systems, has executed a vertical industry consolidation strategy, which will expand its product lines, selling more products to its existing customer base as well as expand its territory. The Company is in the process of expanding its sales force by almost 50% over the next 12 -to- 18 months, opening sales offices in 4 major cities. The market for industrial environmental and filtration control equipment is between $400 and $500 million annually, growing at an annual rate of over 5%. With its planned acquisition of HBS Equipment, Pego Systems will be able to capture nearly 10% of the market almost immediately. The Company's goal is to increase its world-wide share of the market to 15%, or $60 million in sales annually over the next 3 -to- 5 years, an annual revenue growth rate of approximately 45%, while operating margins are expected to increase to 15% due to the synergies of its recent merger and the planned HBS acquisition combination synergies.
Electronic Components and Systems, Inc. / Pruzin Tech. (Acquired Oct. 1997)
ECS, based in Tucson, Arizona, is a leading High-Technology Contract Manufacturer. The Company specializes in the manufacturing and assembly of printed circuit boards, telephone cable wires, coil winding and plastic injection. ECS is also the largest manufacturer of cable reception and channel switching boxes due to its contract with General Instrument (NYSE: GIC). Some of the Company's largest clients include Motorola (NYSE: MOT), Intel (NASDAQ: INTC) and AT&T (NYSE: T). ECS operates facilities in Tucson, Chandler, and Nogales Arizona, as well as a large facility in the Maquiladora free trade zone in Sonora, Mexico. The Company employs approximately 50 people in the U.S., and 750 in Mexico. ECS has grown from a small Company in 1988 with only $300,000 in revenue to a rapidly growing, leading technology firm with over $14 million in sales in 1997.
The Company pioneered the technology of ball-grid array connection for integrated circuits, a leading manufacturing technology, which dramatically improves the efficiency of printed circuit boards. Micron Technologies (NASDAQ: MU) is working very closely with the Company for the application of this technology on its existing and future products. All of the Company's principals will remain with ECS, including Jim Pruzin as President, and Don Gentry as Vice President of Operations.
Acquisitions 1998
In the third quarter of 1998, Hartcourt/ECS should close two acquired contract circuit board manufacturers, ELAN and FM Technologies, merging them into ECS. Both companies had sales of $1.8 million in 1997, for a total of $3.6 million, with net after-tax profit of approximately 3%. Hartcourt management believes that each of these two acquisitions should be producing approximately $10 million in sales annually with a net after tax profit of over 5%. Currently, both ELAN and FM are providing "Labor Only / Assembly" contract services for their clients. Under ECS management, both companies will integrate full circuit board manufacturing capabilities with all of ECS's technology to its existing "Labor Only / Assembly" contracts. This will increase revenue to almost $10 million per company immediately, while Net Profit margins will increase to approximately 5% for all of ECS due to the synergies of the acquisitions. All acquisitions were done mostly with HRCT common stock ($500,000 cash paid to ECS in addition to common and non-liquidating convertible preferred Hartcourt stock).
Hartcourt is near signing a letter of intent with Silicon Valley Printed Circuits, Inc., (SVPC, Inc.), a San Jose based high-technology contract manufacturer with sales of approximately $18 million and an after-tax profit margin of about 4%. The acquisition of SVPC is a key strategic move by Hartcourt to enter the Silicon Valley area as a powerful high-technology contract manufacturer. Combining SVPC's technology and its customer base with ECS will allow the Company to expand vertically in its core markets, as well as grow sales into new areas currently supplied by SVPC. Contract manufacturing is a very "click-ish" industry, where contacts with buyers and other manufacturers is the only way to obtain new business. The SVPC acquisition gives Hartcourt's subsidiary, ECS an automatic intro into the vast high-tech manufacturing market of the Silicon Valley. This acquisition will also open the door for Hartcourt to further its acquisition campaign in the Silicon Valley, consolidating the many small, fragmented, privately owned high-tech manufacturers in Northern California's high-tech breeding ground.
Products and Markets
Printed Circuit Boards: One of the largest segments of ECS's sales (over 50%) is the assembly of printed circuit boards. The Company produces a variety of boards, both complex and simple, built on its automated Surface Mount and manual Through Hole equipment, allowing for custom applications and hybrid combination requirements. Most high volume manual requirement boards are produced in the Mexico facility, while the Arizona facilities produce most of the high volume automated surface mount boards. The Tucson facility also does a large amount of research and development for its customers, with prototype runs and small production lots. ECS also offers Circuit Board Testing for its customers.
Telephone Cord: ECS has the capacity to produce a wide variety of telephone cords and at one time was AT&T's sole supplier for all of North America for AT&T Telephone Cord products. ECS is still a large supplier to AT&T (NYSE: T)through its contract with Cable Systems International (CSI), the successor company to AT&T's phone cord supplier division. ECS produces phone cord for business phone systems as well as consumer phone cord. The Company ships cord directly to its customers from its 25,000 square foot warehouse in Nogales, Arizona via a direct link to its sales office in Phoenix, Arizona.
Cable Harnesses: These cables are a complex version of simple telephone cord. Complex cable harnesses are used by commercial enterprises and military customers for use in high-tech electronic devices and allow multiple devices to communicate with each other. These cable systems use a variety of cables including coaxial, semi-rigid, and standard hook-up wire. ECS harness customers include Raytheon (NYSE: RTN (a&b)), Motorola (NYSE: MOT), 3-COM (NASDAQ: COMS), General Instruments (NYSE: GIC).
Computer Peripheral Devices: Recently, ECS has become more active in the area of complete computer peripheral devices. This involves building a complete peripheral unit, including packaging and shipping. This segment of the business has been expanding gradually. One of the Company's current customers, Kid Board, uses ECS to completely build its computer peripheral which allows children to use a PC for drawing and other artistic tasks. This is a product ECS also ships directly to the final customer from its Nogales, Arizona warehouse facility. The Computer Peripheral Device business appears to be a major trend in the contract manufacturing business, and with this division of ECS, the Company is poised to dramatically increase its market share of this business opportunity.
Market Positioning
Hartcourt, through its subsidiary ECS, Inc., has executed a vertical industry consolidation strategy, which will expand its product lines, selling more products to its existing customer base as well as expanding its territory. The Company is in the process of pursuing additional acquisitions in the high-tech manufacturing industry, in other regions of the U.S., which will dramatically improve the Company's ability to expand its customer base and product line. Due to the regional nature of the circuit board manufacturing business, the SVPC acquisition in San Jose is a key element of the Company's growth through acquisition strategy. In circuit board and other high-tech contract manufacturing industry segments reliability is the most valuable commodity for the client, not always price even though ECS and SVPC are both highly price competitive. By allowing ECS to attain a foothold with a well known client-base in the Silicon Valley, the SVPC acquisition will open the door for many more acquisitions in the densest high-tech manufacturing region in the U.S.
The market for high-technology contract manufacturing is a multi-billion dollar industry, growing at the high annual rate of over 10% due to the proliferation of integrated circuit components and equipment used in commercial and consumer applications. With Hartcourt's planned acquisition of SVPC, ECS will be able to capture an increasingly large portion of the Western U.S. high-tech contract manufacturing almost immediately. The Company's goal is to increase its presence in all high-tech centers, including Seattle, Boston, and many others, over the next 3 -to- 5 years. With the SVPC acquisition, ECS should be able to grow its revenue at an annual rate of approximately 15% excluding any new acquisitions, while increasing after-tax margins to above 5%, one of highest in the industry. Margins are increasing due to the consolidation of administrative, sales and marketing, and research and development at the Company.
EmKay, Aircraft Leasing
Hartcourt is scheduled to sign an agreement during Q3/98 to acquire EmKay, formerly the world's 3rd largest Aircraft Leasing Company. EmKay currently leases primarily aircraft engines, but has in the past owned and leased many large commercial jet aircraft. Hartcourt's CEO, Alan Phan, was an employee of EmKay's from 1981 until the early 1990s, serving as an executive officer of the corporation. EmKay's revenue in 1997 was $33 million, with a net after-tax profit of $1.6 million. Currently, the Company is on-track to produce revenue of approximately $40 million in 1998. Em Kay has net assets of approximately $10 million, mostly in the form of commercial jet aircraft engines which are leased to major airlines around the world.
The aircraft leasing industry is relatively new, beginning in the late 60's and early 70's. Companies such as Guinness Peat Aviation (GPA), and GE Capital (formerly Polaris) developed the industry to a $12 -to- $15 billion dollar industry. Em Kay had leasing revenue of over $600 million in the mid-1980's. Aircraft leasing companies purchase mostly used aircraft and components (engines) that are 10 -to- 15 years old having achieved a stable depreciable value, and lease them to major airlines across the globe. The asset is moveable so if the market is bad in Asia, the planes can be moved to Europe or the U.S. and leased there. In addition, maintenance is government mandated and regulated, so the asset generally has a very long life, with low depreciation due to the age of the original asset. During the period from 1985 to 1990, an aircraft glut dramatically reshaped the industry, and EmKay scaled back its operations. The current owner of EmKay semi-retired during this period, allowing sales to decrease to current levels by the early 1990's, where they have remained. Hartcourt management believes that EmKay can produce as much as $400 million in revenue annually within the next 2 years (by year-end 1999 or mid-year 2000), with an after tax profit of between 1.5% -to- 3%. Em Kay is being purchased for $10 million, mostly stock.
Valuation
Financial overview: Hartcourt has evolved from a struggling holding company with interests in Asia and only $74,000 in revenue in 1994 to a solid growth company with actual 1997 proforma (including all 1997 acquisitions from January 1, 1997) revenue of $20.8 million, and projected 1998 revenue of approximately $26 million (excluding the EmKay and other planned acquisitions), net profit of about $1.2 million, and 1998E projected EPS of about $0.08. The Company has changed its focus and redirected its growth through vertical acquisition and consolidation strategy to focus on undervalued companies in high-growth and high technology industries. The Company successfully acquired Pego Systems, Inc., and ECS, Inc., in 1997, and will close three new acquisitions to merge into Pego and ECS during Q3/98. These three acquisitions alone add almost $10 million to in revenue to the Company for 1998E. In addition, through 3-more synergetic acquisitions planned to be complete by September, 1998, (letters of intent already signed), Hartcourt will add at least another $60 million in revenue this year. Through its synergetic acquisitions and subsequent mergers, Hartcourt has been able to improve operating margins at each one of its subsidiaries, increasing from 5.7% at Pego in 1997 to over 10% in 1998E, and increasing from 3.7% at ECS to over 5% in 1998E.
Hartcourt's balance sheet is strong with approximately $38 million in net assets as of 12-31-97. The Company has a current book value of $2.18, and has virtually no debt (debt to equity ratio of 1.7%). The Company also has approximately $8 million in working capital, and a stable source of cash to fund operations. In addition, the Company's operating subsidiaries are all cash-flow positive.
NMS Listing: Hartcourt is in the process of filing all necessary documents to begin trading on the NASDAQ NMS system. This will bring the Company off the Bulleting Board. This is a major step for small companies such as Hartcourt to make. It allows them greater access to capital and broad exposure to Institutional Investors and Fund Managers, which are generally restricted from purchasing bulleting board companies. We expect the Company to begin trading on the NMS early in Q4/1998.
Forward Valuation: Based upon Hartcourt's high growth profile, successful acquisition and consolidation campaign to-date, acquisitions in hand for the remainder of 1998, the high quality products it produces through its subsidiaries, and the technology element of its core business units, we believe the Company is more fairly valued at between 20X -to- 25X 1999E earnings or between $4.20 and $5.25 (this does not include acquisitions that have not closed ie. EmKay, HBS and SVPC). When compared to other high-growth holding and investment companies with multi-industry operating subsidiaries, Hartcourt is significantly undervalued. High-growth holding companies such as RJR/Nabisco (NYSE: RN, trading at 65X trailing 1997 earnings P/E), and Coca-Cola (NYSE: KO, trading at 55X trailing 1997 earnings P/E) which have similar business units, trade in excess of 70X their forward earnings.
EmKay addition: The above valuation does not include the Em Kay acquisition. With projected revenue of $40 million in 1998, and earnings of approximately $2 million, the EmKay acquisition should be valued at 2X its 1998E revenue due to its extremely high growth profile, and will add $3.20 to Hartcourt's common stock valuation.
Other Acquisitions: The above valuation does not include the HBS or SVPC acquisitions. With projected revenue of $20 million and earnings of $1million for SVPC and projected 1998E revenue of $20 million and earnings of $4 million for HBS, the acquisitions should be valued at about 30X earnings and will add $6.00 to Hartcourt's common stock valuation.
Total Hartcourt Valuation: With all expected 1998 acquisitions, aggressive future acquisition strategy, rapidly expanding revenue base, and a strong balance sheet we believe Hartcourt's common stock would be more fairly valued at $13.70 ($4.5 current + $3.20 EmKay + $6.00 1998E ACQs), or about 3X its total expected revenue for 1998E including all acquisitions.
Hartcourt Valuation Table
Company Public
Valuation
Base Hartcourt Companies $4.20
Added Value with EmKay acquisition $3.20
Added Value with SVPC & HBS acquisition $6.00
Total Hartcourt Valuation*
$13.40
*Valuation based upon projected 1998E results for EmKay, SVPC, and HBS, and assumes the completion of the aforementioned acquisition candidates (all have letters of intent signed).
Hartcourt Companies, Inc., currently trades on the NASDAQ OTC Bulletin Board under the symbol HRCT. The Company will begin trading on the NMS (full NASDAQ Listing) by August, 1998. The Company is currently trading at a significant discount to its fundamental underlying valuation as compared to other high growth companies due to a lack of following among NASDAQ broker-dealers.
Year Ended December, 1997 Valuation: Based solely upon actually reported results of operations (proforma) for 1997, Hartcourt is trading at a substantial discount to its actual value. We believe the Company would be fairly valued at 6X 1997 proforma revenue, or $5.00 per share. And this is historical valuation. Growth companies in today's market all trade on forward valuations, and Hartcourt is a rapidly growing company with revenue growing in excess of 50% per year and expected to remain at these levels for the next several years.
|
