April 15, 2002
HARTCOURT COMPANIES INC (HRCT.OB)
Annual Report (SEC form 10KSB)
Item 6. Management's Discussion and Analysis or Plan of Operation
The following is a summary of certain information contained in this Report and is qualified in its entirety by the detailed information and financial statements that appear elsewhere herein. Except for the historical information contained herein, the matters set forth in this Report include forward-looking statements within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially. These risks and uncertainties are detailed throughout the Report and will be further discussed from time to time in Hartcourt's periodic reports filed with the Commission. The forward-looking statements included in the Report speak only as of the date hereof.
Plan of Operation
The Hartcourt Companies, Inc. is a holding and development enterprise that is building a broad network of Internet, media, and telecommunication companies in Greater China. In partnership with leading Chinese entrepreneurs and government-sponsored entities, Hartcourt is developing and investing in emerging technologies while building an integrated commercial framework for its subsidiaries and their partners. Hartcourt's operative business strategy is designed to establish market-leading position and facilitate a series of venture divestitures via IPO or public mergers in its five main business divisions to fully realize the value of these assets for its investors. The five business
divisions are Sinobull Financial Group, Media Services Group,
Broadband/Telecommunications Group, E-learning Group and Hartcourt Capital.
Hartcourt, through a combination of expertly managed internal expansion and accretive strategic acquisitions, is executing plans to provide a sustainable, growing, diversified and profitable revenue base throughout its operations. The company is aggressively identifying and pursuing the best business opportunities available. Through a continued refinement of operational efficiencies, and increasing revenue margins, the Company is providing a clear path to profitability for its current and future businesses."
Results of Operations
Comparison of the fiscal years ended December 31, 2001 and December 31, 2000.
During 2001, Hartcourt continued its previously implemented plan to acquire profitable companies that were in established industries with a history of growth. Since mid-1999, Hartcourt has been focusing on assembling a collection of companies and services that will provide citizens of China with next generation communication services, including China-focused Internet access and financial portals, online share trading services, data broadcasting, and financial services. The Company signed underwriting agreements for the initial public offerings of shares of its two most developed investments, both of which were planned in the year 2001. On January 4, 2002, pursuant to an Agreement of Merger and Plan of Reorganization, Hartcourt's subsidiary ElephantTalk merged with Staruni Corporation, a California corporation, organized under the laws of California and listed on the over the counter on bulletin board of NASDAQ exchange. After the conclusion of the merger Hartcourt retained a majority ownership in ETCI. Hartcourt's division Sinobull Group intends to complete its merger with Global Telephone Communications, Inc. ("GTCI") in May 2002 pending approval from SEC. Hartcourt plans to eventually build all of its current operations into stand-alone entities that will also be taken public on US and/or Asian Financial markets.
To stay focused and achieve its mission to become a leading Internet company in Asia and China, Hartcourt continued to build a network of Internet companies in partnership with young Chinese enterprenuers as well as government owned entities. On May 16, 2001, Hartcourt acquired 51% ownership interest in Elephant Talk. On July 16, 2001 Hartcourt entered into a rescission agreement with UAC Trading and sold its 51% ownership interest in UAC Exchange for its original investment of $2,858,286. On August 9, 2001, Hartcourt acquired an additional 35% ownership interest in StreamingAsia Ltd. and its subsidiaries increasing its ownership interest to 85%.
The operations of Hartcourt for 2001 primarily consisted of operations of FTL (58.53% ownership interest), StreamingAsia (85% ownership interest), ElephantTalk (51% ownership interest), Sinobull (wholly-owned subsidiary), HCTV (66.7% ownership interest), AI-Asia (wholly-owned subsidiary) and Hartcourt Capital, Inc. (wholly-owned subsidairy) and its investments and advances to entities in China, Hong Kong and US. The operations of Hartcourt 2000 consisted of operations of FTL (58.53% ownership interest), StreamingAsia (50% equity investment interest), UAC Exchange (51% ownership interest) and its investment and advances to Sinobull for acquisitions in China and Hong Kong.
Net sales and cost of sales. Net sales in 2001 amounted to $10,621,205 compared to $1,391,666, consisting of sales from providing telecommunications services, sale of prepaid telephone cards, sale of financial pagers and the related Internet and telephone services. Cost of sales amounted to $7,757,779 in year 2001 compared to $1,409,364 during 2000. Cost of sales for 2001 included cost of capacity associated with the sales recognized from providing telecommunications services, costs associated with in acquiring data-feed from Honk Kong Stock Exchange and various commodities exchanges in China via TV channels and satellite transmissions, equipment rental in providing event real-time Internet broadcasting and on-demand multimedia content delivery and total web solutions. Cost of sales for the year 2000 included a write down of $150,771 of inventory relating to the financial pagers that became obsolete as FTL switched their wireless network to a new platform during 2000.
Selling, general and administrative expenses. Selling, general and administrative expenses amounted to $7,379,192 for 2001 compared to $2,985,433 for 2000. The increase is primarily due to increase in legal, professional and consulting fees amounting to $2,267,014 due to the acquisition of various entities and public offering costs, increase in compensation expense amounting to $2,072,767 due to the increase in the number of employees as a result of acquisitions, and providing for the doubtful accounts of $898,059.
Impairments. Impairments in year 2001 amounted to $1,785,262 compared to $3,065,600 in the year 2000. Impairments in 2001 resulted primarily due to Company taking conservative position and writing down the intangible software costs and goodwill of $934,884 in FTL, $742,207 in Sinobull Network; and $109,171 in StreamingAsia due to consistent operating losses in these entities and general market conditions. Impairments in 2000 resulted due to the write down of the marketable securities of $2,500,000 as a result of exchanging GoCall preferred shares, and writing down of investments by $480,871 and $565,600 in UAC Exchange and FTL.
Loss from discontinued operations. Hartcourt discontinued the operations of UAC Exchange during 2001 and incurred $377,952 in losses from discontinued operations. Hartcourt did not discontinue any operations in 2000 and therefore, no losses were incurred.
Gain on disposal of discontinued operations. Hartcourt disposed of the operations of UAC Exchange during the year and recognized a gain of $1,060,371. No operations were disposed off in the year 2000.
Gain on extinguishment of debt: During 2001, the Chairman of the Company donated 5,000,000 shares of Hartcourt to the Company. Hartcourt settled a loan payable
of $1,862,630 in exchange of 5,000,000 shares of common stock of Hartcourt. The accompanying financial statements at December 31, 2001 reflect the donation of 5,000,000 shares recorded as treasury shares and satisfaction of loan of $1,862,630.
Liquidity and Capital Resources
Hartcourt's principal capital requirements during 2001 were to fund the acquisitions of growth oriented Internet related operating companies in China and Asia. Hartcourt raised substantial funds necessary to carry out its plans of acquisitions by selling its own common shares to selected investors and bringing in business partners whose contributions included the necessary cash.
As shown in the accompanying financial statements, Hartcourt incurred net losses of $5,329,408 and 6,790,879 for the years ended December 31, 2001 and 2000, respectively. In addition, Hartcourt's working capital deficit of $3,889,779 is not adequate to meet its minimum monthly expenses. These factors, as well as negative cash flows from current operations of $984,224, Hartcourt's inability to meet debt obligations, and the need to raise additional funds to accomplish its objectives, create substantial doubt about Hartcourt's ability to continue as a going concern.
Hartcourt has taken certain restructuring steps in 2001, which in management's opinion will provide the necessary capital to continue its operations for the next five years. These steps included: 1) the settlement of certain matters of litigation and disputes; 2) signed a Investment Agreement with Swartz Private Equity, LLC, who agreed to purchase from time to time, up to $35,000,000 Hartcourt shares of common stock. The Investment Agreement with Swartz is still subject to the approval of SEC, 3) raised $9,858,277 in cash through issuance of its common shares since the beginning of the year 2000 through December 31, 2001.
Operating activities. Net cash used in current operating activities decreased to $984,224 during the year 2001 compared to net cash used in operating activities of $2,513,094 during the year 2000. This is primarily due to the fact that in 2001, Hartcourt recorded a gain of $1,862,630 due to extinguishment of a loan payable, providing for $1,478,313 in depreciation and amortization of intangible software casts, write down of note receivable of $329,171, impairments due to write down of goodwill and intangible software costs amounting to $1,785,262, increase in accounts receivable of 143,278, decrease in inventory and prepaid expenses amounting to $136,575 and $543,846, respectively, and increase in accounts payable and accrued expenses of $1,811,444. During 2000, Hartcourt recorded impairments due to write down of the marketable securities of $2,500,000 as a result of exchanging GoCall preferred shares, writing down the investments in UAC and FTL by $480,871 and $565,600, respectively, providing for doubtful accounts of $767,586, write down of the wireless network assets amounting to $193,905 as FTL switched its wireless network structure to a new platform during 2000. Net cash used in discontinuing operations amounted to $478,327 during 2001 compared to zero in 2000.
Investing activities. Net cash used in investing activities amounted to $338,950 during 2001 compared to $4,589,125 during 2000. This is mainly due to the payment of $823,585 in notes receivable, purchase of property and equipment of $51,721, offset by cash of $690,202 acquired in acquisitions of ElephantTalk,
Sinobull Group and StreamingAsia. Net Cash used in investing activities in 2000 was due to investment in eMPACT of $300,000, purchases of property and equipment of $347,051, and advances to Sinobull for $2,819,884 for acquisitions during 2000.
Financing activities. Net cash provided by financing activities amounted to $1,984,912 in 2001 compared to net cash provided by financing activities of $7,174,155 during 2000. Hartcourt raised $1,988,501 from issuance of common stock during 2001, made payments on loans due to related parties amounting to $865,048, made payments of shareholders loans of $999,436, and proceeds of long tern debt of $1,619,807. During 2000, Hartcourt raised $7,869,776 from issuance of common shares that was partially offset by $81,094 $695,621 in payments to related parties and $614,527 payments on long term debt.. The main financing sources of Hartcourt are the line of credit from the bank, issuance of long term debt, proceeds from issuance of its common stock, and proceeds on exercise of its options and warrants.
The ability of Hartcourt to continue as a going concern is dependent on its success in fulfilling its plan.