SHAREHOLDER UPDATE FROM DR. PHAN
January 30, 2000
Dear Shareholders:
It has been a busy two weeks since our meeting in Long Beach. We have been trying to move things forward as quickly as possible as China will be on vacation for the next 2 weeks. It is their New Year - the Year of The Dragon. How appropriate, for Hartcourt is emerging as the Dragon of the Chinese Internet. It will be our year.
Now, let me update you on our progress:
1. Nasdaq NMS Listing: As promised, we filed on time. I am optimistic that Nasdaq will process the application quickly and we should be notified of the result in a week or two.
2. American Partner: The legal paperwork seems endless. I will be in New York next week to personally push it forward. I hope to have something to report to you in a few days.
3. The Ernst & Young Report on the Sinobull.com IPO: We should have the first draft next week and if all items are in order, the final version will be published on our Web site soon afterwards.
4. The IPO Underwriting Agreement: We are continuing our discussion with the bankers. Nothing will be signed until the E&Y report is officially issued.
5. Acquisition of Chinese Companies: We have 3 major deals outstanding, but nothing more can be done until Feb. 14th when the Chinese return to work. I will also be back in China then to sign the deals and to launch the Web site of Sinobull.com.
6. Innostar Joint Venture: We expect to get the license in February and we shall commence the works immediately thereafter.
7. US Technology Group: To bolster our technical strength, we have decided to invest in a few leading-edge technology companies here in the U.S. and will be their partner to market their products and services in China. ESAT is an example of how this process works. During the next 2 weeks, we should be able to close the deals on a Linux software company, an Internet phone company and a B2B (Business to Business) E-commerce company.
8. The CEO Position: We are narrowing down to 3 candidates and are negotiating their employment terms. The CEO could start as soon as March 1st. The CTO position would also be filled then.
9. Board of Directors: We are still discussing with a few national figures. Since they are very high profile and busy people, the timing is not in our control.
10. Financing: We just obtained a $3 Million equity line to pay for the Shangdi and Guo Mao acquisitions. Another $10 Million is in the works, together with the $35 Million from Swartz. It will be sufficient until the IPO of Sinobull.com.
11. Enova Lawsuit: As we disclosed in our 10SB registration of Enova, Enova/Pego is in dispute with Comerica Bank regarding a $900,000 credit line. Let me emphasize that Pego has not missed a single payment and has sufficient liquidity and assets to pay off the loan immediately. The lawsuit and the counter-lawsuit are in regard to the bad faith of the bank in overcharging and over-penalizing Pego. The lawsuit has no effect on the financial situation of either Pego or Hartcourt.
Since I am a positive person, many shareholders wonder if I am overly optimistic about Hartcourt's future. They want to know more about the risks to their investment. Actually, if you carefully read the SEC reports and the prospectus, you see that we have continuously warned you of all the standard risks associated with buying stock in any small company. However, let me analyze the 3 biggest concerns people have inquired about regarding investing in this sector:
a) What if the Stock Markets crash and the Internet Bubble bursts? Personally, I would not try to predict a major, major correction. People have been predicting them for some time and none has gotten it right. Every new economy trend enjoys a honeymoon cycle, and the supply-demand situation of Internet stocks is still in good ratio. However, in the worst case scenario, the odds are in favor of companies with good fundamentals. Hartcourt is one such company. By the end of 2001, we should have more revenue and earnings than most Internet companies.
b) What if the Chinese economy collapses or the Chinese government decides to nationalize foreign assets? This is the same question that I was asked when I went into China business 20 years ago. The risk is less and less every day as remarkable progress is made by ordinary Chinese. The government is stable because the living standard keeps rising and because it is in firm control of the Army (whether we like it or not, political power does grow out of the gun's barrel). The principal stimulant of the economy is foreign investment, to the tune of $35 Billion a year. It would certainly not be in the best interest of the current Chinese leadership to create havoc in the system by turning off or endangering this income stream.
c) What if the WTO is implemented and Hartcourt faces hundreds of world-class competitors? Unlike Russia, China opens its doors very slowly. I do not expect that WTO will be implemented until the end of 2001. Our foreign competitors will have to go through the learning curve of China business and - in my opinion - won't be ready to enter in a big way until late 2002. With a minimum two-year headstart, Hartcourt should be able to secure a strong foothold with its market position and be ready to wage battle with all takers. Besides, the potential market is so big that a 10 percent of the market share in any area would generate substantial profit for the company.
Overall, the progress is steady, the performance is solid and the harvest is near. There is still much hard work ahead and there will always be plenty of challenges, obstacles and insects along the way. But, we are extremely pleased with our achievements. With your strong support, we will arrive at our destination on time.
As de Buffon once said, "Hold on; hold fast, hold out. Patience is genius."
Sincerely,
Dr. Alan V. Phan
Chairman & CEO
Certain statements in this letter may constitute "forward-looking" statements within the meaning of Section 21E of the Securities Exchange Act of 1934. Such "forward-looking" statements involve risks, uncertainties and other factors, which may cause the actual results, performance or achievements expressed or implied by such "forward-looking" statements to differ materially.
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