Exits Declining /Unattractive Businesses JUST AS YOU THOUGHT THAT IT COULD NOT GET ANY WORSE, LIGHTNING STRIKES FAKE DOC PHANS
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FOR IMMEDIATE RELEASE
Source: The Hartcourt Companies, Inc.
Shanghai, January 20, 2005 at 6.30am EST
Press Release
Hartcourt Forms Strategic Alliance with Shenzhen Capital Group, Exits Declining /
Unattractive Businesses
Shanghai – January 20, 2005 -The Hartcourt Companies, Inc. (OTC BB: HRCT, Frankfurt:
900009) (“Hartcourt” or the “Company”), today announced that it has signed a memorandum of
understanding to enter into a strategic alliance with Shenzhen Capital Group Co, Ltd., one of the
largest investment holding companies in China. Shenzhen Capital has invested more than 3 billion
RMB in Chinese companies in the high growth segments of the Chinese high tech market. Hartcourt
management believes that the strategic alliance will be a win-win arrangement for the two companies.
Pursuant to the strategic alliance, Hartcourt hopes to accelerate its growth in China by gaining access
to Shenzhen Capital’s extensive investment network, which includes many investments in high growth
Chinese IT companies. Shenzhen Capital’s IT company holdings would in turn benefit from
Hartcourt’s access to US and German capital markets. In addition, both companies plan to work
closely together in the areas of investment financing, management and human resources development.
As part of its strategy to shift its operations to high profit, high growth segments of the Chinese IT
market, Hartcourt also intends to divest its operations in low value, low margin segments of the market.
In line with this strategy, Hartcourt’s Board of Directors has authorized the sale of its Do-It-Yourself
(DIY) business back to the original owners. China’s computer DIY market, in which retail stores
assemble desktop computers immediately upon customer request, experienced a significant downturn
in the fourth quarter of 2004. The price level for low-end branded desktop computers in China
declined to that of non-branded DIY desktops, taking a substantial share of the market away from
existing DIY business. Meanwhile, the pricing for notebook computers continued to erode
significantly, leading to notebook computers becoming an attractive alternative to desktop computers.
These factors have caused a rapid decline in market share of the entire DIY segment. Hartcourt’s DIY
business has recently suffered sales decline and substantial margin erosion in line with the rest of
industry. Hartcourt currently has a 50.5% equity interest in a leading DIY chain store in Shanghai, for
which it paid a substantial premium above the market value in 2003 in order to gain entry into the
business. A final agreement is expected to be reached in the first quarter of 2005. Hartcourt will
likely suffer a loss upon the sale of its ownership interest.
Hartcourt acquired a 51% equity interest in Challenger, a second tier distributor of IBM products at the
end of 2003. Most of the consideration paid by Hartcourt for this acquisition consisted of shares of
Hartcourt common stock. Due to a decline in its share price over the past year, Hartcourt has had to
issue an additional 22 million shares to the minority owners of Challenger in order to maintain its 51%
equity interest pursuant to the terms of the original purchase agreement. While Hartcourt’s IBM
distribution business had steady growth in revenue in 2004, the minority owner/manager of the
business has refused to upgrade Challenger’s accounting system and has declined to develop an end-
user customer base, which Hartcourt believes has rendered the business vulnerable to competition
from first tier and third tier distributors. In addition, Challenger has been negatively impacted by
IBM’s decision during 2004 to flatten its distribution channel in China. With the sale of IBM’s
worldwide PC business to Lenovo, and in view of the existing efficient and effective Lenovo
distribution network in China, Hartcourt believes that Challenger’s value in the supply chain could
rapidly diminish in the near term. Hartcourt’s Board of Directors has concluded that the business will
likely not be able to generate a favorable return on Hartcourt’s investment and has authorized the
disposition of the Company’s interest in Challenger. Negotiations are underway with the original
owners of the company to dissolve the current investment arrangement.
China’s IT sales are forecasted to reach US$32 billion in 2005 and are expected to continue to grow at
a compound annual rate of 15% through 2008, according to a report by IDC. Hartcourt believes that
its strategy of focusing on high profit, high growth IT businesses will allow it to benefit from this
exciting growth opportunity and help bring China’s future growth into the present. The key to the
Company’s success, however, will be in positioning itself to participate in profitable and growthoriented
segments of the Chinese IT industry. To this end, Hartcourt believe that it is imperative that
the Company make the transition now to a high profit and high growth-oriented portfolio of IT
businesses. While the Company may experience short term financial performance set backs, Hartcourt
believes that its strategy of focusing on higher margin segments of the Chinese IT market will lead to a
significant improvement on the return on investment for its shareholders.
About Hartcourt
Hartcourt’s achievements and operations can be found on its web site: www.hartcourt.com
Forward-looking statements
The statements made in this press release, which are not historical facts, contain certain forward-looking statements concerning potential
developments affecting the business, prospects, financial condition and other aspects of the company to which this release pertains. The
actual results of the specific items described in this release, and the company's operations generally, may differ materially from what is
projected in such forward-looking statements. Although such statements are based upon the best judgments of management of the
company as of the date of this release, significant deviations in magnitude, timing and other factors may result from business risks and
uncertainties including, without limitation, the company's dependence on third parties, general market and economic conditions,
technical factors, the availability of outside capital, receipt of revenues and other factors, many of which are beyond the control of the
company. The company disclaims any obligation to update information contained in any forward-looking statement.
Contact:
For Hartcourt:
Mr. Tony Xia, Tel: + 86 21 52138810 Fax: + 86 21 52138870 Email: ir@hartcourt.com
For Adam Friedman Associates:
Leslie Wolf-Creutzfeldt, Tel: 212 981-2529 X 11 Email: leslie@adam-friedman.com |
