Hartcourt Forms Strategic Alliance With Shenzhen Capital Group, Exits Declining / Unattractive BusinessesSHANGHAI, CHINA -- (MARKET WIRE) -- 01/20/2005 --
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 growth-oriented segments of the Chinese IT industry. To this end, Hartcourt believes 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 setbacks, 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.
