Vtech 2001 Annual Report Download

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Rebuilding
Value
annual report 2001

Table of contents

  • Page 1
    Rebuilding Value a n n u a l r e p o r t 2 0 0 1

  • Page 2
    ...21 26 31 32 33 34 35 36 41 66 68 Corporate Profile Financial Highlights Letter to Shareholders Review of Operations Year in Review Group Structure Directors and Senior Management Report of the Directors Report of the Auditors Consolidated Income Statement Consolidated Balance Sheet Consolidated Cash...

  • Page 3
    ... AT&T brand on wired telephone products. Founded in Hong Kong in 1976, VTech is today a global company with annual sales over US$1 billion. The Group's high frequency cordless phones enjoy dominant market share in the US while the VTech brand electronic learning products represent a prominent label...

  • Page 4
    Financial Highlights All figures are in US$ million except those stated otherwise 2 Year to 31st March 2001 2000 Turnover Percentage... Employees (number of persons) Manufacturing Non-manufacturing Total employees at end of year Average for the year *Excluding the effect of the Wired Business ...

  • Page 5
    ... Consumer Telephone Products 291.2 (21.8%) Electronic Learning Products Contract Manufacturing Services & 823.8 (61.7%) 11.7 (0.9%) FY2001: US$1,334.9M Multimedia Communications Products 208.2 (15.6%) Other Businesses 181.6 (13.6%) 51.0 (3.8%) 55.1 (4.1%) Turnover by Region (US$'M) USA Europe...

  • Page 6
    Letter to Shareholders The VTech Management Team Allan WONG C.W. TO Jack HIRSCH 4 Paddy LAW Barry ARMSTRONG Albert LEE William HO Highlights Turnover increased 27.6% to US$1,334.9 million. Net loss of US$215.0 million Broad restructuring to cut costs, improve efficiency Major management ...

  • Page 7
    ..., we have been aggressively growing our businesses and we successfully built VTech into a company with over US$1 billion in annual sales in the financial year 2000 while this growth was achieved through investing in new businesses and focusing on growing market share. At times, this was done at the...

  • Page 8
    ... inventories. The Mexican manufacturing and repair operations were closed and production was relocated to our more cost-effective facilities in mainland China. The majority of the US consumer telephone business operations were consolidated into Beaverton, Oregon from New Jersey in an effort to...

  • Page 9
    ..., our major market, it would be inappropriate to be over-optimistic for the financial year 2002. We expect the US market to remain soft for the remainder of the year, especially for our ELPs, since a number Allan WONG Chi Yun Chairman Hong Kong, 27th June 2001 VTech Holdings Ltd Annual Report 2001

  • Page 10
    ... annually. We will also increase our emphasis on higher margin products. The wide-reaching changes will be completed by the end of the calendar year 2001. of VTech's Businesses VTech Consumer Telephone Products Electronic Learning Products Contract Manufacturing Services Other Businesses

  • Page 11
    ... efficiencies and the New Jersey and UK centres have been closed. Factories in Mexico, which were acquired from Lucent in 2000 in connection with the consumer telephone business, have been closed down and premises are being sold. The electronic learning products (ELP) operations in Europe are being...

  • Page 12
    Review of Operations 10 The focus of the consumer telephone business is now firmly on higher margin products such as advanced technology 2.4GHz cordless phones and more feature-rich 900MHz cordless phones, which are expected to boost earnings. Consumer Telephone Products

  • Page 13
    ... and are divesting the factories in Mexico, moving production and repair to mainland China. Simultaneously, VTech has integrated the information appliances business into the consumer telephone business unit to leverage joint technology, marketing and sales channels. This new business area is in...

  • Page 14
    Review of Operations 12 We are now revitalizing the business through a series of far-reaching initiatives that are cutting costs, improving the product range and bringing greater focus to marketing. Electronic Learning Products

  • Page 15
    ... million. The VTech has streamlined the ELP operations in Hong Kong and Dongguan, China. New "cell production" and "cell engineering" concepts have been introduced to improve efficiency, by breaking down production teams into small self-contained "project cells". Under this system, the job scope of...

  • Page 16
    Review of Operations 14 Our contract manufacturing services continue to show steady growth, on the back of VTech's reputation and know-how in manufacturing telecommunication products. Contract Manufactu Services

  • Page 17
    ...ur contract manufacturing services continue to show steady growth, on the back of VTech's reputation and know-how Production costs of the multimedia communication products increased due to initial set up costs at our Mexico facility. We hired consultants to study the validity of the business model...

  • Page 18
    ... e-commerce software market in China, in particular providing "one-stop" e-commerce solution for business in mainland China. The cost of these investments expensed in the year was US$0.7 million. Corporate Affairs Liquidity and Financial Resources Net cash outflow from operating activities during...

  • Page 19
    ... seminars and workshops, as well as joint post-graduate and diploma courses offered in conjunction with reputable mainland Chinese universities. Customers One of VTech's strengths is our enduring customer relationships. As a consumer-focused technology company, introducing the right product for the...

  • Page 20
    ... our IQ Builders brand in Spain. July 2000 "Dr. Toy's 100 Best Children's Products of 2000", named our Non-Stop Girl TM "Dr. Toy's Best Vacation Toy". Our ImpactTM was given the "Silver Award" in the UK's Good Toy Awards 2000. August 2000 Successfully launched our DECT cordless phone in the UK...

  • Page 21
    ... Our Non-Stop GirlTM, Little Smart DJ Jazz'n JamTM and Muttzart's Symphony SoundsTM were given the prestigious "Children's Choice Award" by the Canadian Toy Testing Council. November 2000 Announced a partnership with South China University of Technology to establish SCVTech, an application services...

  • Page 22
    Group Structure 20 VTech Holdings Ltd Telecommunication and Electronic Products e-Business Related Services Consumer Telephone Products Electronic Learning Products Contract Manufacturing Services

  • Page 23
    ... (Hong Kong) Limited and the Hong Kong Productivity Centre. Mr. TO has 20 years of experience in Hong Kong's electronics industry. He holds Bachelor of Science and Master of Science degrees in electrical engineering from the University of Hong Kong. William HO Mook Lam, aged 54, Managing Director...

  • Page 24
    ... Manufacturing) business worldwide and the sales & marketing of VTech brand in Europe. Mr. TAM joined VTech in 1986. He holds a Bachelor degree in electronics engineering from the Chinese University of Hong Kong. Gary ROGALSKI, aged 38, Vice President of Engineering, VTech Engineering Canada Limited...

  • Page 25
    ... the Group. He holds a Bachelor of Commerce degree from the University of British Columbia, Canada. Thomas LI Shu Chi, aged 52, General Manager of Marketing of VTech Electronics Limited. Mr. LI is responsible for all activities relating to Sales and Marketing, Shipping and Customer Service. He has...

  • Page 26
    ... product development and engineering management in the consumer electronics and telecommunication industries. He holds a Bachelor of Science degree in electrical engineering and a Master degree in telecommunication systems. Chris ROSE, aged 36, Engineering Manager of VTech Engineering Canada Limited...

  • Page 27
    ...(Hons) degree in Sociology from the Hong Kong Baptist University and has a MBA degree from Strathclyde University. She is a member of Hong Kong Institute of Human Resources Management and executive committee member of Hong Kong Industrial Relations Association. VTech Holdings Ltd Annual Report 2001

  • Page 28
    ... of the Directors 26 The directors submit their report together with the audited financial statements for the year ended 31st March 2001. PRINCIPAL ACTIVITIES The principal activity of the Group is the design, manufacture and distribution of electronic consumer products. GROUP RESULTS The results...

  • Page 29
    ... in relation to the Company's business to which the Company or its subsidiaries was a party and in which a director of the Company had a material interest, whether directly or indirectly, subsisted at the end of the year or at any time during the year. VTech Holdings Ltd Annual Report 2001

  • Page 30
    ... the year ended 31st March 2001 which also constitute connected transactions for the Company under Chapter 14 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited and Chapter 11 of the Listing Rules of the Financial Services Authority in the United Kingdom...

  • Page 31
    ... covenants by LTCP and Lucent with respect to the consumer wired business. On 25th January 2001, the Company and VTech Electronics Netherlands BV (collectively ``VTech'') filed a complaint in the United States District Court for the Southern District of New York seeking damages in excess of US$300...

  • Page 32
    ... two independent non-executive directors of the Company. CODE OF BEST PRACTICE In the opinion of the directors, the Company has complied with the Code of Best Practice as set out in Appendix 14 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited throughout the...

  • Page 33
    ... International Accounting Standards and have been properly prepared in accordance with the Bermuda Companies Act and the disclosure requirements of the Hong Kong Companies Ordinance. PricewaterhouseCoopers Certified Public Accountants Hong Kong, 27th June 2001 VTech Holdings Ltd Annual Report 2001

  • Page 34
    ...2001 32 2001 Note US$ million 2000 US$ million Turnover Cost of sales Gross profit Selling and distribution costs Administrative and other operating expenses Research and development expenses Restructuring and impairment charges Operating... 20.9 The principal accounting policies on pages 36 to 40...

  • Page 35
    ... Ð 244.5 3.1 79.6 584.0 172.8 (32.2) 4.3 1.8 146.7 The principal accounting policies on pages 36 to 40 and the notes on pages 41 to 65 form an integral part of these consolidated financial statements. Allan WONG Chi Yun Director William HO Mook Lam Director VTech Holdings Ltd Annual Report 2001

  • Page 36
    ... 2001 34 2001 Note US$ million 2000 US$ million Operating activities Operating (loss)/profit Depreciation charges Amortization of goodwill Impairment of intangible assets Impairment of fixed assets Recognition of negative goodwill Loss on disposal of tangible assets Write down of discontinued...

  • Page 37
    ... (losses)/gains 21 21 21 21 Ð Ð Ð (3.9) (3.9) (215.0) (218.9) 1.6 (0.3) (0.2) (2.0) (0.9) 45.0 44.1 The principal accounting policies on pages 36 to 40 and the notes on pages 41 to 65 form an integral part of these consolidated financial statements. VTech Holdings Ltd Annual Report 2001

  • Page 38
    Principal Accounting Policies 36 A. BASIS OF PREPARATION The consolidated financial statements are prepared in accordance with International Accounting Standards (IAS) and under the historical cost convention, with certain tangible fixed assets included at revalued amounts. The Company is ...

  • Page 39
    ... years the directors review the carrying value of land and buildings and adjustment is made where there has been a material change. The valuations are on an open market value basis and are incorporated in the annual financial statements. Increases in valuation are credited to the revaluation...

  • Page 40
    ... out basis, comprises materials, direct labour and an appropriate proportion of all production overhead expenditure. Net realizable value is determined on the basis of anticipated sales proceeds in the ordinary course of business less estimates of costs to completion and selling expenses. M. N.

  • Page 41
    ... on all products of the Group still under warranty at the balance sheet date. This provision is calculated based on past experience of the level of repairs and returns. The Group provides for expenses related to closure of business locations and reorganizations of the Company's operations which are...

  • Page 42
    ...-term employee benefits, pension costs arising under the defined benefit scheme are assessed using the projected unit credit method. Under this method, the cost of providing pensions is charged to the income statement so as to spread the regular cost over the service lives of employees in accordance...

  • Page 43
    ...operations comprise two main business segments: telecommunication and electronic products and e-Business related services. Telecommunication and electronic products include the design, manufacture and distribution of telephones, electronic learning, information appliances , interactive set top boxes...

  • Page 44
    ... and other net non-cash expenses Other net non-cash Capital expenditure 2001 US$ million 2000 US$ million Depreciation 2001 US$ million 2000 US$ million expenses 2001 US$ million 2000 US$ million Telecommunication and electronic products e-Business related services Others 1.7 0.6 30.7 0.1 0.9 29...

  • Page 45
    ...and electronic consumer products. Europe Ð the operations are principally the distribution of electronic consumer products. Asia Pacific Ð the Group's headquarters are in Hong Kong and the Group's principal manufacturing operations are in the People's Republic of China. The USA and Mexico segments...

  • Page 46
    ... electronic learning products operations in Europe will be centralized under regional management. In addition, e-Business related services and other development stage businesses such as mobile phones will be downsized and re-organized. The information appliances and multimedia communication business...

  • Page 47
    ...whose emoluments were among the five highest earning employees of the Group. Details of the emoluments in aggregate for this executive are set out below. 2001 US$ million 2000 US$ million Salaries, allowances and benefits in kind Bonuses 0.4 0.2 0.6 Ð Ð Ð VTech Holdings Ltd Annual Report 2001

  • Page 48
    ... in which the Group operates and includes Hong Kong profits tax charge of US$ 0.9 million (2000 : US$3.3 million), United Kingdom corporation tax credit of US$ 0.1 million (2000 : tax charge of US$0.4 million) and a tax charge in the USA of US$ 1.0 million (2000 : tax credit of US$1.1 million). The...

  • Page 49
    ... The net book value of fixed assets held under finance lease as at 31st March 2001 is US$0.6 million (2000 : Nil). The net book value of tangible assets pledged as security for liabilities at 31st March 2001 amounted to US$7.0 million (2000 : US$12.3 million). VTech Holdings Ltd Annual Report 2001

  • Page 50
    ...At 1st April Charge for the year Acquisition of subsidiaries Transfer between categories Revaluation Disposal Transfers to assets held for sale (Note 14...March 2001 by Chung, Chan & Associates (Hong Kong), independent professional valuers, on an open market value basis. The directors have reviewed the...

  • Page 51
    ... forwards Other deductible temporary differences 1.6 1.0 2.7 5.3 Deferred tax liabilities Accelerated tax depreciation Asset revaluation (2.0) (0.4) (2.4) Net deferred tax assets 2.9 0.3 Ð 0.3 (0.2) (1.7) (0.4) (2.1) 2.7 (1.0) 0.7 (0.2) (0.5) 0.6 1.7 2.5 4.8 VTech Holdings Ltd Annual Report 2001

  • Page 52
    ...in the consolidated balance sheet: 2001 US$ million 2000 US$ million Deferred tax assets Deferred tax liabilities 4.0 (1.3) 2.7 4.3 (1.4) 2.9 Deferred tax assets are recognized for tax losses carried forward to the extent that realization of the related tax benefit through future taxable profits...

  • Page 53
    ...Work in progress Finished goods 40.7 6.4 140.4 187.5 77.0 16.0 163.8 256.8 Analysis by product category: Telecommunication and electronic products e-Business related services 187.5 Ð 187.5 255.4 1.4 256.8 At 31st March 2001... estimated recoverable amounts. VTech Holdings Ltd Annual Report 2001

  • Page 54
    ... are on letter of credit and on open credit with varying terms of 30 to 90 days. Certain open credit sales are covered by credit insurance or bank guarantees. 16. CREDITORS AND PROVISIONS 2001 Note US$ million 2000 US$ million Trade creditors Provisions for liabilities and charges Other creditors...

  • Page 55
    ... based on advice from Watson Wyatt Hong Kong Limited (``Watson Wyatt''), independent actuaries and consultants. The Scheme is valued annually. The latest actuarial valuation was completed by Watson Wyatt as at 31st March 2001 using the projected unit credit method. VTech Holdings Ltd Annual Report...

  • Page 56
    ... 9.0% 8.0% 19. PROVISIONS FOR LIABILITIES AND CHARGES Employee compensated Restructuring Warranties US$ million At 1st April 2000 Additional provision Unused amount reversed Charged to income statement Utilized during the year At 31st March 2001 23.1 36.6 Ð 36.6 (39.2) 20.5 Returns US$ million 14...

  • Page 57
    ... AND CHARGES (Continued) Warranties The Group gives one year warranties on certain products and undertakes to repair or replace items that fail to perform satisfactorily. A provision is recognized for expected warranty claims based on past experience of the level of repairs and returns. It...

  • Page 58
    ... use the AT&T brand for 10 years in connection with the manufacture and sale of wireless telephones and accessories in the United States and Canada, the Company granted AT&T warrants carrying rights to subscribe for 3,000,000 shares in the Company at a subscription price of HK$20.00 per share on or...

  • Page 59
    ...the Financial Statements 57 21. RESERVES Group 2001 Note US$ million 2000 US$ million Company 2001 US...123.4 123.5 (10.6) (26.5) Ð 209.8 Reserves of the Company available for distribution to shareholders amounted to US$35.3 million (2000 : US$209.8 million). VTech Holdings Ltd Annual Report 2001

  • Page 60
    ... of VTech Mobile Limited was effectively transferred to the Company. On the same date, the Company allotted and issued 5,578,292 of its shares in accordance with the sales and purchase agreement. The fair value of the shares issued, based on the closing price of the Company's shares on the Hong Kong...

  • Page 61
    ...-term deposits are at fixed interest rates and mature within three months. All of the Group's borrowings bear interest based on floating interest rates except for term loans amounting to US$7.0 million (2000 : US$3.6 million) which have fixed rates of interest. VTech Holdings Ltd Annual Report 2001

  • Page 62
    ... using the expected future payments discounted at market interest rates. Currency profile The currency profile of the Group's financial assets and liabilities, before taking account of hedging transactions, is summarized as follows: 2001 Financial assets US$ million Financial liabilities US$ million...

  • Page 63
    ... is expected to be operational in October 2001. Under a Brand License Agreement, VTech USA Holdings LLC (``VTech USA''), a wholly-owned subsidiary, is required to make royalty payments to AT&T Corp., calculated as a percentage of net sales of the relevant categories of products, subject to certain...

  • Page 64
    ... Consumer Products L.P. for fraud and breaches of the Agreement for Purchase and Sale of Stock and Assets in connection with the acquisition from Lucent of their consumer telephone operations (see note 3 above). 26. COMPANY BALANCE SHEET 2001 Note US$ million 2000 US$ million Non-current...

  • Page 65
    ... HK$3,300,000 *100 Provision of IT training courses and online education services and the sale of consumer electronic products VTech Electronics Limited HK$5,000,000 *100 Design, manufacture and distribution of electronic products VTech Communications Limited Ordinary HK$1,000 Deferred HK$5,000,000...

  • Page 66
    ... Class B PESO80,840,930 *100 Manufacture of telecommunication products VTech Communications Mexico S.A. de C.V. PESO25,490,000 *100 Manufacture and repair of telecommunication products Incorporated and operating in the U.S.: VTech Industries, LLC. US$22,212,997 *100 Sale of electronic products VTech...

  • Page 67
    ... Electronics (UK) Plc. GBP500,000 *100 Sale of electronic products Incorporated in the British Virgin Islands and operating in the People's Republic of China: Asian Luck Limited US$1 *100 Manufacture of electronic and telecommunication products * indirectly held by subsidiary companies 28. RELATED...

  • Page 68
    ... million 2000 US$ million 2001 US$ million Note Turnover Cost of sales Gross profit Selling and distribution costs Administrative and other operating expenses Research and development expenses Loss on disposal of subsidiaries Restructuring and impairment charges Operating profit/(loss) Net finance...

  • Page 69
    ...) Current liabilities have been adjusted to exclude the final dividend proposed in accordance with IAS 10 (revised 1999) by the following amounts: 10.5 21.2 26.5 Ð Ð VTech Holdings Ltd Annual Report 2001

  • Page 70
    ... Corporate Services Limited Rosebank Centre, 11 Bermudiana Road P.O. Box HM1540, Hamilton HM FX Bermuda UK branch registrars Capita IRG Plc Bourne House, 34 Beckenham Road Kent BR3 4TU, DX91750 Beckenham West, United Kingdom Hong Kong branch registrars Central Registration Hong Kong Limited Shops...

  • Page 71
    ... Tel : (31) 495 459110 Fax : (31) 495 459114 Germany VTech Electronics Europe GmbH Martinstrasse 5 70794 Filderstadt Tel : (49) 711 709 740 YELLOW CREATIVE CONSULTANT LIMITED / ROMAN FINANCIAL PRESS LIMITED USA VTech Industries, LLC 101 East Palatine Road Wheeling, IL 60090-6500 Tel : (1) 847...

  • Page 72
    57 Ting Kok Road, Tai Po, NT, Hong Kong Tel: (852) 2680 1000 Fax: (852) 2680 1300 http://www.vtech.com email: [email protected]