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VTech Holdings Ltd Annual Report 2001
11
be robust demand for these products. There was
also an increase in sell-through costs, including
rebates and discounts.
We suffered substantial losses in connection with
the business acquired from Lucent. The adverse
changes in the condition of the business were not
fully disclosed to us and sales of the AT&T branded
phones acquired with the acquisition greatly under-
performed our original forecast. On 25th January
2001, VTech filed a complaint in the United States
District Court for the Southern District of New York
seeking damages in excess of US$300.0 million
against Lucent Technologies Inc. and Lucent
Consumer Products, L.P. for fraud and breach of
the Agreement for the Purchase and Sale of Stock
and Assets.
respectively. We have also reorganized the R&D
structure 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 a
development stage and incurred loss in the financial
year 2001.
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.
The consumer telephone products business
remains the core of VTech’s operations, in
the financial year 2001 accounting for
61.7% of total Group turnover. Turnover of the
product line increased 50.1% to US$823.8 million,
which included US$319.8 million for sales of AT&T
branded phones. Profitability of this business area,
however, was adversely affected by the unfavourable
condition of the Lucent business and its excessive
inventory levels in relation to demand. These factors
also constrained our working capital and had negative
impact on the Group’s other operations. We have
worked hard to remedy these matters during the year.
In addition, the industry faced a shortage of critical
components VTech needed for its 2.4GHz phones.
As a result, in the first half of the year, we were unable
to increase production to meet what has proven to
The poor performance of the Lucent business and
the high inventory level led to significant working
capital constraint which resulted in broad-based
business restructuring and consolidation, including
asset impairment, employee terminations,
streamlining the research and development function,
divesting the facilities in Mexico and consolidating
our US consumer telephone operations. This working
capital constraint has also negatively impacted the
Group’s other operations.
We are cutting costs and increasing the efficiency of
manufacturing, sales and distribution operations. The
majority of the consumer telephone business
operations in the US have been consolidated into
Beaverton, Oregon. The distribution and call centre
operations were consolidated and out-sourced to
third parties in San Antonio, Texas and St. Louis
Review of Operations 11
VTech Holdings Ltd Annual Report 2001