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VTech Holdings Ltd
(Incorporated in Bermuda with limited liability)
Annual Report 2003
A Solid
Foundation for
Future Growth

Table of contents

  • Page 1
    A Solid Foundation for Future Growth VTech Holdings Ltd (Incorporated in Bermuda with limited liability) Annual Report 2003

  • Page 2
    ... Review of Operations 20 Year in Review 22 Corporate Affairs 25 Directors and Senior Management 28 Report of the Directors 31 Report of the Auditors 32 Consolidated Financial Statements 33 Principal Accounting Policies 37 Notes to the Financial Statements 49 VTech in the Last Five Years 51 Corporate...

  • Page 3
    ...employees, including around 720 R&D professionals in R&D centres in Canada, Hong Kong SAR and mainland China. This network allows VTech to stay abreast of the latest technology and market trends throughout the world. Shares of VTech Holdings Limited are listed on both the Hong Kong and London stock...

  • Page 4
    ..., and Employees PROFIT/(LOSS) ATTRIBUTABLE TO SHAREHOLDERS IN LAST 5 YEARS US$ million 100 50 0 (50) (100) (150) (200) (250) 99 00 01 02 03 (215.0) 82.3 44.8 11.2 40.8 The financial year 2003 was one of solid achievements for VTech in its financial results. At the interim, we reported a return to...

  • Page 5
    ...) business in telecommunication products. In 2002, one of our largest ODM customers exited the North America telephone market and hence these ODM sales did not recur in financial year 2003. Lower sales at our Electronic Learning Products (ELP) business in the United States was another major factor...

  • Page 6
    ... consumer sentiment, sales of our branded telecommunication products increased considerably, helping to maintain our dominant share in the US cordless phones market. For the financial year 2003, sales of the 2.4GHz and 5.8GHz models, accounted for over 50% of our telecommunication products business...

  • Page 7
    ... the new product development function completely in Hong Kong and mainland China under the leadership of our new senior management team. Our product design teams in Hong Kong and mainland China will be supported by the up-to-date market intelligence collected from our distribution networks in major...

  • Page 8
    ...In telecommunication products, we have already delivered some of the new 2.4GHz and 5.8GHz cordless phones to sustain the sales momentum created during the financial year 2003 and capture more market share in the United States. A large number of new models were introduced at the Consumer Electronics...

  • Page 9
    ...in Hong Kong. We are also exploring entirely new product categories. During the financial year 2004, we have a range of 16 different electronic learning products ready to test the longer-term China market. These products cover our three major categories, namely electronic infant toys, electronic pre...

  • Page 10
    ... teams in Hong Kong and mainland China have developed a range of products specifically for this market. Sixteen products are ready for testing the market in the financial year 2004. They cover all three major ELP categories: electronic infant toys, electronic pre-school toys and electronic learning...

  • Page 11
    ... accountability, in April 2003 we launched a new "balanced scorecard" management system. As we implement this across the Group in calendar year 2003, it will help build an open corporate culture through the internal sharing of knowledge and information, creating a system of corporate accountability...

  • Page 12
    ... REVENUE BY PRODUCT LINE (US$ million) Telecommunication products Electronic learning products Contract manufacturing services Other businesses 609.8 161.9 94.7 0.1 2003 GROUP REVENUE BY REGION (US$ million) North America Europe Asia Pacific Others 680.3 149.5 29.2 7.5 10 VTech Holdings Ltd

  • Page 13
    ...the financial year 2003 as compared to 49.1% in the financial year 2002. Building on the innovative ability of our R&D teams in Hong Kong and mainland China, management decided to close the R&D centre in ELECTRONIC LEARNING PRODUCTS REVENUE BY REGION (US$ million) North America Europe Asia Pacific...

  • Page 14
    ... Southern District of the New York seeking damages and related relief arising out of the acquisition by the Group of Lucent's Wired Consumer Products Business in 2000. As disclosed in Note 3 to the financial statements, on 7th June 2002, the Group and Lucent settled the lawsuit filed by the Group...

  • Page 15
    ... determined based on the performance of the Group and individual employees. NUMBER OF EMPLOYEES As at 31st March 2003 Manufacturing Non-manufacturing Total employees at the end of the year Average for the year 2003 12,113 1,447 13,560 15,600 2002 12,739 1,512 14,251 16,104 Annual Report 2003 13

  • Page 16
    ... ODM customers exited the North America telephone market in 2002. In North America, our new range of 2.4GHz analog and digital phones, in particular our AT&T branded phones, was well received by our customers and end consumers. This strong sales momentum was sustained by the delivery of the world...

  • Page 17
    ... the US residential phone market. Since our European sales accounted for around 5% of the telecommunication products revenue in the financial year 2003, we see enormous potential for VTech in this market over the medium term and have set a target of raising the proportion of sales from Europe to 15...

  • Page 18
    ... Systems, Smarty's Workshops and the XL Series, which were headed by the product development team located in Connecticut, USA. Innovative ideas and play concepts were put into the design of the products and, as a result, they were well received by the trade during the preview at the New York Toy...

  • Page 19
    ... range of 16 different ELP products ready to test the China market. These products cover our three major categories, namely electronic infant toys, electronic pre-school toys and electronic learning aids. They are designed to appeal to the children aged 6 months to 11 years old and will initially be...

  • Page 20
    ... Chief Executive Officer, Contract Manufacturing Services Business According to the new study from Technology Forecasters on 20th June 2003, the EMS industry recorded a 9% decline in revenues in the calendar year 2002. Our results were also well ahead of our immediate peer groups in Hong Kong where...

  • Page 21
    ... from the supply chain by shortening manufacturing cycle times. CONTRACT MANUFACTURING SERVICES REVENUE IN LAST 5 YEARS US$ million 150 127.1 125 92.8 100 75 49.5 50 25 99 00 01 02 03 66.7 94.7 Outlook Market observers forecast modest growth in the EMS market in the calendar year 2003. We regard...

  • Page 22
    ... of Hong Kong Industries. Sixteen-year VTech veteran Edwin YING was appointed the new CEO of the Electronic Learning Products business replacing Dennis Perry. VTech announced its financial year 2003 interim results, returning to net cash position. Smarty's Workshop was named "Toy of the Year" in...

  • Page 23
    ...VTech Telecommunications Canada Ltd, received the 2002 Chairman's Award, which is one of the highest honors VTech presents to the employees. Feb 2003 Mar 2003 A new range of 2.4GHz and 5.8GHz models with significant advancements was introduced in conjunction with the annual Consumer Electronics...

  • Page 24
    ... its standard of corporate governance and ensuring that full, timely and equitable information are disclosed to its shareholders and investors. In recent years, additional efforts were devoted to the building of investor relationships in all major market places, i.e. Hong Kong, Asia, Europe and the...

  • Page 25
    ... community initiatives in the markets where it operates that help further ideals such as improved access to education and support for individuals in genuine need. In Hong Kong, VTech provides summer internships at local universities and colleges of education. These give students the opportunity...

  • Page 26
    ...-profit organization based in Hong Kong that works on behalf of all investors and other interested parties to improve corporate governance practices in Asia. This report did recognize VTech's effort and commitment in maintaining a high level of corporate governance. Our company structure also helps...

  • Page 27
    ... business back in 1979. Before starting up G2000, he worked with Macy's Department Store in New York, USA. Mr. TIEN is an active member in Hong Kong community affairs, holding posts like Chairman of the Standing Committee on Language Education and Research; Vice Chairman of the Employee Retraining...

  • Page 28
    ... the development of ODM (Original Design Manufacturing) business worldwide and the sales & marketing of VTech brand in Europe and South America. Mr. TAM joined VTech in 1986. He holds a Bachelor degree in electronics engineering from The Chinese University of Hong Kong. Gary ROGALSKI, aged 40, Vice...

  • Page 29
    ... quality management of the contract manufacturing services. Before joining VTech in 2000, Mr. YUNG had 18 years of experience in electronic manufacturing. He holds a Bachelor of Science degree in Electrical Engineering from the University of Hong Kong. Corporate Services Helen WONG Shuk Ying, aged...

  • Page 30
    ... in Hong Kong is Computershare Hong Kong Investor Services Limited, Shops 1712-1716, 17th Floor, Hopewell Centre, 183 Queen's Road East, Hong Kong. COMMENTARY ON PERFORMANCE A commentary on the performance of the Group is included in the review of operations set out on pages 14 to 19. FINANCIAL...

  • Page 31
    ... 5th March 2002 26th July 2002 Exercise price HK$10.20 HK$10.20 HK$10.20 HK$8.71 Exercisable period Interests) Ordinance of Hong Kong and the records of notification made to the UK Listing Authority pursuant to Paragraphs 16.13 to 16.17 of the Listing Rules of the Financial Services Authority in...

  • Page 32
    ... 14 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the "Listing Rules") and Chapter 11 of the Listing Rules of the Financial Services Authority in the United Kingdom (as the case may be) as set out below: On 11th April 2003, the Company as tenant entered...

  • Page 33
    ... 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 accounting period except that...

  • Page 34
    ... Financial Statements CONSOLIDATED INCOME STATEMENT For the year ended 31st March 2003 2003 US$ million 2002 US$ million (restated) CONSOLIDATED BALANCE SHEET As at 31st March 2003 2003 US$ million 2002 US$ million Note Note Non-current assets Revenue Cost of sales Gross profit Selling...

  • Page 35
    ... Accounting Standards ("IAS") and related Interpretations. These financial statements also comply with the disclosure requirements of the Hong Kong Companies Ordinance and the applicable disclosure provisions of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited...

  • Page 36
    ... in the period in which it is incurred. Amortization is calculated to write off capitalized development costs on a straight-line basis over their estimated useful lives, commencing from the date when the products are put into commercial production. 34 VTech Holdings Ltd

  • Page 37
    ...the directors review the carrying value 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 reserve; decreases are first set off...

  • Page 38
    ...benefits derived from employee past service, with reference to market yields on high quality corporate bonds which have terms to maturity approximating the terms of the related liability. All actuarial gains and losses are spread forward over the average remaining service lives of employees. The net...

  • Page 39
    ... design, manufacture and distribution of consumer electronic products. The telecommunication and electronic products business is the principal business segment of the Group. Primary reporting format - business segments Year ended 31st March 2003 Telecommunication and electronic products US$ million...

  • Page 40
    ...and electronic consumer products. Europe - the operations are principally the distribution of electronic consumer products. Asia Pacific - the Group is headquartered in the Hong Kong SAR and the Group's principal manufacturing operations are located in mainland China. Staff related costs - salaries...

  • Page 41
    ... States District Court for the Southern District of New York seeking damages and related relief arising out of the acquisition by the Group of Lucent's Wired Consumer Products Business in 2000. On 7th June 2002, the Group and Lucent settled the lawsuit filed by the Group against Lucent in January...

  • Page 42
    ...5.1 273.6 The Group is currently in discussions with Hong Kong IRD regarding a dispute over the offshore income claims made by certain subsidiaries of the Group in prior years. Whilst management considers that the subsidiaries have grounds to support these claims, the outcome of the dispute remains...

  • Page 43
    ... of the related tax benefit through future taxable profits is probable. Deferred tax assets of US$63.2 million (2002: US$ 80.3 million) arising from unused tax losses of US$213.5 million (2001: US$255.4 million) have not been recognized at the end of the year. 2.7 3.1 Annual Report 2003 41

  • Page 44
    ... swaps 2003 US$ million 59.5 111.9 - 171.4 2002 US$ million 76.3 110.7 0.9 187.9 ii) 0.1 0.2 0.1 0.4 22 13 STOCKS 2003 US$ million Telecommunication and electronic products Raw materials Work in progress Finished goods 2002 US$ million An aging analysis of trade creditors by transaction date...

  • Page 45
    ... employees, contributions made by the Group during the year were calculated 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 2003...

  • Page 46
    ... of Hong Kong Limited (the "Listing Rules") was amended whereby if the Company wishes to grant options under the 2001 Scheme on or after 1st September 2001, it must comply with the new requirements set out therein. Pursuant to the Listing Rules, the Company can issue options so that number of...

  • Page 47
    ... the Company the exclusive right to 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 Annual Report 2003 45

  • Page 48
    ... consolidated income statement when the forecasted sales and purchases occur, at various dates between 1 month to 6 months from the balance sheet date. At 31st March 2003, there were no outstanding forward foreign exchange contracts (2002: contract amount of US$22.8 million). 46 VTech Holdings Ltd

  • Page 49
    ...Group. Annual Report 2003 47 Currency profile The currency profile of the Group's financial assets and liabilities, before taking account of hedging transactions, is summarized as follows: 2003 Financial assets US$ million Currency: United States Dollar Euro United Kingdom Sterling Hong Kong Dollar...

  • Page 50
    ... electronic products Design, manufacture and distribution of telecommunication products Property holding VTech Electronics Europe plc Incorporated in the British Virgin Islands and operating in the People's Republic of China: Asian Luck Limited GBP 500,000 *100 Sale of electronic products VTech...

  • Page 51
    ....8 156.6 84.0 139.9 70.4 9.5 303.8 (227.3 ) 76.5 131.3 165.9 7.1 (32.2 ) 6.1 146.9 95.9 7.0 - 4.5 107.4 58.0 3.1 - 4.7 65.8 48.0 2.7 - 4.1 54.8 US$ million 2000 US$ million 2001 US$ million 2002 US$ million 2003 US$ million Annual Report 2003 49

  • Page 52
    ...$ million 1,334.9 (213.1 ) (1.8 ) (214.9 ) (0.1 ) (215.0 ) (96.7 ) 2002 US$ million 959.8 13.9 (2.6 ) 11.3 (0.1 ) 11.2 5.0 2003 US$ million 866.5 58.3 (17.4 ) 40.9 (0.1 ) 40.8 18.1 Depreciation on moulds for new products that ultimately go into production for the years ended 31st March 1998 to 31st...

  • Page 53
    ... Sun HONG KONG BRANCH REGISTRARS Computershare Hong Kong Investor Services Limited Shops 1712-16 17th Floor Hopewell Centre 183 Queen's Road East Hong Kong COMPANY SECRETARY CHANG Yu Wai REGISTERED OFFICE Clarendon House Church Street Hamilton HM11 Bermuda ADR DEPOSITARY The Bank of New York 101...

  • Page 54
    ... 87 82 Germany VTech Electronics Europe GmbH Martinstrasse 5 70794 Filderstadt Tel : (49) 711 709 740 Fax : (49) 711 709 7449 A Chinese translation of the annual report may be obtained on request from Computershare Hong Kong Investor Services Limited, Shops 1712-16, 17th Floor, Hopewell Centre, 183...