VTech Holdings Ltd.

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VTech Holdings Ltd.

23/F Block 1-Tai Ping Ind Centre
57 Ting Kok Road, Tai Po
Hong Kong,
Hong Kong
Telephone: +852 2680 1000
Fax: +852 2680 1300
Web site: http://www.vtech.com

Public Company
Incorporated: 1976 as Video Technology Ltd.
Employees: 20,700
Sales: $1.02 billion (2005)
Stock Exchanges: Hong Kong London OTC (ADRs)
Ticker Symbol: VTKHY
NAIC: 334111 Electronic Computer Manufacturing; 334119 Other Computer Peripheral Equipment Manufacturing; 334210 Telephone Apparatus Manufacturing; 334310 Audio and Video Equipment Manufacturing

VTech Holdings Ltd. is a world-leading manufacturer of cordless and corded telephones, electronic learning products, and other consumer electronics products. Based in Hong Kong, VTech produces "mini-PCs," gaming consoles, and other toys and products targeting the 3- to 12-year-old market. Among the company's products are the Smart Start toys, and the V-Smile game console for young children, launched to great commercial success in 2004. VTech also has announced its plans to release a console developed for children under three years of age in 2006. In support of its products, VTech holds licensing agreements for a number of major children's characters from Disney, Marvel, Brainy Baby, Nickelodeon, Sesame Street, HIT Entertainment, and Joester Loria—American Greetings. The company is one of the world's largest producers of cordless telephones, marketed under its own brand name, as well as the AT&T brand; the company is also a major original equipment manufacturer (OEM) for brands such as Sony and Phillips. The company launched a new Internet-based VoIP (voice-over-Internet-protocol) telephone in partnership with Vonage in 2005. In addition to telephones, the company produces pagers, personal digital assistants, e-mail readers, and modems, as well as set-top satellite television devices. Telephones accounted for nearly 60 percent of the group's revenues of $1.02 billion in 2005, while educational products added 27.5 percent. The North American market is the company's primary market, representing nearly 61 percent of sales, compared with nearly 33 percent in Europe. VTech is led by founder, Chairman, and CEO Allan Wong and is listed on both the Hong Kong and London Stock Exchanges.

CHILDREN'S ELECTRONICS IN THE 1980S

VTech was founded in 1976 as Video Technology Ltd. in Hong Kong by Allan Wong, an electrical engineer with a master's degree from the University of Wisconsin. Wong began his professional career as an engineer for electronics giant NCR, before leaving to found his own company. VTech, with just 40 employees, began developing its first electronics products, using microprocessors to produce small-scale versions of the video arcade games just becoming popular at that time. By 1978, VTech, as the company came to be called, had launched its first product, a handheld copy of the original video game, "Pong."

The company quickly expanded its electronics business, in particular by acting as an OEM for others. From the start, VTech targeted the international market, and especially the North American market, where demand for the new low-cost electronics goods arriving from the Far East ran high in the late 1970s and early 1980s.

An important milestone for the company came in 1981, when U.S. department store giant Sears commissioned the company to develop an electronic children's educational toy. VTech responded with the Lesson One, designed to teach basic reading and math skills. The toy was a big success for Sears, and established the VTech name as a pioneer in the children's electronics sector.

VTech's children's toy development benefited from the company's expansion into the personal computer (PC) market as well. In 1981, the company released its first computer-hybrid product, the CreatiVision. Soon after, the company introduced its first computer, the Laser 110. By 1983, the company introduced a more robust computer, the Laser 200 series. The new series established the company on the OEM computer market, and Laser 200 computers were soon sold worldwide under a variety of brand names, including Texet, Salora, and Dick Smith in Australia and New Zealand.

VTech caught onto Apple's fast-rising coattails, releasing the Laser 3000 in 1985. That computer represented a first attempt to clone the highly popular Apple IIc. With the launch of the Laser 128 in 1988, VTech succeeded in releasing a computer that was nearly 100 percent compatible with the Apple IIc. The company later won the lawsuit challenge by Apple, proving that it succeeded in developing the Laser 128 through its own reverse engineering efforts, without violating any of Apple's patents and copyrights.

Parallel to its attempt to produce Apple clones, the company also produced IBM-based PCs. By the late 1980s, while continuing to produce computers under a variety of brand names, including as a private-label producer for Sears and other department stores, the company also had begun marketing its PCs under the VTech brand name. In the meantime, the company had become an early entrant into the market for satellite receivers, producing its first receiver in 1984.

REVISING THE PRODUCT MIX IN THE 1990S

VTech went public during the 1980s, listing its stock on the Hong Kong Stock Exchange in order to fuel its expansion. While the company continued producing electronic learning aids and satellite receivers, the PC market became its main target. In 1988, the company became one of the first to shift its production to the Chinese mainland, opening production facilities in the Guangdong province. Taking advantage of the low wage scale in China, VTech set out to conquer the global PC market.

VTech had early success in Japan, where it became a market leader in the early 1990s. The North American market provided a strong growth area for the company as well, where it acquired the rights to the Leading Technology brand name. VTech began plans to expand its PC sales, targeting an entry into the European market. As part of that effort, the company delisted its stock from the Hong Kong Stock Exchange, and instead launched a new public offering in 1991, placing its shares on the London Stock Exchange as well.

The company's computer sales, under the VTech, Laser, and Leading Technology brand names, depended primarily on mass-market retailers. Yet the company became caught up in a brutal price war, and especially in a battle for shelf space, at the beginning of the 1990s. As it began experiencing difficulties getting its PCs on stores' shelves, VTech attempted to convert its PC sales to a direct sales model similar to that of Dell. Yet the company proved unable to make its mark in that sales channel. With sales tumbling, VTech attempted to restructure its money-losing PC division in 1993, announcing that it was abandoning sales of complete branded computer systems and instead planned to produce computer components for the OEM market.

By 1997, however, VTech was forced to abandon this operation, too, and in that year the company sold off its computer components division in a management buyout joined by a number of its OEM customers. VTech retained only a small, Hong-Kong focused PC division.

COMPANY PERSPECTIVES

Mission: VTech's mission is to be the most cost effective designer and manufacturer of innovative, high quality consumer electronics products and to distribute them to markets worldwide in the most efficient manner.

Elsewhere, the company operations also were struggling into the early 1990s. The satellite receiver market had failed to take off, in part because of delays in the launch of satellite television services. VTech ended its satellite receiver production in 1993. The company also had attempted to enter the market for cellular telephone handsets in the early 1990s, but was forced to abandon that production by 1995.

ANSWERING THE PHONE IN THE NEW CENTURY

VTech's problems in these product areas were more than offset by the company's entry into the production of corded and cordless telephones in the early 1990s. Combining its experience in radio frequency technology gained through its production of satellite receivers, and its electronics expertise, VTech launched its first 900 Mhz cordless telephone in 1991.

The new technology significantly increased the roaming distance of cordless telephones, as well as offering higher-quality reception. At first, the company produced telephones primarily for the OEM market, producing telephones for brand names such as AT&T, Radio Shack, Sony, and Panasonic through the 1990s. In the mid-1990s, however, the company began a push to establish sales of its own line of higher-end, VTech-branded telephones. Toward the end of the decade, the company complemented these models with a more expensive range, becoming one of the first to break the $99 price barrier.

Amid the economic crises that swept the Asian region in the late 1990s, VTech appeared to be one the few Hong Kong-based companies to post rising sales and rising profits. The company's focus on two core markets, cordless telephones and electronic learning aids, coupled with the fact that the Asian markets accounted for less than 5 percent of its total sales, shielded the group from the disastrous financial climate at home. By 1998, at the height of the crisis, VTech sales had soared to $842 million, with profits climbing to $69 million.

Buoyed by its success, VTech began adding new products to its mix in the late 1990s and early 2000s, such as pagers, personal digital assistants, e-mail readers, and modems. Nonetheless, cordless phone sales continued to drive the company's growth through the end of the decade. By the late 1990s, the company had added OEM production for a number of the United States' regional Bell carriers, which had been allowed begin marketing telephones under their own brands for the first time since the breakup of AT&T.

That company, or, more accurately, the AT&T brand formed the basis of the next expansion move. 2000, VTech reached agreement with Lucent, which had inherited the rights to the AT&T brand, to purchase Lucent's own telephone manufacturing unit, including plant in Mexico, some 4,800 employees, as well exclusive rights to the AT&T brand for the next ten years. Under the agreement, VTech paid $133 million for the deal. The addition of Lucent's operations boosted the company's sales past $1 billion, and gave it more than 50 percent of the entire U.S. cordless phone market.

VTech quickly rolled out a new line of AT&T branded telephones, reserving its VTech brand for lower-priced telephones. The company also turned its expanded production capacity toward a drive to move the VTech brand into the European cordless phone market, unveiling a new line of DECT-based telephones for the United Kingdom and Germany.

KEY DATES

1976:: Allan Wong founds Video Technology Ltd. in Hong Kong.
1978:: The company releases its first product, a portable video game system.
1981:: The company launches its first personal computer product; the first electronic learning aid is developed for Sears.
1988:: A production plant is established in Guang-dong province in mainland China.
1991:: Production of cordless telephones is launched.
1997:: The company abandons the personal computer market.
2000:: The company acquires Lucent's telephone production unit and the rights to the AT&T brand name.
2001:: The company shuts down Lucent's plant in Mexico and shifts production to expanded plants in China.
2004:: The company launches the V.Smile game console for three- to seven-year-olds.
2005:: The company launches the handheld V. Smile console; a VoIP telephone is launched in partnership with Vonage.

Yet the Lucent deal quickly turned sour. Soon after taking over Lucent's operations, VTech discovered that it also had been overloaded with Lucent's inventory. (VTech sued Lucent for $170 million, claiming it had concealed the extent of the telephone manufacturing operation's problems.) VTech, which also was struggling with quality control issues, made its problems even worse when it began marketing its low-priced telephones under the AT&T brand as well.

VTech's woes were compounded by the economic slump in its core markets in the United States and Europe. By 2001, VTech had slipped into losses for the first time in its history. In that year, VTech announced that it had decided to shut down the plant in Mexico, lay off some 4,500 workers, and transfer all of its telephone production to its newly expanded production plants in mainland China.

VTech restructured its product mix, shifting its focus to higher-margin items. In 2002, the company achieved a new success, becoming the first in the U.S. market to launch a new generation of 5.8 GHz cordless telephones. The company also renegotiated the terms of its AT&T brand agreement, securing the exclusive rights to the brand in China, and non-exclusive rights to market AT&T branded telephones in Europe and the Latin American region.

VTech returned to profitability into the mid-2000s, rebuilding its sales past $1 billion by 2005. Although the company's telephone production continued to account for nearly 60 percent of its sales, the company owed much of its renewed health to its electronic learning aid division. Through the early 2000s, the company had come under increasing pressure from competitors, particularly with the rising use of video game consoles in its core youth market. In August 2004, the company countered with its own game console, dubbed a "TV Learning System" called the V.Smile. Targeting the three- to seven-year-old market, the V.Smile featured licensing agreements with Disney, Marvel, Warner Brothers, Hit Entertainment, and others. The console became a huge success.

VTech quickly moved to capitalize on the V.Smile's success, releasing a new handheld console in 2005. In that year, as well, the company announced to some controversy that it intended to release a new console targeting children under three years of age in 2006. In addition, in 2005, VTech unveiled a new telephone, in partnership with U.S. provider Vonage, providing VoIP capability. As it approached its 30th anniversary, VTech had positioned itself as a worldwide leader in its two core product categories.

PRINCIPAL SUBSIDIARIES

Dongguan VTech Electronics Industries (China); Dongguan VTech Electronics Telecommunication Industries (China); VTech (China) Trading Ltd.; VTech (Dongguan) Electronics and Communications Ltd. (China); VTech (OEM), Inc. (U.S.A.); VTech Communications Limited (Hong Kong); VTech Communications Ltd. (U.K.); VTech Communications, Inc. (U.S.A.); VTech de Mexico Reynosa S.A.; VTech Electronics (Hong Kong) Ltd.; VTech Electronics Europe B.V. (Netherlands); VTech Electronics Europe GmbH (Germany); VTech Electronics Europe PLC (U.K.); VTech Electronics Europe S.A.S. (France); VTech Electronics Europe S.L. (Spain); VTech Electronics Limited (Hong Kong); VTech Electronics North America, L.L.C. (U.S.A.); VTech Holdings Limited (Hong Kong); VTech Telecom, L.L.C. (U.S.A.); VTech Telecommunications Canada Ltd.; VTech Telecommunications Limited (Hong Kong).