Creative 2002 Annual Report Download - page 14

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YEAR ENDED JUNE 30, 2002 COMPARED TO YEAR ENDED JUNE 30, 2001
Net sales for the year ended June 30, 2002 decreased by 34% compared to the year ended June 30, 2001. The substantially
lower revenues in fiscal year 2002, was a result of the strategic shift by Creative to focus on its core products and to de-
emphasize lower margin products and the difficult global economic climate. Audio product sales (Sound Blaster audio
cards and chipsets) for fiscal year 2002 decreased by 30% compared to fiscal year 2001, but as a percentage of total sales,
increased from 41% in fiscal 2001 to 44% in fiscal 2002. Sales of speakers increased by 10% and represented 21% of
sales in fiscal 2002 compared with 12% of sales in fiscal 2001. The improvement in speaker sales was primarily a result
of the introduction of new models of multi-media speakers. Sales of personal digital entertainment (“PDE”) products
which includes digital audio players and digital cameras, decreased by 31% and represented 9% of sales in fiscal 2002
and fiscal 2001. Sales of multimedia upgrade kits (“MMUK”) which includes data storage, decreased by 84% in fiscal 2002
compared to fiscal 2001 and comprised 5% of sales compared to 22% of sales in the prior fiscal year. The reduction in
MMUK sales in fiscal 2002 is in line with Creative’s current business strategy of de-emphasizing lower margin products.
Similarly, in line with this current strategy, sales of graphics and video products decreased by 36% and represented 6%
of sales in both fiscal years 2002 and 2001. Sales of other products, which includes accessories, music products,
communication products and other miscellaneous items, increased by 4% and represented 15% of sales in fiscal 2002
compared to 10% of sales in the prior fiscal year. This increase in other product sales was primarily due to an increase
in sales of communication products.
Gross profit in fiscal 2002 increased to 33% of net sales, compared to 27% in fiscal 2001. This improvement in gross profit
was primarily a result of the strategic shift in business, with emphasis on Creative’s core audio products, speakers and
PDE products.
Selling, general and administrative (“SG&A”) expenses in fiscal 2002 declined by 26% due to management’s cost cutting
efforts to correspond to the revised revenue expectations. As a percentage of sales, SG&A expenses were 21% of sales
for fiscal 2002 and 19% for fiscal 2001. Research and development expenses were 5% of sales in fiscal 2002 and 4%
of sales in fiscal 2001.
Other charges of $26.1 million in fiscal 2002 relates to the write off of acquired in-process technology arising from the
acquisition of 3Dlabs and represented 3% of sales in fiscal 2002 compared to 2% of sales in fiscal 2001. The write off of
acquired in-process technology is in accordance with the prevailing accounting standards. See Note 15 of “Notes to
Consolidated Financial Statements.”
Net investment loss of $45.4 million in fiscal year 2002 comprised $49.3 million in write-downs of investments, offset
partially by a $3.9 million net gain from sales of investments and marketable securities. Net investment loss of $148.5
million in fiscal 2001 included $200.3 million in write-downs of investments, offset partially by a $51.8 million net gain
from sales of investments and marketable securities. Net interest and other income increased by $2.7 million to $5.1
million in fiscal 2002 compared to $2.4 million in the prior fiscal year. This increase was primarily due to an exchange
gain of $3.9 million in fiscal 2002 versus an exchange loss of $3.7 million in fiscal 2001, offset partially by lower interest
income resulting from lower interest rates and lower average cash balances.
Creative’s provision for income taxes for fiscal 2002 remained flat at 1% of sales compared to the prior fiscal year. The
provision for income taxes as a percentage of income before taxes and minority interest excluding net loss or gain from
investments declined from 31% in fiscal 2001 to 17% in fiscal 2002. This reduction was primarily due to changes in the
mix of taxable income arising from various geographical regions and utilization of non Singapore net operating losses.