Creative 2002 Annual Report Download - page 15

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YEAR ENDED JUNE 30, 2001 COMPARED TO YEAR ENDED JUNE 30, 2000
Net sales for the year ended June 30, 2001 decreased by 9% compared to the year ended June 30, 2000. Audio product
sales (Sound Blaster audio cards and chipsets) for fiscal year 2001 decreased marginally by 2% compared to fiscal year
2000 primarily due to weaker demand in the system integrator and original equipment manufacturer (“OEM”) channels.
As a percentage of total sales, audio product sales increased to 41% of sales compared to 39% of sales in fiscal year 2000.
Sales of multimedia upgrade kits (“MMUK”), including data storage, decreased by 12% in fiscal year 2001 and represented
22% of sales compared to 23% of sales in the prior fiscal year. Within MMUK, sales of audio upgrade kits and CD-ROM
drives declined but their impact on total sales was partially offset by an increase in sales of Compact Disk ReWritable (“CD-
RW”) drives. The decline in sales of multimedia audio upgrade kits, which comprised a combination of sound cards and
CD-ROM drives is mainly due to the downturn in the PC business. Sales of video and graphics products decreased by
63% and represented 6% of sales in fiscal year 2001 compared with fiscal year 2000, when they represented 15% of sales.
The decline in sales was due to management’s decision to de-emphasize on lower margin graphics products. Sales of
personal digital entertainment products (“PDE”) which include digital audio players and digital cameras increased by 95%
to represent 9% of sales compared to fiscal 2000 when they represented 4% of sales. This increase in sales was primarily
due to an increase in sales of the NOMAD Jukebox product introduced in the first quarter of fiscal year 2001. Sales of
speakers increased marginally by 2% and represented 12% of sales in fiscal 2001 compared with fiscal 2000, when they
represented 11% of sales. This improvement in speaker sales was primarily a result of the introduction of new models
of multimedia speakers. Sales of other products, which included accessories, music products, communication products
and other miscellaneous items, increased by 7% and represented 10% of sales in fiscal 2001 compared to 8% 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 2001 declined by 16% to represent 27% of sales compared to 30% in fiscal 2000. Margins in fiscal
2001 were negatively impacted by a decline in the average selling prices of drives and PDE products and an $8.2 million
inventory restructuring charge applied to cost of goods sold.
Selling, general and administrative (“SG&A”) expenses in fiscal 2001 declined by 9% and were flat at 19% of sales
compared to fiscal 2000. SG&A expenses declined due to management’s cost cutting efforts and reduction in expenses
incurred on non-revenue generating Internet activities. Research and development expenses in fiscal 2001 remained flat
at 4% of sales compared with fiscal 2000.
Other charges of $22.8 million booked in fiscal 2001 comprised restructuring charges totaling $8.4 million, $3.2 million
write-downs of fixed assets and write-off of other assets acquired from Aureal amounting to $11.2 million. See Note
12 of “Notes to Consolidated Financial Statements.”
In fiscal 2001, Creative’s net loss from investments was $148.5 million compared to a net gain of $103.4 million in fiscal
2000. The loss relates to $200.3 million of losses from 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 decreased by $2.9 million to $2.4
million in fiscal 2001 compared to $5.3 million in the prior fiscal year. This decline was primarily a result of a reduction
in interest income arising from a lower average cash balance.
Creative’s provision for income taxes for fiscal 2001 remained flat at 1% of sales as 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 increased from 14% in fiscal 2000 to 31% in fiscal 2001. The increase was primarily due to a higher effective
tax rate in Singapore due to the expiration of the Singapore pioneer status in March 2000, and changes in the mix of
taxable income arising from various geographical regions, where the tax rates range from 0% to 50%. Creative has
applied for a separate and new Pioneer Certificate. If Creative is awarded this new Pioneer Certificate, profits under the
new Pioneer Certificate will be exempted from tax in Singapore. In the event that Creative fails to obtain the new Pioneer
Certificate, future taxable income in Singapore shall be subjected to a statutory tax rate of 22.0%. There can be no
assurance that Creative will be awarded a new Pioneer Certificate.