Creative 1999 Annual Report Download - page 12

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YEAR ENDED JUNE 30, 1999 COMPARED TO YEAR ENDED JUNE 30, 1998
Net sales in fiscal 1999 increased by $62.3 million or 5% compared to fiscal 1998. This increase in sales was primarily due to an increase
in sales of graphics and speakers products. During fiscal 1999, audio sales (Sound Blaster audio cards and chipsets) decreased by 13%,
compared to fiscal 1998, and represented 38% of total sales, compared to 45% in fiscal 1998. This decrease in sales was due to a decline
in average selling prices in particular lower end audio cards. Sales of multimedia upgrade kits (“MMUK”) decreased by 21% in fiscal 1999,
and represented 27% of sales, compared to 36% in fiscal 1998. The reduction in MMUK sales is due mainly to declining average selling
prices, adverse market conditions in Asia and Latin America and the shortage of DVD drives during the first two quarters of fiscal 1999.
Nonetheless, sales recovered in the second half of fiscal 1999 due to increased availability of DVD drives from Creative’s vendors. Sales
of video and graphics products increased by 169% in fiscal 1999 and represented 20% of total sales, compared to fiscal 1998, when they
represented 8% of total sales. This increase was primarily attributable to an increase in sales of Creative’s new graphics cards that were
introduced in fiscal 1999. Sales of other products including speakers increased by 45% to 15% of total sales in fiscal 1999, compared to
11% in fiscal 1998. Speaker sales represented 7% of sales in fiscal 1999, compared with 3% in fiscal 1998.
Gross profit decreased by 9% in fiscal 1999 and represented 27% of sales, compared to 31% in fiscal 1998. This decrease in gross profit
percentage was largely attributable to a decline in average selling prices of audio products and unfavorable product mix. In addition, the
increase in overall revenue contribution of lower margin video and graphic products has led to a decline in the gross profit margin during
fiscal 1999.
Selling, general and administrative expenses increased to 16% of sales in fiscal 1999, compared to 13% of sales in fiscal 1998. This increase
was primarily due to a full year amortization of intangibles arising from acquisitions in fiscal 1998 (see Note 14 of “Notes to Consolidated
Financial Statements”), marketing programs for Sound Blaster Live! and an increase in marketing and advertising expenses incurred
in launching other new products. Research and development expenses in fiscal 1999 remained flat at 3% of sales, compared to the prior
year.
Included in the results of fiscal 1998 were other charges of $68.6 million. This related to three acquisitions recorded under the purchase
method of accounting, resulting in an aggregate write off of acquired in-process technology of $60.3 million (see Note 14 of “Notes to
Consolidated Financial Statements”) and a one-time charge of $8.3 million for the cessation of certain activities.
Net interest and other income for Creative decreased by 25% in fiscal 1999 as compared to fiscal 1998. Included in the net interest and
other income for fiscal 1999 and 1998 were net gains from investments of $15.0 million and $18.5 million, respectively. Interest and other
income for fiscal 1999 decreased by $6.5 million compared to fiscal 1998, due to a decline in interest income resulting from a lower average
cash balance.
Creative’s effective tax rate decreased from 13% in fiscal 1998 to 8% in fiscal 1999. The decrease is primarily attributable to decreased
profitability; the mix of income arising from various geographical regions, where the tax rates range from 0% to 50%; pioneer status income
from Singapore, which is exempt from tax; and utilization of non-Singapore net operating losses. The pioneer status had the effect of
reducing Creative’s provision for income taxes by approximately $26.4 million or $0.29 per share and $43.3 million or $0.46 per share,
for fiscal 1999 and 1998, respectively. The Pioneer Certificate will expire in the year 2000, subject to certain conditions. See Note 9 of
“Notes to Consolidated Financial Statements”.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations