Creative 2003 Annual Report Download - page 11

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YEAR ENDED JUNE 30, 2003 COMPARED TO YEAR ENDED JUNE 30, 2002
Net sales for the year ended June 30, 2003 decreased by 12.9% compared to the year ended June 30, 2002. The lower
net sales was mainly attributed to the difficult global economic climate where several major U.S. retailers have encountered
slowing sales. Audio product sales, which include Sound Blaster audio cards and chipsets, for fiscal year 2003 decreased
by 34% compared to fiscal year 2002, and as a percentage of total sales, decreased from 44% in fiscal 2002 to 33% in
fiscal 2003. The decrease in audio product sales was primarily due to the decline in sales to the system integrator market
and a drop off in sales of low-end audio products. Sales of speakers in fiscal 2003 decreased marginally by 4% compared
to fiscal 2002, mainly due to reduced sales of non-multimedia speakers offset by higher demand for new models of
multimedia speakers. Speakers represented 23% of sales in fiscal 2003 compared with 21% of sales in fiscal 2002. Sales
of personal digital entertainment (“PDE”) products, which includes digital audio players and digital cameras, increased
by 71% in fiscal 2003 compared to fiscal 2002 and represented 18% of sales in fiscal 2003 as compared to 9% of sales
in fiscal 2002. The significant increase was driven by strong demand for the NOMAD MuVo and the introduction of the
NOMAD Jukebox Zen in fiscal 2003. Sales of graphics and video products increased by 78% in fiscal 2003 compared to
fiscal 2002 and represented 12% of sales in fiscal 2003 compared with 6% of sales in fiscal 2002. The significant increase
in graphic card sales was primarily due to sales of graphic cards by 3Dlabs, which was acquired by Creative in May 2002.
Sales of multimedia upgrade kits (“MMUK”), which includes data storage devices, decreased by 82% in fiscal 2003
compared to fiscal 2002 and comprised 1% of sales compared to 5% of sales in the prior fiscal year. The reduction in
MMUK sales in fiscal 2003 is in line with Creative’s current business strategy of de-emphasizing lower margin products.
Sales of other products, which includes accessories, music products, communication products and other miscellaneous
items, decreased by 27% in fiscal 2003 compared to fiscal 2002 and represented 13% of sales in fiscal 2003 compared
to 15% of sales in the prior fiscal year. This decrease in other product sales was primarily due to a decrease in sales of
communication products.
Gross profit in fiscal 2003 increased to 35% of net sales, compared to 33% in fiscal 2002. This improvement in gross profit
was primarily a result of Creative’s business strategy of shifting away from low-margin and high-risk products and
focusing on audio products, speakers and PDE products.
Selling, general and administrative (“SG&A”) expenses in fiscal 2003 declined by 4% compared to fiscal 2002. As a
percentage of sales, SG&A expenses were 23% of sales for fiscal 2003 and 21% for fiscal 2002. Creative has been focusing
on reducing its operating expenses, but the increase in SG&A expenses as a percentage of sales was primarily due to the
addition of operating expenses incurred by 3Dlabs. SG&A expenses incurred by 3Dlabs include amortization of other
intangible assets of $8.0 million in fiscal 2003 and $2.5 million in fiscal 2002. Research and development (“R&D”)
expenses increased from 5% of sales in fiscal 2002 to 8% of sales in fiscal 2003, mainly due to the higher R&D expenses
incurred by 3Dlabs which was acquired in May 2002.
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. See Note 16 of “Notes to Consolidated Financial
Statements.”
Net investment loss of $6.0 million in fiscal year 2003 included permanent write-downs of quoted and unquoted investments
by $13.6 million offset partially by net gains from sale of quoted investments of $7.6 million. The $45.4 million net
investment loss 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 interest and other income decreased by $0.3
million to $4.8 million in fiscal 2003 compared to $5.1 million in the prior fiscal year. This decrease was primarily due
to a reduction in interest income by $1.0 million resulting from lower interest rates, increase in share of associates’ losses
by $1.0 million, offset partially by increase in exchange gain of $1.5 million.
Creative’s provision for income taxes for fiscal 2003 as a percentage of operating income was 10% compared to 20% in
fiscal 2002. The higher tax provision in fiscal 2002 was primarily due to changes in the mix of taxable income arising
from various geographical regions and other charges of $26.1 million in fiscal 2002 which Creative has considered it a
non-tax deductible expense.