Creative 2004 Annual Report Download

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AN N UAL
REPORT
2004
Get Inspired.
The Leader In Digital Entertainment
Here at Creative, we aim to meld our products into your life. W ith a slew of
top-notch quality MP3 players, speakers and a host of other products, we
offer consumers a variety of choices coupled with entertaining experiences.
To us, innovation has no limits and we will continue to evolve along with your
ever-changing needs. For now. For always.
Sleek, stylish design
Revolutionary innovative technology
Sheer uncompromised quality
Great, unbeatable value
Excellent customer service

Table of contents

  • Page 1
    ... Leader In Digital Entertainment Here at Creative, we aim to meld our products into your life. W ith a slew of top-notch quality M P3 players, speakers and a host of other products, we offer consumers a variety of choices coupled with entertaining experiences. To us, innovation has no limits and we...

  • Page 2
    ... Creative Sound Blaster Live! 24-bit External Creative WebCam Live! Creative Inspire TD7700 Creative Sound Blaster PCMCIA Audigy 2 ZS Creative WebCam Instant Creative Digital Camera 4200ZS Creative DV-CAM 316 Creative I-Trigue 3400 Creative GigaWorks S750 700Watts 7.1 Speaker System Creative...

  • Page 3
    ... Financial Condition and Results of Operations Report of Independent Accountants Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Cash Flows Consolidated Statements of Shareholders' Equity Notes to Consolidated Financial Statements Stock Market Information...

  • Page 4
    ... of the exploding MP3 digital audio and PDE markets. We have started to reap the benefits of our hard work over the past few years to remodel our product lines and businesses, and to invest in expanding our product development capabilities in PDE. We returned to revenue growth in fiscal 2004, with...

  • Page 5
    ... graphics and has rocked the workstation market with its stunning image processing power. To have a comprehensive view of the breadth and beauty of the full range of Creative's new products, which includes many offerings in MP3 digital audio players, cameras, sound cards, external audio, speakers...

  • Page 6
    ... Creative's Consolidated Statements of Operations for the five years ended June 30, 2004. The data for the three years ended June 30, 2004 is derived from and should be read in conjunction with, the consolidated financial statements and related notes thereto included elsewhere in this Annual Report...

  • Page 7
    ... income tax rate in Singapore, which would otherwise be applicable, would have been 25.5%. Creative was granted a new Pioneer Certificate under the International Headquarters Award that will expire in March 2010. Under the new Pioneer Certificate, profits arising from qualifying activities will...

  • Page 8
    ... products from competitors at the application software, chip and operating system levels; the failure of cost-cutting measures to achieve anticipated cost reduction benefits; the deterioration of global equity markets; exposure to excess and obsolete inventory; Creative's reliance on sole or limited...

  • Page 9
    ... accounts, returns and discounts based on credit profiles of its customers, current economic trends, contractual terms and conditions and historical payment, return and discount experience. Management performs ongoing credit evaluations of customers' financial condition and uses letters of credit...

  • Page 10
    ... condition of and business outlook for the company, including key operational and cash flow metrics, current market conditions and future trends in the company's industry, and the company's relative competitive position within the industry; and Creative's intent and ability to retain the investment...

  • Page 11
    ... % 23 8 - 4 (1) 1 4 (1) - 3 % 21 5 3 4 (6) 1 (1) (1) - (2) % Creative's net sales, by product category, for the past three fiscal years were as follows: Percentage of Net Sales for fiscal years ended June 30 2004 Audio Speakers Personal Digital Entertainment Graphics & Video Communication Others 25...

  • Page 12
    ...ended June 30, 2004 increased by 16% compared to the year ended June 30, 2003. The revenue increase was mainly attributable to Creative's strategy of focusing on audio products, speakers and personal digital entertainment ("PDE") products outside the personal computer ("PC") box. Audio product sales...

  • Page 13
    ...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...

  • Page 14
    ... in-process technology arising from the acquisition of 3Dlabs and represented 3% of sales in fiscal 2002. See Note 17 of "Notes to Consolidated Financial Statements." Net investment loss Net investment loss of $6.0 million in fiscal year 2003 included permanent write-downs of quoted and unquoted...

  • Page 15
    ... of sales represented by such results. Consistent with the PC peripherals and digital entertainment market, demand for Creative's products is generally stronger in the quarter ended December 31, compared to any other quarter of the fiscal year due to consumer buying patterns. In management's opinion...

  • Page 16
    ...'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Unaudited data for quarters ended (as a percentage of sales) Jun 30 2004 Sales, net Cost of goods sold Gross profit Operating Expenses: Selling, general and administrative Research and development Operating income Net gain...

  • Page 17
    ... of, and investments in, companies that can provide Creative with technologies, subsystems or complementary products that can be integrated into or offered with its existing product range. Creative generally satisfies its working capital needs from internally generated cash flow. Management believes...

  • Page 18
    ... 30, 2004, Creative has utilized approximately $2.4 million under guarantees and letters of credit. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS Please refer to Note 1 of "Notes to Consolidated Financial Statements" for the discussion of recently issued accounting pronouncements. 16 US report 04-6 22...

  • Page 19
    REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF CREATIVE TECHNOLOGY LTD. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of cash flows and of shareholders' equity present ...

  • Page 20
    ... BALANCE SHEETS (In US$'000, except per share data) June 30 2004 ASSETS Current assets: Cash and cash equivalents Accounts receivable, less allowances of $20,700 and $18,417 Inventory Other assets and prepaids Total current assets Property and equipment, net Investments Other non-current assets...

  • Page 21
    CONSOLIDATED STATEMENTS OF OPERATIONS (In US$'000, except per share data) Years ended June 30 2004 Sales, net Cost of goods sold Gross profit Operating expenses: Selling, general and administrative Research and development Other charges (Note 17) Operating income Gain (loss) from investments, net ...

  • Page 22
    ... receivable Inventory Marketable securities Other assets and prepaids Accounts payable Accrued and other liabilities Income taxes, including deferred tax Net cash (used in) provided by operating activities Cash flows from investing activities: Capital expenditures, net Proceeds from sale of fixed...

  • Page 23
    ... of year Cash and cash equivalents at end of year Supplemental disclosure of cash flow information: Interest paid Income taxes paid, net Non cash transaction: Buyout of a subsidiary's preference shares Shares issued for aqcuisition of subsidiary Fixed assets acquired under capital lease $ - (24...

  • Page 24
    CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (In US$'000, except share data) Ordinary Shares ('000) Balance at June 30, 2001 Shares issued under employee options and share purchase plans Repurchase of ordinary shares Dividends paid Reversal of unvested deferred share compensation, net ...

  • Page 25
    ... time of purchase. All deposits are in short term deposit and money market accounts with various banks. This diversification of risk is consistent with Creative's policy to maintain liquidity and ensure the safety of principal. Included in cash equivalents as of June 30, 2004 and 2003 are fixed rate...

  • Page 26
    ... condition of and business outlook for the company, including key operational and cash flow metrics, current market conditions and future trends in the company's industry, and the company's relative competitive position within the industry; and Creative's intent and ability to retain the investment...

  • Page 27
    ... value of the goodwill or intangible assets may be impaired, Creative measures any impairment based on a projected discounted cash flow method using a discount rate determined by the management to commensurate with the risk inherent in Creative's current business model. Creative performed its annual...

  • Page 28
    ... accounts, returns and discounts based on credit profiles of its customers, current economic trends, contractual terms and conditions and historical payment, return and discount experience. Stock-based compensation Creative accounts for stock-based employee compensation in accordance with Accounting...

  • Page 29
    ... loss per share as the effect of including such shares would be anti-dilutive. NOTE 3 - BALANCE SHEET DETAIL (in US$'000) As of June 30 2004 Inventory: Raw materials Work in progress Finished products Total inventory Estimated Useful Life Property and equipment: Land and buildings Construction in...

  • Page 30
    ...TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 - BALANCE SHEET DETAIL (in US$'000) (Cont'd) Included in property and equipment are assets purchased under capital lease obligations with a cost and accumulated depreciation of approximately $16.2 million and $8.7 million for fiscal 2004, and $9.0 million...

  • Page 31
    .... The land and facility leases expire at various dates through 2052 and provide for fixed rental rates during the terms of the leases. Minimum future lease payments for non-cancelable leases as of June 30, 2004, are as follows (in US$'000): Operating Leases Fiscal years ended June 30, 2005 2006...

  • Page 32
    ...the issued share capital of Creative. The amended New Plan also provided for incentive stock options to be granted to employees of Creative on a quarterly basis, at the average market price established on the five days closing immediately prior to the date of grant. The options vested at the rate of...

  • Page 33
    ... and non-employee directors under Creative's stock option plans is presented below: Options Outstanding Number of Shares ('000) Balance as of June 30, 2001 Granted - at fair market value - below fair market value - pursuant to the acquisition of 3Dlabs (see Note 17) Exercised Canceled Balance as of...

  • Page 34
    ... or (ii) one percent of the issued share capital of the Company as at the last day of the immediately preceding fiscal year. The exercise price of options granted under the 2000 Plan may be less than the fair market value of the shares as of the date of grant and the options expire after the tenth...

  • Page 35
    ...the Creative employee share purchase plan and stock option plan is estimated at the date of the grant using the Black-Scholes model based on the following assumptions: Fiscal 2004 Volatility Risk-free interest rates Share purchase plan Stock options Dividend yield Expected lives: Share purchase plan...

  • Page 36
    ... FINANCIAL STATEMENTS NOTE 10 - INCOME TAXES Creative was granted a Pioneer Certificate in 1990 under the Singapore Economic Expansion Incentives (Relief from Income Tax) Act, Cap. 86 for the design and manufacture of digital computer video, audio and multimedia products, including personal...

  • Page 37
    ... will be accounted for as a credit to additional paid-in capital rather than a reduction of the income tax provision. NOTE 11 - DEBT OBLIGATIONS On November 21, 2002, Creative Technology Centre Pte Ltd ("CTC"), a Singapore subsidiary of Creative, entered into a nine year term loan facility for...

  • Page 38
    ... appraiser. The acquisition was accounted for by the purchase method. The payment was allocated to land and buildings, deferred tax liability and against minority interest. NOTE 13 - INTELLECTUAL PROPERTY INDEMNIFICATION OBLIGATIONS Creative indemnifies certain customers, distributors, suppliers...

  • Page 39
    ... in Computer Aided Design, Digital Content Creation, and visual simulation markets. To acquire the remaining outstanding capital stock of 3Dlabs, Creative paid approximately $37.0 million in cash, issued approximately 6.3 million shares of Creative's ordinary shares valued at approximately...

  • Page 40
    ... Acquired in-process technologies Other intangible assets consisting of: Existing technology Patent/core technology Non-competition agreement Trade name/trademarks Total purchase price excluding deferred share compensation Total deferred share compensation Total purchase price including deferred...

  • Page 41
    ... sales and marketing efforts predominantly through sales offices in North America, Europe and the Asia Pacific region. The following is a summary of net sales by product category (in US$'000): Years ended June 30 2004 External net sales: Audio Speakers Personal Digital Entertainment Graphics & Video...

  • Page 42
    ... FINANCIAL STATEMENTS NOTE 18 - SEGMENT REPORTING (Cont'd) As of June 30 2004 Identifiable assets: Asia Pacific The Americas Europe Consolidated $ $ 742,139 123,628 75,081 940,848 $ $ 496,646 89,683 60,514 646,843 2003 Long-lived assets are based on the physical location of the assets at the end...

  • Page 43
    ... Singapore to accounts with brokers located in the United States. The delisting of Creative ordinary shares from NASDAQ would not affect the status of Creative's shares on the SGX-ST. The following table presents, for the registered shares on the NASDAQ and SGX-ST: (i) the annual high and low market...

  • Page 44
    THE CREATIVE NETWORK Worldwide Corporate Headquarters Creative Technology Ltd. 31 International Business Park, Creative Resource, Singapore 609921 Tel: +65-6895 4000 Fax: +65-6895 4999 Website: www.creative.com US Headquarters Creative Labs, Inc. 1901 McCarthy Boulevard, Milpitas, CA 95035 Tel: +1-...

  • Page 45
    ... United Kingdom Creative Labs (UK) Ltd Unit 3, The Pavilions, Ruscombe Business Park, Ruscombe...Creative Labs, S.L. Constitución 1-4º, 3 Edificio Diagonal 2, 08960 Sant Just Desvern Barcelona, Spain Tel: +34-93-470 3150 Fax: +34-93-499 0811 Sweden Creative Technologies Scandinavia AB Spånga Center...

  • Page 46
    ...DIRECTORS Sim Wong Hoo, Tan Lip-Bu, Tang Chun Choy, Lee Kheng Nam, Chairman Director Director Director CORPORATE HEADQUARTERS 31 International Business Park Creative Resource Singapore 609921 Tel: 65-6895-4000 COMPANY SECRETARY Ng Keh Long 31 International Business Park Creative Resource Singapore...