Creative 2005 Annual Report Download - page 14

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Operating expenses
SG&A expenses in fiscal year 2004 increased marginally by 3% compared to fiscal year 2003. The increase in SG&A
expenses was mainly attributable to an increase in sales and marketing expenses, which were in line with the increase in net
sales, and an increase in expenses related to the company’s European operations due to the strengthening of the Euro
compared to the U.S. dollar during fiscal year 2004. As a percentage of sales, SG&A expenses were 21% of sales compared
to 23% of sales in fiscal year 2003. R&D expenses increased by 18% primarily due to an increase in resources to develop
new products. As a percentage of sales, R&D expenses remained at 8% of sales in fiscal year 2004 compared to fiscal year
2003.
Net investment gain (loss)
Net investment gain of $72.6 million in fiscal year 2004 comprised a $52.9 million gain from sales of investments and a $23.1
million non-cash gain on a “deemed disposal” of interests in SigmaTel offset by $3.4 million in write-downs of unquoted
investments. The net gain of $52.9 million in fiscal year 2004 from sales of investments includes a $38.1 million net gain
from the sale of interests in SigmaTel (see Note 14 of “Notes to Consolidated Financial Statements”). Net investment loss
of $6.0 million in fiscal year 2003 included write-downs of quoted and unquoted investments of $13.6 million offset partially
by net gains of $7.6 million from the sale of quoted investments.
Net interest
Net interest income of $3.6 million in fiscal year 2004 increased by $2.5 million compared to $1.1 million in fiscal year 2003.
The increase was mainly due to higher average cash balance and interest rates in fiscal year 2004 compared to fiscal year
2003.
Others
Other income of $5.7 million in fiscal year 2004 increased by $2.0 million compared to $3.7 million in fiscal year 2003. The
increase was mainly due to an increase in share of equity-method investees’ profits by $2.5 million to $0.3 million in fiscal
year 2004, compared to share of losses of $2.2 million in fiscal year 2003. Exchange gain was reduced by $0.9 million to
$4.5 million in fiscal year 2004 compared to $5.4 million in fiscal year 2003.
Provision for income taxes
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 be exempted from income tax in Singapore,
subject to certain conditions. As a result of obtaining the new Pioneer Certificate, fiscal year 2004 tax write-back includes
a $12.3 million reversal of income taxes. The reversal was related to corporate taxes provided for in full for profits arising
from qualifying activities from the commencement date of the new Pioneer Certificate until the second quarter of fiscal year
2004, based on the standard tax rates of 24.5% for fiscal year 2001, 22% for fiscal years 2002 and 2003, and 20% for fiscal
year 2004. These standard corporate income tax rates continue to be applicable to profits arising from activities excluded
from the new Pioneer Certificate. Excluding the $12.3 million reversal of income taxes, Creative’s provision for income taxes
for fiscal year 2004 as a percentage of operating income was 8% compared to 10% in the prior fiscal year. The lower tax
provision in fiscal year 2004 was primarily due to changes in the mix of taxable income arising from various geographical
regions and the new Pioneer Certificate granted to Creative.