6-K 1 u92115e6vk.txt CREATIVE TECHNOLOGY LTD. ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 6-K REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR 15d-16 OF THE SECURITIES EXCHANGE ACT OF 1934 QUARTERLY REPORT FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2002 Commission File Number 0-20281 CREATIVE TECHNOLOGY LTD. (Exact name of Registrant as specified in its charter) SINGAPORE ----------------------------------------------- (Jurisdiction of incorporation or organization) 31 INTERNATIONAL BUSINESS PARK CREATIVE RESOURCE SINGAPORE 609921 ---------------------------------------- (Address of principal executive offices) Indicate by check mark whether the Registrant files or will file annual reports under cover of Form 20-F or 40-F. Form 20-F X Form 40-F ------ ------ Indicate by check mark if the Registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): ------ Indicate by check mark if the Registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): ------ Indicate by check mark whether by furnishing the information contained in this Form, the Registrant is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934. Yes No X ------- ------ If "Yes" is marked, indicate below the file number assigned to the Registrant in connection with Rule 12g3-2(b):82 N/A ----- ================================================================================ PAGE 1 OF 18 TABLE OF CONTENTS PART I - FINANCIAL INFORMATION
ITEM 1 Financial Statements Consolidated Balance Sheets as of December 31, 2002 and June 30, 2002 3 Consolidated Statements of Operations for the Three Months and Six Months 4 ended December 31, 2002 and 2001 Consolidated Statements of Cash Flows for the Six Months 5 ended December 31, 2002 and 2001 Notes to Consolidated Financial Statements 6 ITEM 2 Management's Discussion and Analysis of Financial Condition and Results of Operations Safe Harbor Statements under The Private Securities Litigation Reform Act of 1995 10 Selected Consolidated Financial Data 11 Results of Operations 13 Liquidity and Capital Resources 15 Contractual Obligations and Commercial Commitments 15 Effects of Recent Accounting Pronouncements 16 ITEM 3 Quantitative and Qualitative Disclosures about Market Risk 17 SIGNATURE 18
Page 2 PART I - FINANCIAL INFORMATION ITEM 1 FINANCIAL STATEMENTS CREATIVE TECHNOLOGY LTD. CONSOLIDATED BALANCE SHEETS (IN US$'000, EXCEPT PER SHARE DATA)
DECEMBER 31, 2002 JUNE 30, 2002 (Unaudited) ----------------- ------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $203,009 $166,917 Marketable equity securities 844 1,388 Accounts receivable, net 106,864 85,193 Inventory 121,609 108,549 Other assets and prepaids 14,392 17,773 -------- -------- TOTAL CURRENT ASSETS 446,718 379,820 Property and equipment, net 108,179 104,748 Investments 47,386 66,688 Other non-current assets 108,606 115,122 -------- -------- TOTAL ASSETS $710,889 $666,378 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $114,475 $ 64,809 Accrued liabilities 92,648 77,831 Income taxes payable 40,093 43,794 Current portion of long term obligations and others 24,056 27,441 -------- -------- TOTAL CURRENT LIABILITIES 271,272 213,875 -------- -------- Long term obligations 26,722 16,782 --------- -------- Minority interest in subsidiaries 3,387 11,769 -------- -------- SHAREHOLDERS' EQUITY: Ordinary shares ('000); S$0.25 par value; Authorized: 200,000 shares Outstanding: 79,333 and 78,866 shares 7,658 7,592 Additional paid-in capital 312,879 311,445 Unrealized holding gains on quoted investments 7,582 20,636 Deferred share compensation (5,805) (8,836) Retained earnings 87,194 93,115 -------- -------- TOTAL SHAREHOLDERS' EQUITY 409,508 423,952 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $710,889 $666,378 ======== ========
The accompanying notes are an integral part of these consolidated financial statements Page 3 CREATIVE TECHNOLOGY LTD. CONSOLIDATED STATEMENTS OF OPERATIONS (In US$' 000, except per share data) (Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, ------------------------ ------------------------ 2002 2001 2002 2001 ---------- ---------- ---------- ---------- Sales, net $230,940 $249,506 $391,563 $429,948 Cost of goods sold 149,169 167,353 251,799 291,882 -------- -------- -------- -------- GROSS PROFIT 81,771 82,153 139,764 138,066 Operating expenses: Selling, general and administrative 49,039 45,143 91,194 88,570 Research and development 13,279 9,480 28,546 19,088 -------- -------- -------- -------- TOTAL OPERATING EXPENSES 62,318 54,623 119,740 107,658 -------- -------- -------- -------- OPERATING INCOME 19,453 27,530 20,024 30,408 Gain (loss) from investments, net 172 728 (6,144) (15,697) Interest income and other, net 1,199 1,291 2,006 2,715 -------- -------- -------- -------- INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 20,824 29,549 15,886 17,426 Provision for income taxes (1,945) (2,753) (2,002) (2,983) Minority interest in (income) loss -- (489) 18 (984) -------- -------- -------- -------- NET INCOME $ 18,879 $ 26,307 $ 13,902 $ 13,459 ======== ======== ======== ======== Basic earnings per share: $ 0.24 $ 0.36 $ 0.18 $ 0.18 Weighted average ordinary shares outstanding ('000) 79,026 72,366 78,951 73,110 Diluted earnings per share: $ 0.23 $ 0.36 $ 0.17 $ 0.18 Weighted average ordinary shares and equivalents outstanding ('000) 80,669 73,664 80,970 73,895
The accompanying notes are an integral part of these consolidated financial statements Page 4 CREATIVE TECHNOLOGY LTD. CONSOLIDATED STATEMENTS OF CASH FLOWS INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (IN US$'000) (UNAUDITED)
SIX MONTHS ENDED DECEMBER 31, ----------------------------- 2002 2001 --------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 13,902 $ 13,459 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 15,940 12,008 Deferred stock compensation amortization 2,260 1,313 Minority interest in (loss) income (18) 984 Equity share in loss of unconsolidated investments 369 67 Write downs of investments and other non-current assets 9,191 20,005 Gain from investments, net (3,759) (4,699) Changes in assets and liabilities, net: Accounts receivable (21,671) (10,818) Inventory (13,060) 34,337 Marketable securities 544 1,142 Other assets and prepaids 3,518 (816) Accounts payable 49,666 (454) Accrued and other liabilities 11,115 (16,237) Income taxes payable (3,701) (2,795) -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 64,296 47,496 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures, net (7,666) (5,298) Proceeds from sale of quoted investments 6,701 12,895 Purchase of investments (5,885) (9,833) Increase in other assets, net (165) (1,098) -------- -------- NET CASH USED IN INVESTING ACTIVITIES (7,015) (3,334) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Decrease in minority shareholders' loan and equity balance (6,818) (101) Buyout of subsidiary's minority interest (3,992) -- Proceeds from exercise of ordinary share options 2,271 4,060 Repurchase of ordinary shares -- (18,013) Proceeds from/(Repayments of) long-term obligations, net 9,238 (1,979) Dividends paid (19,823) (18,025) Dividends paid to minority interest (2,065) -- -------- -------- NET CASH USED IN FINANCING ACTIVITIES (21,189) (34,058) -------- -------- NET INCREASE IN CASH AND CASH EQUIVALENTS 36,092 10,104 Cash and cash equivalents at beginning of year 166,917 168,157 -------- -------- CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $203,009 $178,261 ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid $ 482 $ 224 ======== ======== Income taxes paid $ 5,730 $ 5,777 ======== ========
The accompanying notes are an integral part of these consolidated financial statements Page 5 CREATIVE TECHNOLOGY LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 - BASIS OF PRESENTATION In the opinion of management, the accompanying unaudited consolidated interim financial statements of Creative Technology Ltd. ("Creative") have been prepared on a consistent basis with the June 30, 2002 audited consolidated financial statements and include all adjustments, consisting only of normal recurring adjustments, necessary to provide a fair presentation of the results of operations for the interim periods presented. The consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States of America ("US GAAP"). These consolidated interim financial statements should be read in conjunction with the consolidated financial statements and accompanying notes thereto included in Creative's 2002 annual report on Form 20-F filed with the Securities and Exchange Commission. The results of operations for the three and six months period ended December 31, 2002 are not necessarily indicative of the results to be expected for the entire year or any future period. Creative generally operates on a thirteen week calendar closing on the Friday closest to the natural calendar quarter. For convenience, all quarters are described by their natural calendar dates. Creative conducts a substantial portion of its business in United States dollars ("US$" or "$") and all amounts included in these interim financial statements and in the notes herein are in US$, unless designated as Singapore dollars ("S$"). NOTE 2 - OTHER NON-CURRENT ASSETS (IN US$'000)
DECEMBER 31, JUNE 30, 2002 2002 ------------ -------- Goodwill $ 91,976 $ 91,976 Other intangible assets 11,737 17,894 Other non-current assets 4,893 5,252 -------- -------- $108,606 $115,122 ======== ========
NOTE 3 - INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined using standard cost, appropriately adjusted at the balance sheet date to approximate actual cost on a weighted average basis. In the case of finished products and work-in-progress, cost includes materials, direct labor and an appropriate proportion of production overheads. The components of inventory are as follows (in US$'000):
DECEMBER 31, JUNE 30, 2002 2002 ------------ -------- Raw materials $ 28,623 $ 33,826 Work in progress 8,582 5,658 Finished products 84,404 69,065 -------- -------- $121,609 $108,549 ======== ========
Page 6 NOTE 4 - PRODUCT WARRANTIES The warranty period for the bulk of Creative's products typically ranges between 1 to 3 years. The product warranty accrual reflects management's best estimate of probable liability under its product warranties. Management determines the warranty based on known product failures (if any), historical experience, and other currently available evidence. Changes in the product warranty accrual for the six months ended December 31, 2002 was as follows (in US$'000):
DECEMBER 31, 2002 ----------------- Balance as of June 30, 2002 $ 2,292 Accruals for warranties issued during the period 1,313 Accruals related to pre-existing warranties (include changes in estimates) 77 Settlements made (in cash or in kind) during the period (1,126) ------- Balance as of December 31, 2002 $ 2,556 =======
NOTE 5 - NET INCOME PER SHARE In accordance with Statement of Financial Accounting Standards No. 128 ("SFAS 128") "Earnings per Share", Creative reports both basic earnings per share and diluted earnings per share. Basic earnings per share is computed using the weighted average number of ordinary shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of ordinary and potentially dilutive ordinary equivalent shares outstanding during the period. Ordinary equivalent shares are excluded from the computation if their effect is anti-dilutive. In computing the diluted earnings per share, the treasury stock method is used to determine, based on average stock prices for the respective periods, the ordinary equivalent shares to be purchased using proceeds received from the exercise of such equivalent shares. Other than the dilutive effect of stock options, there are no other financial instruments that would impact the weighted average number of ordinary shares outstanding used for computing diluted earnings per share. The potentially dilutive ordinary equivalent shares outstanding under the employee share purchase plan were not material. Following is a reconciliation between the average number of ordinary shares outstanding and equivalent shares outstanding (in '000):
THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, --------------------- --------------------- 2002 2001 2002 2001 ------ ------ ------ ------ Weighted average ordinary shares outstanding 79,026 72,366 78,951 73,110 Weighted average dilutive stock options outstanding 1,643 1,298 2,019 785 ------ ------ ------ ------ WEIGHTED AVERAGE ORDINARY SHARES AND EQUIVALENT OUTSTANDING 80,669 73,664 80,970 73,895 ====== ====== ====== ======
Page 7 NOTE 6 - INCOME TAXES Provisions for income taxes for interim periods are based on estimated annual effective income tax rates. Income of foreign subsidiaries of Creative is subject to tax in the country in which the subsidiary is located. Creative's effective income tax rate is based on the mix of income arising from various geographical regions, where the tax rates range from 0% to 50%; pioneer status income in Singapore, which is exempt from tax; and the utilization of non-Singapore net operating losses. As a result, Creative's overall effective rate of tax is subject to changes based on the international source of income before tax. Creative's Pioneer Certificate expired in March 2000 and 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. The Singapore corporate income tax rate of 22.0% is applicable to the profits excluded from the new Pioneer Certificate. NOTE 7 - COMPREHENSIVE INCOME The components of total comprehensive income (loss) are as follows (in US$'000):
THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, -------------------- ---------------------- 2002 2001 2002 2001 ------- ------- -------- ------- Net income $18,879 $26,307 $ 13,902 $13,459 Unrealized (loss) gain on quoted investments (3,365) 13,030 (13,054) (6,106) ------- ------- -------- ------- TOTAL COMPREHENSIVE INCOME (LOSS) $15,514 $39,337 $ 848 $ 7,353 ======= ======= ======== =======
NOTE 8 - SHARE REPURCHASES Details of Share Repurchases by Creative since the commencement date of the program on November 6, 1998 are set out below:
NUMBER OF SHARES REPURCHASED AVERAGE PRICE ---------------------------- ------------- (IN MILLIONS) Year ended June 30, 1999 10.0 $14 Year ended June 30, 2000 5.9 $17 Year ended June 30, 2001 7.7 $12 Year ended June 30, 2002 2.7 $ 7 Quarter ended September 30, 2002 -- -- Quarter ended December 31, 2002 -- -- ---- --- TOTAL 26.3 $13 ==== ===
Page 8 At the Annual General Meeting ("AGM") held on November 20, 2002, the shareholders approved a share repurchase mandate allowing Creative to buy up to 10% of the issued share capital of Creative outstanding as of the date of the AGM. This amounts to approximately 7.9 million shares. This authority to repurchase shares shall continue in force unless revoked or revised by the shareholders in a general meeting, or until the date the next AGM of Creative is held or is required to be held, whichever is the earlier. In accordance with Singapore statutes, such repurchases are recorded as a reduction in retained earnings. NOTE 9 - GUARANTEES As of December 31, 2002, Creative's bankers have given guarantees totaling $1.7 million to various parties, $1.3 million in relation to the payment of custom and excise duty to the revenue authorities and the balance of $0.4 million in relation to payment of utilities and workers security bonds. The bankers hold a counter indemnity from Creative in relation to these guaranties given. NOTE 10 - LEGAL PROCEEDINGS During the course of its normal business operations, Creative and its subsidiaries are involved from time to time in a variety of intellectual property and other disputes, including claims against Creative alleging copyright infringement, patent infringement, contract claims, employment claims and business torts. A lawsuit by a purported class of 3Dlabs shareholders against Creative and 3Dlabs has been dismissed in defendants' favor and is no longer pending. Ongoing disputes exist with, among other entities, MPEG Audio, Inc. (a declaratory relief action regarding a patent dispute), the Lemelson Foundation (an action that involves patent claims by Lemelson against over 500 entities, including Creative, which action has been stayed pending resolution of issues in third party litigation), and representative purchasers of Audigy sound cards (an action for unfair competition based on allegations that Creative's packaging and advertising falsely represent the Audigy sound card's audio processing capabilities). Creative also from time to time receives licensing inquiries and/or threats of potential future patent claims from a variety of entities, including Lucent Technologies and Dyancore Holdings. Creative believes it has valid defenses to the various claims asserted against it, and intends to defend the actions vigorously. However, should any of these claimants prevail in their suits or claims, Creative does not expect there to be any consequent material adverse effect on its financial position or results of operations. NOTE 11 - SUBSEQUENT EVENTS In January 2003, Creative announced that it intends to move to a single primary stock exchange listing. Creative's current listing on the Singapore Exchange Securities Trading Limited ("SGX-ST") would become Creative's sole exchange listing. Creative has the intention to delist its Ordinary Shares from the NASDAQ National Market ("NASDAQ"), and will initiate steps that can facilitate the elimination of its U.S. public reporting obligations. The delisting from NASDAQ would not affect the status of Creative's shares on the SGX-ST. Page 9 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SAFE HARBOR STATEMENTS UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 SAFE HARBOR STATEMENTS UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Except for the historical information contained herein, the matters set forth are forward-looking statements and are subject to certain risks and uncertainties that could cause actual results to differ materially. Such risks and uncertainties include: Creative's ability to timely develop new products that gain market acceptance and to manage frequent product transitions; competitive pressures in the marketplace; Creative's ability to successfully integrate acquisitions; potential fluctuations in quarterly results due to the seasonality of Creative's business and the difficulty of projecting such fluctuations; possible disruption in commercial activities caused by factors outside of Creative's control, such as terrorism, armed conflict and labor disputes; a reduction in demand for computer systems, peripherals and related products, including Creative's products, as a result of poor economic conditions and social and political turmoil; the proliferation of sound functionality in new 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 continued deterioration of global equity markets; increased exposure to excess and obsolete inventory; Creative's reliance on sole sources for many of its chips and other key components; component shortages which may impact Creative's ability to meet customer demand; Creative's ability to protect its proprietary rights; a reduction or cancellation of sales orders for Creative products or other unexpected or unplanned events that could cause Creative to miss its revenue guidance, operating expense projections or negatively impact its margins; accelerated declines in the average selling prices of Creative's products; the vulnerability of certain markets to current and future currency fluctuations; the effects of restricted fuel availability and rising costs of fuel; and fluctuations in the value and liquidity of Creative's investee companies; and a potential decrease in the trading volume and value of Creative's ordinary shares due to its intended delisting from NASDAQ and the elimination of its U.S. reporting obligations. For further information regarding the risks and uncertainties associated with Creative's business, please refer to its filings with the SEC over the past twelve months, including, without limitation, Creative's Form 20-F dated October 31, 2002 and its press release, dated March 11, 2002, announcing the signing of a definitive agreement to acquire 3Dlabs. Creative undertakes no obligation to update any forward-looking statement to conform the statement to actual results or changes in Creative's expectations. Page 10 SELECTED CONSOLIDATED FINANCIAL DATA The following is a summary of Creative's unaudited quarterly results for the eight quarters ended December 31, 2002, together with the percentage of sales represented by such results. Consistent with the PC peripherals market, due to consumer buying patterns, demand for Creative's products is generally stronger in the quarter ended December 31, compared to any other quarter of the fiscal year. In management's opinion, these results detailed below have been prepared on a basis consistent with the audited financial statements and include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the information for the periods presented when read in conjunction with the financial statements and notes thereto contained elsewhere herein. Creative's business is seasonal in nature and the quarterly results are not necessarily indicative of the results to be achieved for the complete year.
UNAUDITED DATA FOR QUARTERS ENDED (IN US$'000 EXCEPT PER SHARE DATA) -------------------------------------------------------------------------------------- DEC 31 SEP 30 JUN 30 MAR 31 DEC 31 SEP 30 JUN 30 MAR 31 2002 2002 2002 2002 2001 2001 2001 2001 -------- -------- -------- -------- -------- -------- -------- --------- Sales, net(1) $230,940 $160,623 $182,572 $193,385 $249,506 $180,442 $233,315 $ 262,009 Cost of goods sold 149,169 102,630 122,291 129,209 167,353 124,529 170,211 199,622 -------- -------- -------- -------- -------- -------- -------- --------- GROSS PROFIT 81,771 57,993 60,281 64,176 82,153 55,913 63,104 62,387 Operating expenses: Selling, general and administrative(1) 49,039 42,155 42,815 38,737 45,143 43,427 48,237 54,664 Research and development 13,279 15,267 10,748 8,412 9,480 9,608 12,431 11,380 Other charges(2) -- -- 26,080 -- -- -- -- 22,814 -------- -------- -------- -------- -------- -------- -------- --------- OPERATING INCOME (LOSS) 19,453 571 (19,362) 17,027 27,530 2,878 2,436 (26,471) Net gain (loss) from investments 172 (6,316) (29,845) 128 728 (16,425) (75,988) (75,360) Interest income and other, net 1,199 807 2,289 151 1,291 1,424 183 1,090 -------- -------- -------- -------- -------- -------- -------- --------- INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST 20,824 (4,938) (46,918) 17,306 29,549 (12,123) (73,369) (100,741) Provision for income taxes (1,945) (57) (1,012) (1,703) (2,753) (230) -- -- Minority interest in (income) loss -- 18 (436) (423) (489) (495) (71) (289) -------- -------- -------- -------- -------- -------- -------- --------- NET INCOME (LOSS) $ 18,879 $ (4,977) $(48,366) $ 15,180 $ 26,307 $(12,848) $(73,440) $(101,030) ======== ======== ======== ======== ======== ======== ======== ========= Basic earnings (loss) per share $ 0.24 $ (0.06) $ (0.65) $ 0.21 $ 0.36 $ (0.17) $ (0.94) $ (1.27) ======== ======== ======== ======== ======== ======== ======== ========= Weighted average ordinary shares outstanding ('000) 79,026 78,877 74,375 72,134 72,366 73,854 78,084 79,299 ======== ======== ======== ======== ======== ======== ======== ========= Diluted earnings (loss) per share $ 0.23 $ (0.06) $ (0.65) $ 0.20 $ 0.36 $ (0.17) $ (0.94) $ (1.27) ======== ======== ======== ======== ======== ======== ======== ========= Weighted average ordinary shares and equivalents outstanding ('000) 80,699 78,877 74,375 76,323 73,664 73,854 78,084 79,299 ======== ======== ======== ======== ======== ======== ======== =========
Page 11
UNAUDITED DATA FOR QUARTERS ENDED (AS A PERCENTAGE OF SALES) ----------------------------------------------------------------------------------- DEC 31 SEP 30 JUN 30 MAR 31 DEC 31 SEP 30 JUN 30 MAR 31 2002 2002 2002 2002 2001 2001 2001 2001 ------ ------ ------ ------ ------ ------ ------ ------ Sales, net(1) 100% 100% 100% 100% 100% 100% 100% 100% Cost of goods sold 65 64 67 67 67 69 73 76 --- --- --- --- --- --- --- --- GROSS PROFIT 35 36 33 33 33 31 27 24 Operating Expenses: Selling, general and administrative(1) 21 26 24 20 18 24 21 21 Research and development 6 10 6 4 4 5 5 4 Other charges(2) -- -- 14 -- -- -- -- 9 --- --- --- --- --- --- --- --- OPERATING (LOSS) INCOME 8 -- (11) 9 11 2 1 (10) Net (loss) gain from investments -- (4) (16) -- -- (9) (32) (29) Interest income (expense) and other, net 1 1 1 -- 1 -- -- 1 --- --- --- --- --- --- --- --- (LOSS) INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 9 (3) (26) 9 12 (7) (31) (38) Provision for income taxes (1) -- (1) (1) (1) -- -- -- Minority interest in (income) loss -- -- -- -- -- -- -- -- --- --- --- --- --- --- --- --- NET (LOSS) INCOME 8% (3)% (27)% 8% 11% (7)% (31)% (38)% === === === === === === === ===
1. Since the quarter ended March 31, 2002, Creative has adopted EITF Issue No. 01-9, "Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products)." As a result, certain consideration paid to distributors and resellers of its products has been reclassified as a revenue offset rather than as selling, general and administrative expense. Prior quarters' financial data have been reclassified to conform to this presentation. 2. Other charges for the quarter ended June 30, 2002 relates to the write-off of in-process technology arising from the acquisition of 3Dlabs. Other charges for the quarter ended March 31, 2001 includes $8.4 million in restructuring charges, fixed assets impairment write-downs of $3.2 million and write-off of other assets acquired from Aureal amounting to $11.2 million. GENERAL Management's Discussion and Analysis of Financial Condition and Results of Operations are based upon Creative's Consolidated Condensed Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgements about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Page 12 RESULTS OF OPERATIONS THREE MONTHS ENDED DECEMBER 31, 2002 COMPARED TO THREE MONTHS ENDED DECEMBER 31, 2001 Net sales for the second quarter of fiscal 2003 ("Q2/03") decreased by 7%, compared to the same quarter ("Q2/02") in the prior fiscal year. The lower revenue in this quarter were mainly attributed to the difficult global economic climate and the closure of U.S. west coast ports which delay the shipping of inventory for the holiday season sales. Audio product sales (Sound Blaster audio cards and chipsets) in Q2/03 decreased by 34% compared to Q2/02, primarily attributable to the continued decline in sales to the system integrator market and a drop off in the low-end audio products. As a percentage of sales, audio product sales decreased from 48% in Q2/02 to 34% in Q2/03. Sales of speakers increased marginally by 1% compared to Q2/02 and represented 24% of sales in Q2/03 compared with 22% in Q2/02. The increase was primarily due to higher demand for new models of multi-media speakers. Sales of personal digital entertainment ("PDE") products, which includes digital audio players and digital cameras, increased by 96% compared to Q2/02 and represented 19% of sales in Q2/03 compared to 9% of sales in Q2/02. The substantial increase was driven by strong demand for the NOMAD MuVo and the introduction of the NOMAD Jukebox Zen late in the quarter. Sales of graphics and video products in Q2/03 was 92% higher than Q2/02 and represented 11% of sales in Q2/03, compared to 5% in Q2/02. The increase in graphic card sales was primarily due to sales of 3Dlabs Inc. ("3Dlabs") graphic cards. Sales of multimedia upgrade kits ("MMUK"), including data storage kits, decreased by 81% compared to Q2/02 and comprised 1% of sales in Q2/03 compared to 5% of sales in the same quarter in the prior fiscal year. The reduction in MMUK sales is in line with Creative's current business strategy of de-emphasizing lower margin products. Sales of other products, which include communication products, music products, accessories and other miscellaneous items, in Q2/03 remained the same at 11% of sales compared to Q2/02. Gross profit, as a percentage of sales, was 35% in Q2/03 compared to 33% in Q2/02. 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 increased by 9% in Q2/03 compared to Q2/02 and, as a percentage of sales, were 21% in Q2/03, compared to 18% in Q2/02. The marginal increase in SG&A expenses was primarily due to the addition of operating expenses incurred by 3Dlabs. Creative's research and development ("R&D") expenses as a percentage of sales increased from 4% of sales in Q2/02 to 6% of sales in Q2/03. The increase was mainly relating to R&D expenses incurred by 3Dlabs. Net investment gains of $0.2 million in Q2/03 comprised a net gain of $3.8 million from sales of investments offset by permanent write-downs of unquoted investment of $3.6 million permanent write-downs of unquoted investments. In Q2/02, there were no write-downs of investments and net gain from sales of investments was $0.7 million. Interest and other income decreased marginally by $0.1 million to $1.2 million in Q2/03 compared to $1.3 million in Q2/02. Tax provision for Q2/03 as a percentage of income before taxes and minority interest excluding net gain from investments remains the same at about 10% in Q2/02. Page 13 SIX MONTHS ENDED DECEMBER 31, 2002 COMPARED TO SIX MONTHS ENDED DECEMBER 31, 2001 Sales for the first six months of fiscal 2003 decreased by 9% compared with the first six months of the prior fiscal year. The lower revenue for the first six months of fiscal 2003 was mainly attributed to the difficult global economic climate where several major U.S. retailers have encountered slowing sales. Audio product sales (Sound Blaster audio cards and chipsets) declined by 37% compared with the first six months of the prior fiscal year and, as a percentage of total sales, represented 34% of sales in the six-month period ended December 31, 2002, compared to 49% of sales in the comparable period in the prior fiscal year. The decrease in audio 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 increased marginally by 1% in the first half of fiscal year 2003 compared to the first half of the prior fiscal year, primarily due to introduction of new models of multi-media speakers. Speaker sales comprised 22% of total sales in the first six months of fiscal 2003 compared to 20% in the first six months of fiscal 2002. Sales of PDE products, which include digital audio players and digital cameras, increased by 83% compared to the first six months of fiscal 2002 and comprised 17% of total sales for the first six-months of fiscal 2003 compared with fiscal 2002, when they represented 8% of total sales. The significant increase was driven by the strong demand for the NOMAD MuVo and the introduction of the NOMAD Jukebox Zen late in Q2/03. Sales of video and graphics products in the first half of fiscal year 2003 was almost three times higher than the first half of prior fiscal year, and as a percentage of sales, increased from 4% to 12% of sales. The significant increase in graphic card sales was primarily due to sales of 3Dlabs graphic cards. MMUK sales, which also include sales of data storage products, declined by 81% in the first six months of fiscal 2003 compared to the first six months of fiscal 2002, and were 1% of total sales in the first six-months of fiscal 2003, compared with 7% of total sales for the same period in fiscal 2002. The reduction in MMUK sales is in line with Creative's current business strategy of de-emphasizing the lower margin products. Sales of other products, which include accessories, music products, communication products and other miscellaneous items as a percentage of total sales was 14% of total sales in the first six-months of fiscal 2003 compared with 12% in the corresponding period last year. Gross profit for the six-month period ended December 31, 2002 increased to 36% of total sales compared to 32% in the six-month period ended December 31, 2001. 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. SG&A expenses for the six-month period ended December 31, 2002 increased by 3% compared to the same period in the prior fiscal year. The marginal increase in SG&A expenses was primarily due to the addition of operating expenses incurred by 3Dlabs. As a percentage of sales, SG&A expenses were 23% of sales for the six-month period ended December 31, 2002 and 21% for the same period in the prior fiscal year. R&D expenses as a percentage of sales increased from 4% for the six-month period ended December 31, 2001 to 7% in December 31, 2002, mainly relating to the R&D expenses incurred by 3Dlabs. Net investment loss of $6.1 million for the six-month period ended December 31, 2002 comprised $9.2 million in write-downs of quoted and unquoted investments, offset partially by a $3.1 million net gain from sales of investments and marketable securities. Net investment loss of $15.7 million for the corresponding six-month period ended December 31, 2001, included net gains from sale of investments and marketable securities of $4.3 million offset by $20.0 million losses from write-downs of quoted and unquoted investments. Interest and other income decreased by $0.7 million in the first half of fiscal 2003 compared to the first half of fiscal 2002. The decrease was primarily due to lower interest income. Tax provision for the first six months of fiscal year 2003 as a percentage of income before taxes and minority interest excluding net gain from investments remains the same at 9% compared to the same period in the prior fiscal year. Page 14 LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents as of December 31, 2002 increased by $36.1 million to $203.0 million, compared to the balance of $166.9 million at June 30, 2002. Cash generated by operating activities of $64.3 million were mainly due to net income of $13.9 million, adjustments for non-cash items of $24.0 million, $49.7 million increase in accounts payable and $11.1 million increase in accrued and other liabilities. A portion of the contribution was offset by a net increase in accounts receivable and inventory of $21.7 million and $13.1 million. The $24.0 million adjustments in non-cash items to net income include depreciation and amortization of $15.9 million and write-downs of investments and other non-current assets of $9.2 million. $7.0 million utilized in investing activities comprised primarily capital expenditures of $7.7 million, purchase of investments of $5.9 million, offset partially by $6.7 million proceeds from sale of investments. Cash used in financing activities of $21.2 million was mainly due to dividend payment of $21.9 million to shareholders and minority interest, $6.8 million decrease in minority shareholders loan, $4.0 million buyout of minority interest, offset partially by a net increase in long-term obligations of $9.2 million. As of December 31, 2002, in addition to the cash reserves and excluding the long-term loan, Creative had unutilized credit facilities totaling approximately $107.3 million for overdrafts, guarantees, letters of credit and fixed short-term loan. Creative continually reviews and evaluates investment opportunities, including potential acquisitions of, and investments in, companies that can provide Creative with technologies, subsystems or complementary products that can be integrated into or offered with Creative's existing product range. Management believes that Creative has adequate resources to meet its projected working capital and other cash needs for at least the next twelve months. To date, inflation has not had a significant impact on Creative's operating results. CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS The following table presents the contractual obligations and commercial commitments of Creative as of December 31, 2002:
PAYMENTS DUE BY PERIOD (US$'000) -------------------------------------------------------------- LESS THAN 1 TO 3 4 TO 5 AFTER 5 CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR YEARS YEARS YEARS ----------------------- -------- --------- ------ ------ ------- Long Term Debt $ 40,720 $21,222 15,472 4,026 -- Capital Lease Obligations 4,755 2,662 2,022 71 -- Operating Leases 46,497 10,282 16,640 5,826 13,749 Unconditional Purchase Obligations 46,460 46,460 -- -- -- Other Long Term Obligations 1,064 1,064 -- -- -- -------- ------- ------- ------ ------- TOTAL CONTRACTUAL CASH OBLIGATIONS $139,496 $81,690 $34,134 $9,923 $13,749 ======== ======= ======= ====== =======
As of December 31, 2002, Creative has utilized approximately $3.1 million under guarantees, letters of credit, overdraft and fixed short-term loan facilities. Page 15 EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" (SFAS 146). This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." This Statement requires that a liability for costs associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability is incurred. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002. The effect of adoption of SFAS 146 by Creative is dependent on its related activities subsequent to the date of adoption. In December 2002, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting for Stock-Based Compensation, Transition and Disclosure." SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 also requires that disclosures of the pro forma effect of using the fair value method of accounting for stock-based employee compensation be displayed more prominently and in a tabular format. Additionally, SFAS No. 148 requires disclosure of the pro-forma effect in interim financial statements. The transition and annual disclosure requirements of SFAS No. 148 are effective for fiscal years ended after December 15, 2002. The interim disclosure requirements are effective for interim periods beginning after December 15, 2002. With the adoption of this standard, there will be interim disclosure and Creative believes that this will have no impact on its financial statements. In November 2002, the FASB issued Interpretation No. 45 (FIN 45), Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. The Interpretation expands on the accounting guidance of FAS 5, Accounting for Contingencies, FAS 57, Related Party Disclosures, and FAS 107, Disclosures about Fair Value of Financial Instruments, and incorporates without change the provisions of FIN 34, Disclosure of Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statement No. 5, which is being superseded. FIN 45 elaborates on the existing disclosure requirements for most guarantees, including loan guarantees, such as standby letters of credit. It also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value, or market value, of the obligations it assumes under that guarantee and must disclose that information in its interim and annual financial statements. FIN 45 will be effective to Creative on a prospective basis to guarantees issued or modified after December 31, 2002. Creative is currently evaluating the impact of this statement on its results of operations and financial position. Creative has adopted the disclosure requirements in this Interpretation, which are effective for financial statements of periods ending after December 15, 2002 In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46). Under that interpretation, certain entities known as "Variable Interest Entities" (VIE) must be consolidated by the "primary beneficiary" of the entity. The primary beneficiary is generally defined as having the majority of the risks and rewards arising from the VIE. For VIE's in which a significant (but not majority) variable interest is held, certain disclosures are required. The measurement principles of this interpretation will be effective for Creative's 2003 financial statements. Creative is currently evaluating the impact of this statement on its results of operations and financial position. In November 2002, the Emerging Issues Task Force (EITF) reached a consensus on EITF 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables." EITF 00-21 establishes criteria for whether revenue on a deliverable can be recognized separately from other deliverables in a multiple deliverable arrangement. The criteria considers whether the delivered item has stand-alone value to the customer, whether the fair value of the delivered item can be reliably determined and the rights of returns for the delivered item. EITF 00-21 is effective for revenue agreements entered into in fiscal years beginning after June 15, 2003 with early adoption permitted. Creative is currently evaluating the impact of EITF 00-21 on its financial position, results of operations and cash flows. Page 16 ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK EQUITY PRICE RISKS: Creative is exposed to equity price risk on its investments in marketable equity securities and quoted investments. An aggregate 10% reduction in market prices of Creative's investments in marketable equity securities and quoted investments, based on a sensitivity analysis of the balance as of December 31, 2002, would have a $3.1 million adverse effect on Creative's results of operations and financial position. Creative's results of operations for the six months period ended December 31, 2002 included $9.2 million of losses from write-downs of quoted and unquoted investments. INTEREST RATE RISK: Changes in interest rates could impact Creative's anticipated interest income on its cash equivalents and interest expense on its debt. Due to the short duration of Creative cash deposits and terms of its debt, an immediate 10% increase in interest rates would not have a material adverse impact on Creative's future operating results and cash flows. FOREIGN CURRENCY EXCHANGE RISK IN THE RATE OF EXCHANGE OF REPORTING CURRENCY RELATIVE TO US$: The functional currency of Creative and its subsidiaries is the US dollar and accordingly, gains and losses resulting from the translation of monetary assets and liabilities denominated in currencies other than the US dollar are reflected in the determination of net income. Creative enters into forward exchange contracts to reduce its exposure to foreign exchange translation gains and losses. Forward exchange contracts are marked to market each period and the resulting gains and losses are included in the determination of net income or loss. No forward exchange contracts were outstanding at December 31, 2002. Included in interest and other expenses for the three and six months period ended December 31, 2002, are exchange gains of $1.6 million and $1.1 million. The exchange rates for the S$ and Euro utilized in translating the balance sheet at December 31, 2002, expressed in US$ per one S$ and Euro were 0.5752 and 1.0372, respectively. Page 17 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CREATIVE TECHNOLOGY LTD. /s/ Ng Keh Long ------------------------- Ng Keh Long Chief Financial Officer Date: March 19, 2003 Page 18