Creative 2004 Annual Report Download - page 39

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NOTE 14 – LEGAL PROCEEDINGS
During the course of its ordinary 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. Ongoing disputes exist with, among other entities, Compression Labs, Incorporated (a patent infringement action
filed in the Eastern District of Texas against Creative Labs, Inc. and 27 other defendants); representative purchasers of Audigy sound cards
against Creative Labs, Inc. (an action for unfair competition based on allegations that Creative’s packaging and advertising falsely represent
the Audigy sound card’s audio processing capabilities); and representative purchasers of MP3 players against Creative Labs, Inc. (an action
against manufacturers of MP3 players and retailers alleging false advertising and unfair competition in connection with reported storage
capacity). Creative also from time to time receives licensing inquiries and/or threats of potential future patent claims from a variety of entities,
including MPEG Audio, Lucent Technologies, MPEG LA 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 15 – INVESTMENTS IN ASSOCIATED COMPANY
In August 2003, SigmaTel, an equity-method investee of Creative, completed an initial public offering of its common stock in the United
States. As a result of the initial public offering, Creative’s ownership percentage in SigmaTel was reduced. Even though Creative did not
dispose of any of its shareholdings in the initial public offering, the dilution in Creative’s ownership percentage in SigmaTel was treated
as a “deemed disposal” in accordance with US GAAP. In accordance with Staff Accounting Bulletin Topic 5H, “Accounting for Sales of
Stock by a Subsidiary,” Creative recorded a non-cash gain of $23.1 million from this transaction, which represents the net increase in
Creative’s share of the net assets of SigmaTel as a result of the initial public offering.
In February 2004, Creative disposed of 1.9 million shares of SigmaTel common stock in a follow-on public offering. Net proceeds from
the disposal of these shares was about $45.4 million and the net investment gain recognized in Creative’s results of operations in the
quarter ended March 31, 2004 was $38.1 million. As a result of the disposal, Creative’s shareholdings in SigmaTel was reduced to below
20%, and as such, SigmaTel was no longer considered an equity-method investee company. The investment in SigmaTel was reclassified
as available for sale investments in accordance with SFAS 115 “Accounting for Certain Investments in Debt and Equity Securities,” and
carried at fair value with unrealized gains and losses recorded as a separate component of shareholders’ equity.
NOTE 16 – INVESTMENTS
Net investment gain of $72.6 million in fiscal 2004 comprised $52.9 million gain from sales of investments which include $38.1 million
gain from sale of interest in SigmaTel; and a $23.1 million non-cash gain on a “deemed disposal” of interests in SigmaTel, offset by $3.4
million in permanent write-downs of unquoted investments. Net investment losses of $6.0 million in fiscal 2003 include permanent
write-downs of quoted and unquoted investments by $13.6 million and net gains from quoted investments of $7.6 million.
NOTE 17 – BUSINESS COMBINATION
In May 2002, Creative completed the acquisition of 3Dlabs, a graphics vendor, supplying graphics accelerator solutions for professionals
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 $71.7 million at the time of the closing, and assumed 3Dlabs’
outstanding options exercisable into approximately 1.6 million shares of Creative ordinary shares valued at approximately $12.0 million
at the time of the closing. As a result of the acquisition, Creative also assumed 3Dlabs net liabilities of $21.1 million. In addition, Creative
incurred approximately $1.3 million in transaction fees, including legal, valuation and accounting fees. The ordinary shares issued were
valued in accordance with EITF Issue No. 99-12, “Determination of the Measurement Date for the Market Price of Acquirer Securities Issued
in a Purchase Business Combination,” using the average for the Creative closing prices ordinary shares during the two days before and two
days after (and including) the day on which the total number of Creative shares issuable to holders of 3Dlabs common shares were fixed