Creative 2005 Annual Report Download - page 38

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 – INTELLECTUAL PROPERTY INDEMNIFICATION OBLIGATIONS
Creative indemnifies certain customers, distributors, suppliers, and subcontractors for attorneys’ fees and damages and costs awarded
against these parties in certain circumstances in which its products are alleged to infringe third party intellectual property rights, including
patents, trademarks, or copyrights. The terms of its indemnification obligations are generally perpetual from the effective date of the
agreement. In certain cases, there are limits on and exceptions to its potential liability for indemnification relating to intellectual property
infringement claims. Creative cannot estimate the amount of potential future payments, if any, that the company might be required to
make as a result of these agreements. Creative does not expect there to be any consequent material adverse effect on its financial position
or results of operations. However, there can be no assurances that Creative will not have any future financial exposure under those
indemnification obligations.
NOTE 13 – 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, U.S., against Creative Labs, Inc. and 27 other defendants); Sviluppo
del’elettronica S.I.S.V.E.L. S.P.A. and its wholly owned U.S. subsidiary, Audio MPEG, Inc. (legal proceedings in the Netherlands, Germany,
and the Eastern District of Virginia, U.S., each alleging that Creative’s MP3 technology violates patents managed by S.I.S.V.E.L.); and
representative purchasers of MP3 players (an action 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, Lucent Technologies, MPEG LA, Dyancore Holdings and Advanced Audio Devices.
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 14 – 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 $23.1 million from this transaction, which represents the net increase in
Creative’s share of the net assets of SigmaTel as a result of the initial public offering.
The following table presents the payments due by period for the long term debt and capital lease obligations as of June 30, 2005:
Payments Due by Period (US$’000)
Less than 1 to 3 4 to 5 After 5
Debt Obligations Total 1 year years years years
Long Term Debt $ 198,111 $ 3,556 $ 7,111 $ 182,111 $ 5,333
Capital Lease Obligations 4,715 3,827 888 – –
Total Debt Obligations $ 202,826 $ 7,383 $ 7,999 $ 182,111 $ 5,333
Creative has various other credit facilities relating to overdrafts, letters of credit, bank guarantees and short term loans with several
banks totaling approximately $113.9 million at June 30, 2005. Within these credit facilities, sub-limits have been set on how Creative
may utilize the overall credit facilities. At June 30, 2005, $0.2 million in letters of credit and $1.8 million in bank guarantees were drawn
under these facilities. Facilities under letters of credit, bank guarantees, overdraft and short-term loan bear interest at approximately
the banks’ prime rates.
NOTE 11 – DEBT OBLIGATIONS (Cont’d)