Creative 2006 Annual Report Download - page 6

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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฀Creative’s฀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;฀a฀reduction฀or฀cancellation฀of฀sales฀orders฀for฀Creative฀products;฀accelerated฀declines฀in฀the฀average฀selling฀prices฀
of฀Creative’s฀products฀or฀any฀prices฀of฀components;฀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฀consumer฀products฀as฀a฀result฀of฀poor฀economic฀conditions,฀
social฀and฀political฀ turmoil;฀ major฀health฀concerns;฀ the฀ proliferation฀of฀sound฀functionality฀ in฀new฀products฀from฀ competitors฀at฀
the฀ application฀ software,฀ chip฀ and฀ operating฀ system฀ levels;฀ the฀ deterioration฀ of฀ global฀ equity฀ markets;฀ 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;฀Creative’s฀ability฀to฀
successfully฀manage฀its฀expanding฀operations;฀the฀vulnerability฀of฀certain฀markets฀to฀current฀and฀future฀currency฀fluctuations;฀the฀
effects฀of฀restricted฀fuel฀availability฀and฀rising฀costs฀of฀fuel;฀fluctuations฀in฀the฀value฀and฀liquidity฀of฀Creative’s฀investee฀companies;฀
and฀the฀potential฀decrease฀in฀trading฀volume฀and฀value฀of฀Creative’s฀Ordinary฀Shares฀as฀a฀result฀of฀the฀Flow฀Back฀Restriction฀that฀
commenced฀on฀June฀1,฀2003฀and฀Creative’s฀previous฀plan฀and฀any฀future฀plans฀to฀delist฀from฀NASDAQ฀and฀to฀eliminate฀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,฀including฀its฀Form฀20-F฀for฀fiscal฀2005฀filed฀with฀the฀SEC.฀฀Creative฀undertakes฀no฀obligation฀to฀update฀
any฀forward-looking฀statement฀to฀conform฀the฀statement฀to฀actual฀results฀or฀changes฀in฀Creative’s฀expectations.
CRITICAL฀ACCOUNTING฀POLICIES฀AND฀ESTIMATES
GENERAL
Management’s฀Discussion฀and฀Analysis฀of฀Financial฀Condition฀and฀Results฀of฀Operations฀are฀based฀upon฀Creative’s฀Consolidated฀
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.
฀
Management฀believes฀the฀following฀critical฀accounting฀policies฀affect฀its฀more฀significant฀estimates฀and฀assumptions฀used฀in฀the฀
preparation฀of฀its฀consolidated฀financial฀statements:
Revenue฀recognition;
Allowances฀for฀doubtful฀accounts,฀returns฀and฀discounts;
Product฀warranties;
Valuation฀of฀inventories;
Valuation฀of฀investments;
Valuation฀of฀goodwill฀and฀other฀intangible฀assets;
Assessment฀of฀the฀probability฀of฀the฀outcome฀of฀current฀litigation;฀and
Accounting฀for฀income฀taxes.
REVENUE฀RECOGNITION
Revenue฀from฀product฀sales฀is฀recognised฀when฀persuasive฀evidence฀of฀an฀arrangement฀exists,฀title฀and฀risk฀of฀loss฀have฀been฀
transferred,฀delivery฀has฀occurred,฀the฀price฀is฀fixed฀or฀determinable,฀and฀collection฀is฀probable.฀Allowances฀are฀provided฀for฀