Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 27, 2009

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From             To             

Commission File Number: 001-32431

 

 

DOLBY LABORATORIES, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   90-0199783

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

100 Potrero Avenue

San Francisco, CA

  94103-4813
(Address of principal executive offices)   (Zip Code)

(415) 558-0200

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

On April 16, 2009 the registrant had 52,568,169 shares of Class A common stock, par value $0.001 per share, and 60,490,207 shares of Class B common stock, par value $0.001 per share, outstanding.

 

 

 


Table of Contents

DOLBY LABORATORIES, INC.

FORM 10-Q

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION
Item 1.    Condensed Consolidated Financial Statements    2
   Condensed Consolidated Balance Sheets as of September 26, 2008 and March 27, 2009    2
   Condensed Consolidated Statements of Operations for the Fiscal Quarters and Fiscal Year-to-Date Periods Ended March 28, 2008 and March 27, 2009    3
   Condensed Consolidated Statements of Cash Flows for the Fiscal Year-to-Date Periods Ended March 28, 2008 and March 27, 2009    4
   Notes to Condensed Consolidated Financial Statements    5
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations    19
Item 3.    Quantitative and Qualitative Disclosures About Market Risk    32
Item 4.    Controls and Procedures    33
PART II – OTHER INFORMATION
Item 1.    Legal Proceedings    34
Item 1A.    Risk Factors    34
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds    54
Item 4.    Submission of Matters to a Vote of Security Holders    54
Item 6.    Exhibits    56
Signatures    57

 

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PART I – FINANCIAL INFORMATION

ITEM 1 – CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DOLBY LABORATORIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

 

     September 26,
2008
   March 27,
2009
 
     (unaudited)  

ASSETS

     

Current assets:

     

Cash and cash equivalents

   $ 394,761    $ 372,528  

Short-term investments

     119,667      193,543  

Accounts receivable, net

     27,650      45,245  

Inventories

     18,133      14,113  

Deferred taxes

     91,824      70,714  

Prepaid expenses and other current assets

     39,834      29,344  
               

Total current assets

     691,869      725,487  

Property, plant and equipment, net

     87,915      86,895  

Intangible assets, net

     83,060      79,218  

Goodwill

     250,356      225,548  

Long-term investments

     180,996      244,535  

Deferred taxes

     24,900      38,033  

Other assets

     17,050      24,184  
               

Total assets

   $ 1,336,146    $ 1,423,900  
               

LIABILITIES AND STOCKHOLDERS’ EQUITY

     

Current liabilities:

     

Accounts payable

   $ 10,137    $ 10,060  

Accrued liabilities

     146,788      109,576  

Income taxes payable

     4,811      1,384  

Current portion of long-term debt

     1,593      1,540  

Deferred revenue

     37,344      25,372  
               

Total current liabilities

     200,673      147,932  

Long-term debt

     7,782      6,453  

Deferred revenue

     6,171      7,363  

Deferred taxes

     16,755      14,341  

Other liabilities

     33,414      32,542  
               

Total liabilities

     264,795      208,631  

Controlling interest

     22,098      20,174  

Stockholders’ equity:

     

Class A common stock

     52      53  

Class B common stock

     60      60  

Additional paid-in capital

     434,907      449,914  

Retained earnings

     609,495      757,030  

Accumulated other comprehensive income (loss)

     4,739      (11,962 )
               

Total stockholders’ equity

     1,049,253      1,195,095  
               

Total liabilities and stockholders’ equity

   $ 1,336,146    $ 1,423,900  
               

See accompanying notes to unaudited condensed consolidated financial statements

 

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DOLBY LABORATORIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

 

     Fiscal Quarter Ended     Fiscal Year-to-Date Ended  
     March 28,
2008
    March 27,
2009
    March 28,
2008
    March 27,
2009
 
     (unaudited)  

Revenue:

        

Licensing

   $ 149,619     $ 159,879     $ 272,049     $ 313,935  

Product sales

     15,628       36,008       35,638       53,954  

Services

     7,310       8,237       15,097       16,493  
                                

Total revenue

     172,557       204,124       322,784       384,382  
                                

Cost of revenue:

        

Cost of licensing

     5,555       4,613       8,818       7,861  

Cost of product sales (1)

     8,540       24,275       20,188       33,634  

Cost of services (1)

     3,151       3,094       6,206       6,300  

Gain from amended patent licensing agreement

     —         —         —         (20,041 )
                                

Total cost of revenue

     17,246       31,982       35,212       27,754  
                                

Gross margin

     155,311       172,142       287,572       356,628  
                                

Operating expenses:

        

Selling, general and administrative (1)

     55,310       53,420       106,296       107,400  

Research and development (1)

     15,725       16,244       29,632       31,409  

Restructuring charges, net

     —         1,866       —         2,734  

Gain on settlements

     (249 )     (4,900 )     (249 )     (4,900 )
                                

Total operating expenses

     70,786       66,630       135,679       136,643  
                                

Operating income

     84,525       105,512       151,893       219,985  

Interest income

     4,475       2,620       10,296       6,752  

Interest expense

     (632 )     (149 )     (995 )     (412 )

Other (expenses)/income, net

     (1,439 )     236       (1,693 )     (1,146 )
                                

Income before provision for income taxes and controlling interest

     86,929       108,219       159,501       225,179  

Provision for income taxes

     (29,792 )     (38,430 )     (54,399 )     (77,053 )
                                

Income before controlling interest

     57,137       69,789       105,102       148,126  

Controlling interest in net income

     (359 )     (338 )     (651 )     (580 )
                                

Net income

   $ 56,778     $ 69,451     $ 104,451     $ 147,546  
                                

Earnings per share (basic)

   $ 0.51     $ 0.62     $ 0.94     $ 1.31  

Earnings per share (diluted)

   $ 0.49     $ 0.60     $ 0.91     $ 1.28  

Weighted-average shares outstanding (basic)

     111,192       112,852       110,892       112,730  

Weighted-average shares outstanding (diluted)

     114,736       115,059       114,579       114,981  

Expense for rent to related party included in selling, general and administrative expenses

   $ 340     $ 340     $ 680     $ 680  

(1) Stock-based compensation included above was classified as follows:

        

Cost of product sales

   $ 262     $ 222     $ 503     $ 378  

Cost of services

     38       29       78       56  

Selling, general and administrative

     4,600       3,605       8,895       7,068  

Research and development

     1,229       984       2,119       1,918  

See accompanying notes to unaudited condensed consolidated financial statements

 

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DOLBY LABORATORIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

     Fiscal Year-to-Date Ended  
     March 28,
2008
    March 27,
2009
 
     (unaudited)  

Operating activities:

    

Net income

   $ 104,451     $ 147,546  

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     12,238       14,585  

Stock-based compensation expense

     11,527       9,180  

Accretion of discounts/amortization of premium on investments

     212       2,265  

Excess tax benefit from exercise of stock options

     (11,552 )     (1,483 )

Provision for doubtful accounts

     485       1,382  

Deferred taxes

     (15,735 )     16,957  

Gain on Put Rights

     —         (9,220 )

Unrealized losses on auction rate certificates

     —         10,622  

Gain from amended patent licensing agreement

     —         (20,041 )

Other non-cash items affecting net income

     1,500       (609 )

Changes in operating assets and liabilities:

    

Accounts receivable

     (13,521 )     (21,217 )

Inventories

     (6,117 )     (3,710 )

Prepaid expenses and other assets

     (5,313 )     7,693  

Accounts payable and accrued liabilities

     7,341       (15,575 )

Income taxes, net

     12,454       1,268  

Deferred revenue

     11,147       (6,972 )

Other liabilities

     1,657       (2,604 )
                

Net cash provided by operating activities

     110,774       130,067  
                

Investing activities:

    

Purchases of available-for-sale securities

     (163,424 )     (195,253 )

Proceeds from sale of available-for-sale and trading securities

     269,376       53,986  

Purchases of property, plant and equipment

     (4,631 )     (3,552 )

Purchase of intangible assets

     —         (8,321 )

Acquisitions, net of cash acquired

     (253,176 )     —    

Other

     40       —    
                

Net cash used in investing activities

     (151,815 )     (153,140 )
                

Financing activities:

    

Payments on debt

     (759 )     (734 )

Proceeds from the exercise of stock options

     8,001       3,161  

Issuance of Class A common stock (ESPP)

     505       1,635  

Excess tax benefit from exercise of stock options

     11,552       1,483  
                

Net cash provided by financing activities

     19,299       5,545  
                

Effect of foreign exchange rate changes on cash and cash equivalents

     777       (4,705 )
                

Net decrease in cash and cash equivalents

     (20,965 )     (22,233 )

Cash and cash equivalents at beginning of period

     368,467       394,761  
                

Cash and cash equivalents at end of period

   $ 347,502     $ 372,528  
                

Supplemental disclosure:

    

Cash paid for income taxes

   $ 56,197     $ 58,783  

Cash paid for interest

     416       230  

See accompanying notes to unaudited condensed consolidated financial statements

 

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DOLBY LABORATORIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

1. Summary of Business and Significant Accounting Policies

Dolby Laboratories develops and delivers innovative products and technologies that improve the entertainment experience. Since Ray Dolby founded Dolby Laboratories in 1965, we have been at the forefront of delivering sound technologies that are employed throughout the entertainment creation, distribution and playback process to enhance the entertainment experience. Today, Dolby technologies are standard in a wide range of entertainment platforms. Our technologies are used in virtually all DVD players and personal computer DVD playback software, increasingly in digital televisions, set top boxes, portable media devices and in a wide array of consumer electronic products such as gaming systems and audio/video receivers. Movie theatres and broadcasters around the world use Dolby’s products.

Our objective is to be an essential element in the best entertainment technologies by delivering innovative and enduring technologies that enrich the entertainment experience. We believe that our well recognized brand and established history of successful innovations position us to expand the use of our technologies in existing and new markets and to capitalize on key trends in digital entertainment, such as the transition to digital television, digital cinema, high definition home theater systems, portable media devices and downloadable content services.

We deliver innovative technologies, products and services throughout the entertainment industry, including content creation, content distribution and content playback. We work with consumer electronics manufacturers and media software vendors to help develop and incorporate innovations that are designed to improve the entertainment experience at home and on-the-go. Similarly, we focus on developing and delivering new innovations for the professional community. This community includes filmmakers and exhibitors, television producers, music producers, and video game designers, who use Dolby technologies to generate a more realistic and immersive entertainment experience. We believe that our involvement across the entertainment industry has resulted in a globally recognized brand and better positions us to meet our long-term objective of being an essential element in the best entertainment technologies.

Unaudited Interim Financial Statements

The accompanying interim condensed consolidated balance sheets as of September 26, 2008 and March 27, 2009, the condensed consolidated statements of operations for the fiscal quarters and fiscal year-to-date periods ended March 28, 2008 and March 27, 2009, and the condensed consolidated statements of cash flows for the fiscal year-to-date periods ended March 28, 2008 and March 27, 2009 are unaudited. These interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). In our opinion, the interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements for the fiscal year ended September 26, 2008 and include all adjustments necessary for fair presentation. The results for the fiscal quarter and fiscal year-to-date period ended March 27, 2009 are not necessarily indicative of the results to be expected for any subsequent quarterly or annual financial period, including the fiscal year ending September 25, 2009.

The accompanying interim condensed consolidated financial statements are prepared in accordance with Securities and Exchange Commission rules and regulations, which allow certain information and footnote disclosures that are normally included in annual financial statements to be condensed or omitted. As a result, the accompanying interim condensed consolidated financial statements should be read in conjunction with our consolidated financial statements for the fiscal year ended September 26, 2008 that are included in our Annual Report on Form 10-K and filed with the Securities and Exchange Commission. Certain prior period amounts have been reclassified to conform to current year presentation.

Use of Estimates

The preparation of the condensed consolidated financial statements in accordance with U.S. GAAP requires management to make certain estimates and assumptions that affect the amounts reported and disclosed in our condensed consolidated financial statements and accompanying notes. Significant items subject to such estimates

 

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and assumptions include valuation allowances for receivables, carrying values of inventories, goodwill, intangible assets, stock-based compensation, fair values of investments, put rights, accrued expenses including our bonus accrual, liabilities for unrecognized tax benefits and deferred income tax assets. Actual results could differ from our estimates.

Per Share Data

Basic earnings per share is computed by dividing net income by the weighted average number of shares of Class A and Class B common stock outstanding during the period. Diluted earnings per share is computed by dividing net income by the sum of the weighted average number of shares of Class A and Class B common stock outstanding and the potential number of shares of dilutive Class A and Class B common stock outstanding during the period.

The following table sets forth the computation of basic and diluted earnings per share:

 

     Fiscal Quarter Ended    Fiscal Year-to-Date Ended
     March 28,
2008
   March 27,
2009
   March 28,
2008
   March 27,
2009
     (in thousands, except per share amounts)

Numerator:

           

Net income

   $ 56,778    $ 69,451    $ 104,451    $ 147,546
                           

Denominator:

           

Weighted average shares outstanding (basic)

     111,192      112,852      110,892      112,730

Potential common shares from options to purchase Class A and Class B common stock

     3,544      2,207      3,687      2,251
                           

Weighted average shares outstanding (diluted)

     114,736      115,059      114,579      114,981
                           

Basic earnings per share

   $ 0.51    $ 0.62    $ 0.94    $ 1.31

Diluted earnings per share

   $ 0.49    $ 0.60    $ 0.91    $ 1.28

A total of 1,372,755 and 3,541,147 options were excluded from the calculation of potential common shares in the second quarter of fiscal 2008 and 2009, respectively, because their inclusion would have been anti-dilutive. A total of 1,835,198 and 3,644,100 options were excluded from the calculation of potential common shares for the fiscal year-to-date periods ended March 28, 2008 and March 27, 2009, respectively, because their inclusion would have been anti-dilutive.

Cash and Cash Equivalents

We consider all short-term highly liquid investments that have original maturities of 90 days or less from the date of purchase, to be cash equivalents. Cash and cash equivalents consist of funds held in general checking accounts, money market accounts and municipal debt securities.

Investments

As of March 27, 2009, we had investments in United States government agency securities, variable rate demand notes, auction rate certificates, corporate bonds and municipal debt securities. We account for these instruments under the provisions of Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities. Investments that have original maturities between 91 days and one year from the date of purchase are classified as short-term investments and investments that have maturities of more than one year from the date of purchase are classified as long-term investments. All of our investments, except for an equity investment, investments held in our supplemental retirement plan for certain executives and auction rate certificates are classified as available-for-sale securities. Our investments, with the exception of the equity investment, are recorded at fair value in the condensed consolidated balance sheet. Unrealized gains or losses on our available-for-sale securities are reported as a component of accumulated other comprehensive income (loss) while realized gains or losses are reported as a component of net income.

Our equity investment represents an equity security that we have accounted for under the cost method and classified as long-term investments based on our ability and intent to hold for more than one year. Investments held in our supplemental retirement plan for certain executives and auction rate certificates are classified as long-term trading securities. Unrealized gains or losses on trading securities are reported as a component of net income.

 

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Our investments in auction rate securities have been illiquid since February 2008 due to failed auctions. In November 2008, we elected to accept a rights offering providing us with certain put rights to sell our auction rate certificates at par value. See Note 2, “Composition of Certain Financial Statement Captions” for further discussion regarding our auction rate certificates and put rights.

In accordance with FASB Staff Position FAS 115-1 and FAS 124-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments, we review our investment portfolio in order to assess whether our investments with unrealized loss positions are other-than-temporarily impaired.

Stock-Based Compensation

We account for stock-based compensation under the provisions of Statement of Financial Accounting Standards No. 123(R), Share-Based Payment (SFAS 123R). SFAS 123R requires measurement of all employee stock-based awards using a fair-value method and recording of related compensation expense, net of estimated forfeitures, in the financial statements over the requisite service period. See Note 4 “Stock-Based Compensation” for further discussion.

Income Taxes

Our quarterly provision for income taxes includes U.S. federal, state and international income taxes and is based on our estimated annual effective tax rate. We estimate our annual effective tax rate based on projections of our income before taxes for the full fiscal year. However, events that occur in a quarter are reflected as discrete items, which could impact the tax rate. In the period that we file our annual tax returns, we true up our provision for income taxes to reflect any difference between our estimated provision and our filed tax return. A deferred tax liability is recognized for all future taxable temporary differences, and a deferred tax asset is recognized for all future deductible temporary differences. A valuation allowance is recognized if it is more likely than not that some portion of the deferred tax asset will not be realized.

Goodwill and Intangible Assets

We account for goodwill in accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142). We evaluate and test our goodwill for impairment in accordance with the provisions of SFAS 142 at a reporting unit level. A reporting unit is an operating segment or one level below an operating segment. The goodwill impairment test is a two-step process. In the first step, the carrying value of the net assets of a reporting unit, including goodwill, is compared to the fair value of the reporting unit. If the fair value of the reporting unit is determined to be less than the carrying value, a second step is performed to compute the amount of the impairment. We test goodwill for impairment annually during our third fiscal quarter and when an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value.

During our last annual goodwill impairment test performed in the third quarter of fiscal 2008, we had three reporting units – Via, Cinea and Dolby Entertainment Technology. Our Via reporting unit pertains to the operations of a wholly owned subsidiary that administers joint licensing programs for Dolby and other patent holders and has no goodwill. Our Cinea reporting unit pertains to the operations of a content-protection and anti-piracy technology company that we acquired in our fourth quarter of fiscal 2003. We assigned the goodwill recognized on the acquisition to the Cinea reporting unit. Cinea was operated as a stand alone business with its own dedicated resources and facilities. Over recent quarters, we undertook steps to restructure the organization to streamline our worldwide operations and align resources based on function and targeted markets. In line with this strategy, we ceased using Cinea’s facilities, terminated certain employees and integrated Cinea with our Dolby Entertainment Technology reporting unit in our first quarter of fiscal 2009. Accordingly, the goodwill that was assigned to the Cinea reporting unit was reassigned to the Dolby Entertainment Technology reporting unit. As a result, we now have two reporting units – Via with no goodwill and Dolby Entertainment Technology with goodwill.

 

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We use the income approach to determine the fair value of our reporting units based on the estimated future cash flows for the reporting units. The cash flow model is based on our best estimate of future revenues and operating costs. Future revenues are estimated over the period we expect to earn such cash flows, at growth rates consistent with our internal forecasts. The revenue and cost estimates are based on several sources including our historical information, third party industry data and review of our internal operations. The cash flow forecasts are adjusted by a discount rate of approximately 13% based on our weighted average cost of capital (WACC) derived through a capital asset pricing model. The primary components of this model include our considerations of the relative weighting of our total asset structure between our equity and debt, the risk-free rate of return given by the rate of return on U.S. Treasury bonds, an average market risk premium based on a range of historical returns and forward looking estimates and our beta. Our model utilizes an effective tax rate ranging from the mid to high thirties. Historically, our model has indicated a fair value significantly in excess of the carrying value of the net assets of our Dolby Entertainment Technology reporting unit.

Once we determine the fair values of our reporting units under the income approach, we then compare the aggregated values to our market capitalization to test the reasonableness of our valuation under the income approach. Our market capitalization at the end of our third quarter of fiscal 2008, the period of our annual impairment test, was approximately equal to the aggregate fair value of our reporting units determined under the income approach. Both values approximated $4.7 billion, representing an excess of approximately 350% over the aggregate carrying value of our reporting units.

Our market capitalization has declined since our annual impairment test performed in our third quarter of fiscal 2008. We are required to evaluate goodwill for impairment when an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. In light of declines in our market capitalization, we reviewed our market capitalization compared to the aggregate carrying value of the net assets of our Dolby Entertainment Technology and Via reporting units during the interim quarters prior to our annual impairment test, which will be performed in the third quarter of fiscal 2009. Due to the low fair value of our Via reporting unit, we have assumed that the reduction in our market capitalization is primarily attributed to a reduction in the fair value of our Dolby Entertainment Technology reporting unit. Accordingly, we have compared our market capitalization to the aggregate carrying value of our two reporting units in our first quarter of fiscal 2009 and noted that our market capitalization continued to significantly exceed the carrying value of our reporting units. Therefore, in conjunction with our review of our most recent internal cash flow projections, we believe that the decline in market capitalization does not represent a triggering event that would require an interim impairment test.

We regularly assess our assumptions and methodologies utilized in our fair value calculations for reasonableness. We have not changed our methodologies since our previous annual impairment test. However, as part of the assessment of our assumptions, we reduced our near-term outlook and we revised our revenue forecast in our first and second quarters of fiscal 2009. This near-term revision did not reduce our revenue forecasts to a level that would represent a triggering event requiring an interim impairment test. We will consider the current state of the debt and equity markets in determining the market risk premiums included within our WACC during our fiscal 2009 impairment test.

Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144), requires that long-lived assets, including intangible assets, with definite lives be amortized over their estimated useful lives and reviewed for impairment whenever events or changes in circumstances indicate an asset’s carrying value may not be recoverable. Recoverability of an asset is measured by comparison of its carrying amount to the expected future undiscounted cash flows that the asset is expected to generate. If it is determined that an asset is not recoverable, an impairment loss is recorded in the amount by which the carrying amount of the asset exceeds its fair value. Our intangible assets principally consist of acquired technology, patents, trademarks, customer relationships and contracts, and are amortized on a straight-line basis over their useful lives ranging from three to 15 years. No intangible or long-lived assets were impaired as of March 27, 2009.

 

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Comprehensive Income

Comprehensive income includes net income, foreign currency translation adjustments and unrealized gains and losses on available-for-sale securities. The components of comprehensive income were as follows:

 

     Fiscal Quarter Ended     Fiscal Year-to-Date Ended  
     March 28,
2008
    March 27,
2009
    March 28,
2008
    March 27,
2009
 
     (in thousands)  

Net income

   $ 56,778     $ 69,451     $ 104,451     $ 147,546  

Other comprehensive income (loss):

        

Foreign currency translation adjustment, net of tax

     11,084       (8,774 )     16,071       (22,262 )

Unrealized (losses) gains on available-for-sale securities, net of tax (see Note 2)

     (1,972 )     590       (2,067 )     1,835  

Reclassification of unrealized losses on auction rate certificates, net of tax (see Note 2)

     —         —         —         3,727  
                                

Comprehensive income

   $ 65,890     $ 61,267     $ 118,455     $ 130,846  
                                

Withholding and Sales Tax

Licensing revenue is recognized gross of withholding taxes that are remitted by our licensees directly to their local tax authorities. Withholding taxes were $4.7 million and $6.0 million in the second quarter of fiscal 2008 and 2009, respectively. Withholding taxes were $8.6 million and $12.2 million in the fiscal year-to-date periods ended March 28, 2008 and March 27, 2009, respectively. Sales tax is accounted for on a net basis and is excluded from revenues.

 

2. Composition of Certain Financial Statement Captions

Cash, Cash Equivalents, and Investments

Cash, cash equivalents, and investments as of September 26, 2008 and March 27, 2009 consisted of the following:

 

     September 26,
2008
   March 27,
2009
     (in thousands)

Cash and cash equivalents:

     

Cash

   $ 121,676    $ 152,834

Cash equivalents:

     

Money market funds

     270,034      219,694

Municipal debt securities

     3,051      —  
             

Total cash and cash equivalents

     394,761      372,528
             

Short-term investments:

     

Municipal debt securities

     56,663      105,205

U.S. government agency securities

     2,514      4,999

Variable rate demand notes

     60,490      83,339
             

Total short-term investments

     119,667      193,543
             

Long-term investments:

     

Auction rate certificates

     66,146      59,478

Corporate bonds

     —        19,474

Equity investment

     610      610

Municipal debt securities

     95,028      142,513

U.S. government agency securities

     19,212      22,460

Total long-term investments

     180,996      244,535
             

Total cash, cash equivalents and investments

   $ 695,424    $ 810,606
             

 

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At March 27, 2009, we held tax-exempt auction rate certificates with a par value of $70.1 million. Auctions for these instruments have failed and there is no assurance that future auctions will succeed. As a result, we may not be able to liquidate our investment and fully recover the par value in the near term. We do not believe that the underlying issuers of our auction rate certificates are currently at risk of default. We continue to receive interest payments on the auction rate certificates in accordance with their terms. We believe we will ultimately be able to liquidate our auction rate certificates without significant loss primarily due to the collateral securing the auction rate certificates and our acceptance of the rights offering detailed below. Due to the changes and uncertainty in the auction rate certificates market, we believe the recovery period for these investments is likely to be longer than 12 months and as a result, we have classified these investments as long-term as of March 27, 2009.

In November 2008, we elected to accept a rights offering from UBS AG, which we refer to, along with its wholly owned subsidiaries UBS Financial Services, Inc. and UBS Securities LLC, as UBS. The rights offering provides us with rights (the “Put Rights”) to sell to UBS at par value our auction rate certificates purchased through UBS, at any time during a two year sale period beginning June 30, 2010. We elected to measure the Put Rights under the fair value option of SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115 (SFAS 159) and recorded a pre-tax gain of $6.6 million in the first quarter of fiscal 2009. We have classified the Put Rights as a financial asset within our other assets line item in our condensed consolidated balance sheet. Simultaneous with the acceptance of the rights offering, we reclassified our auction rate certificates from available-for-sale securities to trading securities within our long-term investments line item in our condensed consolidated balance sheet. As a result of the reclassification, we recognized a loss of $8.0 million in the first quarter of fiscal 2009. The observable market information to determine the fair value of our auction rate certificates continues to be insufficient and therefore we continue to estimate the fair value by incorporating assumptions that market participants would use in their estimates of fair value. Some of these assumptions included the collateral underlying the security investments, the creditworthiness of the counterparty, the timing of expected future cash flows, the likelihood of a successful auction in a future period and the final stated maturities. During our second quarter of fiscal 2009, the fair value of our auction rate certificates declined further by $2.6 million which was offset by a gain of $2.6 million related to our Put Rights. The decline in the fair value of our auction rate certificates was primarily due to a decline in the variable yield of these securities. In determining the fair value of the Put Rights in our second quarter of fiscal 2009, we did not change our assessment of the credit risk associated with UBS, thus leading to an offset in the decline in the fair value of our auction rate certificates and the appreciation in the fair value of our Put Rights.

Our investment portfolio which is recorded as cash equivalents, short-term investments, and long-term investments as of September 26, 2008 was as follows:

 

     Cost    Unrealized Gain    Unrealized Loss     Estimated Fair Value
     (in thousands)

Auction rate certificates

   $ 72,200    $ —      $ (6,054 )   $ 66,146

Equity investment

     610      —        —         610

Money market funds

     270,034      —        —         270,034

Municipal debt securities

     154,870      173      (301 )     154,742

U.S. government agency securities

     21,775      23      (72 )     21,726

Variable rate demand notes

     60,490      —        —         60,490
                            

Cash equivalents and investments

   $ 579,979    $ 196    $ (6,427 )   $ 573,748
                            

Our investment portfolio which is recorded as cash equivalents, short-term investments, and long-term investments as of March 27, 2009 was as follows:

 

     Cost    Unrealized Gain    Unrealized Loss     Estimated Fair Value
     (in thousands)

Auction rate certificates

   $ 59,478    $ —      $ —       $ 59,478

Corporate bonds

     19,451      29      (6 )     19,474

 

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Equity investment

     610      —        —         610

Money market funds

     219,694      —        —         219,694

Municipal debt securities

     245,324      2,511      (117 )     247,718

U.S. government agency securities

     27,073      388      (2 )     27,459

Variable rate demand notes

     83,339      —        —         83,339
                            

Cash equivalents and investments

   $ 654,969    $ 2,928    $ (125 )   $ 657,772
                            

All of our investments in the tables above, except for our auction rate certificates and equity investment are classified as available-for-sale securities. Our investments, with the exception of the equity investment are recorded at fair market value on the condensed consolidated balance sheet. The equity investment represents an equity security that we have accounted for under the cost method and classified as long-term investments based on our ability and intent to hold for more than one year. Our auction rate certificates are classified as trading securities.

The following table shows the gross unrealized losses and fair values for those available-for-sale investments that were in an unrealized loss position as of March 27, 2009:

 

     Less than 12 months     12 months or greater    Total  
     Fair Values    Gross
Unrealized
Losses
    Fair Values    Gross
Unrealized
Losses
   Fair Values    Gross
Unrealized
Losses
 
     (in thousands)  

Corporate bonds

   $ 7,149    $ (6 )   $ —      $ —      $ 7,149    $ (6 )

Municipal debt securities

     24,733      (117 )     —        —        24,733      (117 )

U.S. government agency securities

     4,998      (2 )     —        —        4,998      (2 )
                                            

Total

   $ 36,880    $ (125 )   $ —      $ —      $ 36,880    $ (125 )
                                            

The unrealized losses on our investments in corporate bonds, municipal debt securities and U.S. government agency securities were caused primarily by changes in interest rates. We have the ability to hold these securities until we recover any unrealized losses. As a result, we do not consider the above investments in an unrealized loss position at March 27, 2009 to be other-than-temporarily impaired.

Accounts Receivable

Accounts receivable consists of the following:

 

     September 26,
2008
    March 27,
2009
 
     (in thousands)  

Trade accounts receivable

   $ 24,604     $ 38,082  

Amounts receivable related to patent administration program

     3,532       8,902  

Other accounts receivable

     1,313       586  
                
     29,449       47,570  

Less: Allowance for doubtful accounts

     (1,799 )     (2,325 )
                

Accounts receivable, net

   $ 27,650     $ 45,245  
                

Inventories

Inventories are stated at the lower of cost (first-in, first-out) or market and consist of the following:

 

     September 26,
2008
   March 27,
2009
     (in thousands)

Raw materials

   $ 3,315    $ 3,441

Work in process

     1,891      1,279

Finished goods

     12,927      9,393
             

Inventories

   $ 18,133    $ 14,113
             

 

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Goodwill and Intangible Assets

The following table outlines changes to the carrying amount of goodwill:

 

     Total  
     (in thousands)  

Balance at September 26, 2008

   $ 250,356  

Translation adjustments

     (24,808 )
        

Balance at March 27, 2009

   $ 225,548  
        

Intangible assets consist of the following:

 

     September 26,
2008
    March 27,
2009
 
     (in thousands)  

Amortized intangible assets:

    

Acquired patents and technology

   $ 55,519     $ 53,296  

Customer relationships

     30,270       27,535  

Customer contracts

     5,300       5,570  

Other intangibles

     11,862       20,174  
                
     102,951       106,575  

Less: Accumulated amortization

     (19,891 )     (27,357 )
                

Intangible assets, net

   $ 83,060     $ 79,218  
                

Amortization expense associated with our intangible assets was $4.1 million and $4.7 million in the second quarter of fiscal 2008 and 2009, respectively, and is included in cost of licensing, cost of product sales and selling, general and administrative expenses in the accompanying condensed consolidated statements of operations. Amortization expense associated with our intangible assets was $6.4 million and $8.0 million for the fiscal year-to-date periods ended March 28, 2008 and March 27, 2009, respectively.

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets were $39.8 million and $29.3 million at September 26, 2008 and March 27, 2009, respectively. In the second quarter of fiscal 2009, we recognized $22.4 million in revenue related to digital cinema products which was previously deferred. Therefore, the associated deferred costs of $15.9 million were transferred from prepaid expenses and other current assets to cost of product sales. See Deferred Revenue below for further discussion.

Accrued Liabilities

Accrued liabilities consist of the following:

 

     September 26,
2008
   March 27,
2009
     (in thousands)

Accrued royalties

   $ 32,064    $ 2,201

Amounts payable to joint licensing program partners

     40,266      51,318

Accrued compensation and benefits

     47,617      28,379

Accrued professional fees

     3,749      4,248

Current portion of litigation settlement (see Note 6)

     2,686      2,686

Other accrued liabilities

     20,406      20,744
             

Accrued liabilities

   $ 146,788    $ 109,576
             

 

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At September 26, 2008, accrued royalties included amounts related to an ongoing dispute regarding the terms of a license agreement with an unrelated patent licensor. We had been accruing royalties related to this matter from the third quarter of fiscal 2006 through the third quarter of fiscal 2007. In the first quarter of fiscal 2009, we entered into an amendment to the license agreement with the unrelated patent licensor. Under the terms of the amendment, we paid a one time lump sum amount of $17.5 million to buy out all payment obligations and each party released any claims it may have against the other with respect to the license agreement. Of the $17.5 million lump sum payment, $8.3 million was recorded as an intangible asset representing the fair value of the future benefit to be obtained from the payment. The intangible asset is being amortized to cost of revenue over a period of three years. The remaining amount of the lump sum payment, or $9.2 million, was recorded as a reduction to accrued royalties which as of September 26, 2008 was approximately $29.2 million. The remaining accrual balance of approximately $20.0 million was eliminated in the first quarter of fiscal 2009 and recorded as a gain from amended patent licensing agreement.

Deferred Revenue

Deferred revenue was $37.3 million and $25.4 million at September 26, 2008 and March 27, 2009, respectively. The period-end balances were comprised of deferrals of product sales, primarily consisting of digital cinema server sales, and to a lesser extent licensing and services revenue. We had recorded deferred digital cinema revenue related to our obligation to upgrade our equipment to be compliant with the Digital Cinema Initiatives (“DCI”) specifications. During the second quarter of fiscal 2009, we achieved compliance with these specifications by making certain software upgrades available and therefore we recognized $22.4 million in product sales revenue and $1.2 million in services revenue. The amounts recognized in services revenue primarily consist of virtual print fees from our agreement with Walt Disney Studios which also were deferred due to the DCI specification upgrade obligation.

Digital cinema server sales are multiple-element arrangements that include the sale of products and product support. As vendor specific objective evidence (“VSOE”) of fair value does not exist for the product support included within digital cinema server arrangements, digital cinema sales are deferred and revenue is recognized for the entire arrangement ratably over the support period. The amounts recognized as product revenue in the second quarter of fiscal 2009 consist of product and product support revenue, pro-rated over the lapsed support period.

Accumulated Other Comprehensive Income (Loss)

Accumulated foreign currency translation gains, net of tax were $9.4 million at September 26, 2008, compared to an accumulated foreign currency translation loss, net of tax of $13.7 million at March 27, 2009. Accumulated unrealized losses on investments, net, were $4.7 million at September 26, 2008, compared to accumulated unrealized gains on investments of $1.7 million, net, at March 27, 2009.

 

3. Fair Value Measurements

Effective September 27, 2008, we adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements (SFAS 157), which defines fair value as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. The standard describes three levels of inputs that may be used to measure fair value:

 

Level 1: Quoted prices in active markets that are accessible by us at the measurement date for identical assets and liabilities.

 

Level 2: Prices not directly accessible by us. Such prices may be based upon quoted prices in active markets or inputs not quoted on active markets, but corroborated by market data.

 

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Level 3: Unobservable inputs are used when little or no market data is available.

The hierarchy noted above requires us to minimize the use of unobservable inputs and to use observable market data, if available, when determining fair value.

Financial assets carried at fair value as of March 27, 2009 are classified below:

 

     Level 1    Level 2    Level 3    Total

Auction rate certificates

   $ —      $ —      $ 59,478    $ 59,478

Corporate bonds

     —        19,474      —        19,474

Investments held in supplemental retirement plan

     3,370      —        —        3,370

Money market funds

     219,694      —        —        219,694

Municipal debt securities

     —        247,718      —        247,718

Put Rights

     —        —        9,220      9,220

U.S. government agency securities

     —        27,459      —        27,459

Variable rate demand notes

     —        83,339      —        83,339
                           

Total

   $ 223,064    $ 377,990    $ 68,698    $ 669,752
                           

Financial liabilities carried at fair value as of March 27, 2009 are classified below:

 

     Level 1    Level 2    Level 3    Total
     (in thousands)

Interest rate derivative

   $ —      $ 309    $ —      $ 309
                           

The following table provides a reconciliation between the beginning and ending balances of items measured at fair value on a recurring basis that used significant unobservable inputs (Level 3):

 

     Auction rate certificates
and Put Rights
 
     (in thousands)  

Balances at September 26, 2008

   $ 66,146  

Unrealized loss from auction rate certificates included in earnings

     (4,722 )

Redemptions at par

     (2,100 )

Realized gain on redemptions of auction rate certificates included in earnings

     154  

Unrealized gain from Put Rights included in earnings

     9,220  
        

Balances at March 27, 2009

   $ 68,698  
        

The unrealized loss from auction rate certificates, the realized gain on redemptions and the unrealized gain from Put Rights are included in the other expenses, net line item in our condensed consolidated statement of operations for the quarter and the year-to-date period ended March 27, 2009. During our second quarter of fiscal 2009, we recorded an unrealized loss of $2.6 million related to our auction rate certificates and an unrealized gain of $2.6 million related to our Put Rights.

The fair values of our Level 1 financial assets are based on quoted market prices of the identical underlying securities and include money market funds and trading securities held in our supplemental retirement plan with quoted prices in active markets. The fair values of our Level 2 financial assets and liabilities are obtained from professional pricing sources for these or comparable instruments, rather than direct observations of quoted prices in active markets and include U.S. government agency securities, municipal debt securities, variable rate demand notes, corporate bonds and interest rate derivative. Fair values of auction rate certificates and Put Rights are classified as Level 3 because quoted prices are unobservable or no market data is available.

 

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4. Stock-Based Compensation

We have adopted stock compensation plans which provide for grants of stock-based awards as a form of compensation to employees, officers, directors and certain non-employee consultants. We have issued stock-based awards in the form of stock options, restricted stock units, stock appreciation rights and shares issued under our employee stock purchase plan. Stock-based compensation expense was $6.1 million and $4.8 million for the second quarter of fiscal 2008 and 2009, respectively. Stock-based compensation expense was $11.6 million and $9.4 million for the year-to-date periods ended March 28, 2008 and March 27, 2009, respectively.

Our stock-based compensation expense for the second quarter of fiscal 2008 was $6.4 million related to stock options and restricted stock units, offset by a credit of $0.3 million related to stock appreciation rights. Our stock-based compensation expense for the second quarter of fiscal 2009 was predominantly comprised of $3.6 million and $1.0 million for stock options and restricted stock units, respectively.

In the second quarter of fiscal 2009, we made company-wide grants to employees. During the year-to-date period ended March 27, 2009, we granted 1,214,855 stock options at a weighted average exercise price of $31.84 per share. We also granted 377,360 restricted stock units at a weighted average grant price of $31.54 per share.

 

5. Restructuring

Over recent quarters, we undertook steps to restructure the organization to streamline our worldwide operations and align resources based on function and targeted markets. Consistent with this strategy, we undertook the following restructuring activities.

In the second quarter of fiscal 2009, we decided to consolidate our Wootton Bassett, U.K. manufacturing operations into our Brisbane, California facility. As of April 30, 2009, we have fully transitioned the manufacturing operations to our Brisbane facility. Since we have not ceased using our Wootton Bassett facilities, no facility related restructuring costs have been recognized in the second quarter of fiscal 2009. We are exploring alternatives pertaining to our facilities in Wootton Bassett and depending upon the outcome of the alternatives, we may recognize facility related restructuring costs in the future. Additionally, due to this restructuring, our work force will ultimately be reduced by approximately 60 employees who will be involuntarily terminated. In the second quarter of fiscal 2009, we recorded $1.8 million of charges related to the consolidation of our manufacturing operations. These restructuring costs will be paid throughout the remainder of fiscal 2009 and fiscal 2010.

Prior to the first quarter of fiscal 2009, our Cinea reporting unit was operated as a stand alone business with its own dedicated resources and facilities. In the first quarter of fiscal 2009, we ceased using two of Cinea’s leased facilities in Virginia, terminated 20 employees and integrated Cinea into our Dolby Entertainment Technology reporting unit. This activity resulted in severance and other charges attributable to the termination of employees and facilities charges relating to non-cancelable lease costs, net of expected sublease income. In regard to this restructuring activity, we recorded charges of $0.3 million in the selling, general and administrative and $0.5 million in the research and development line items within our condensed consolidated statements of operations in the first quarter of fiscal 2009. These amounts have been reclassified to the restructuring charges, net line item within our condensed consolidated statements of operations for the fiscal year-to-date period ended March 27, 2009. In the second quarter of fiscal 2009, we recorded an additional charge of $0.1 million related to Cinea’s integration.

 

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Changes in restructuring accruals included in accrued liabilities in our condensed consolidated balance sheet for the above restructuring activities for our second quarter ended March 27, 2009 were as follows:

 

     Severance     Facilities and contract
termination costs
    Fixed assets
write-off
    Other associated
costs
    Total  
     (in thousands)  

Balance at December 26, 2008

   $ 67     $ 264     $ —       $ 2     $ 333  

Restructuring charges

     1,532       —         137       196       1,865  

Cash payments

     (26 )     (114 )     —         (41 )     (181 )

Non-cash charges

     —         —         (137 )     —         (137 )
                                        

Balance at March 27, 2009

   $ 1,573     $ 150     $ —       $ 157     $ 1,880  
                                        

 

6. Legal Proceedings

In March 1997, an unrelated third party filed a lawsuit against us alleging breach of a written agreement. In April 2002, we settled the dispute and agreed to pay a total of $30.0 million, without interest, in ten equal annual installments of $3.0 million per year beginning in June 2002. We recorded this liability at its present value of $24.2 million in the condensed consolidated balance sheet using a discount rate of 5.125%, which approximated our incremental cost of borrowing rate. Interest related to this liability is recorded quarterly and is included in interest expense on the accompanying condensed consolidated statements of operations. Other than such payments, neither party has any material obligations as a result of the settlement. As of March 27, 2009, we had $9.0 million remaining to be paid under this settlement.

We are involved in various legal proceedings from time to time arising from the normal course of business activities, including claims of alleged infringement of intellectual property rights, commercial, employment and other matters. In our opinion, resolution of these proceedings is not expected to have a material adverse effect on our operating results or financial condition. However, it is possible that an unfavorable resolution of one or more such proceedings could materially affect our future operating results or financial condition in a particular period.

 

7. Geographic Data

Licensing, products and services revenue is based on the location of the corporate headquarters of the licensee, the location where products are shipped or where services are performed. Revenue by geographic regions were as follows:

 

     Revenue by Geographic Region
     Fiscal Quarter Ended    Fiscal Year-to-Date Ended
     March 28,
2008
   March 27,
2009
   March 28,
2008
   March 27,
2009
     (in thousands)

United States

   $ 59,005    $ 78,821    $ 105,201    $ 133,724

International

     113,552      125,303      217,583      250,658
                           

Total revenue

   $ 172,557    $ 204,124    $ 322,784    $ 384,382
                           

The concentration of our revenue from individual countries or geographic regions was as follows:

 

     Fiscal Quarter Ended     Fiscal Year-to-Date Ended  
     March 28,
2008
    March 27,
2009
    March 28,
2008
    March 27,
2009
 
     (in thousands)  

United States

   34 %   39 %   33 %   35 %

Japan

   21 %   18 %   21 %   19 %

Europe

   18 %   19 %   18 %   17 %

Taiwan

   12 %   11 %   11 %   11 %

China

   6 %   5 %   8 %   7 %

Other

   9 %   8 %   9 %   11 %

In the second quarter of fiscal 2008, revenue from one customer represented $24.7 million, or 14%, of the total revenue for the quarter. In the second quarter of fiscal 2009, revenue from one customer represented $24.6 million,

 

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or 12%, of the total revenue for the quarter. Revenue from one customer accounted for $41.2 million, or 13% of total revenue for the fiscal year-to-date period ended March 28, 2008. Revenue from one customer accounted for $43.4 million, or 11%, of total revenue for the fiscal year-to-date period ended March 27, 2009.

Long-lived tangible assets, net of accumulated depreciation, by geographic region were as follows:

 

     Long-Lived Tangible
Assets by Geographic
Region
     September 26,
2008
   March 27,
2009
     (in thousands)

United States

   $ 63,402    $ 68,177

International

     24,513      18,718
             

Total long-lived tangible assets, net of accumulated depreciation

   $ 87,915    $ 86,895
             

Long-lived tangible assets, which consist of property, plant and equipment, net of accumulated depreciation, held in the United Kingdom were $19.2 million and $14.3 million at September 26, 2008 and March 27, 2009, respectively.

 

8. Recently Issued Accounting Standards

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141R, Business Combinations (SFAS 141R). SFAS 141R requires an entity to recognize the assets acquired, liabilities assumed, contractual contingencies and contingent consideration at their fair value on the acquisition date. Subsequent changes to the estimated fair value of contingent consideration will be reflected in earnings until the contingency is settled. SFAS No. 141R also requires acquisition-related costs and restructuring costs to be expensed as incurred rather than treated as part of the purchase price. The adoption of SFAS No. 141R will change our accounting treatment for business combinations on a prospective basis beginning September 26, 2009.

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, Non-controlling Interests in Consolidated Financial Statements (SFAS 160). SFAS 160 changes the accounting and reporting for minority interests, which will be characterized as non-controlling interests and classified as a component of equity. SFAS 160 is effective for us on a prospective basis beginning in the first quarter of fiscal 2010. We do not expect SFAS 160 to have a material impact on our condensed consolidated financial statements.

In December 2007, the FASB issued Emerging Issues Task Force Issue No. 07-1, Accounting for Collaborative Arrangements (EITF 07-1). EITF 07-1 applies to participants in collaborative arrangements that are conducted with the creation of a separate legal entity for the arrangement. EITF 07-1 requires disclosure of payments to or from collaborators based on the nature of the arrangement (including its contractual terms), the nature of the business and whether the payments are within the scope of other accounting literature. EITF 07-1 requires an entity to report the effects of adopting EITF 07-1 as a change in accounting principle through retrospective application to all prior periods presented for all arrangements in place at the effective date unless it is impracticable. EITF 07-1 is effective for fiscal years beginning after December 15, 2008. We do not expect EITF 07-1 to have a material impact on our condensed consolidated financial statements.

In February 2008, the FASB issued FASB Staff Position FAS 157-2, Effective Date of FASB Statement No. 157 (FSP 157-2). FSP 157-2 defers the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair values in the financial statements on a recurring basis (at least annually), to fiscal years, and interim periods within those fiscal years beginning after November 15, 2008. We do not expect the adoption of FSP 157-2 to have a material impact on our consolidated financial statements.

In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133 (SFAS 161). SFAS No. 161 provides new disclosure requirements for an entity’s derivative and hedging activities. SFAS 161 is effective for fiscal years beginning after November 15, 2008. We do not expect the adoption of SFAS 161 to have a material impact on our condensed consolidated financial statements.

 

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In April 2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of Intangible Assets (FSP FAS 142-3). FSP FAS 142-3 removes the requirement to consider whether an intangible asset can be renewed without substantial cost or material modifications to the existing terms and conditions associated with the intangible asset and, instead, requires an entity to consider its own historical experience in renewing similar arrangements. If the entity has no relevant experience, it would consider market participant assumptions regarding renewal. FSP FAS 142-3 also requires expanded disclosures relating to the determination of useful lives of intangible assets. FSP FAS 142-3 is effective for fiscal years beginning after December 15, 2008, and may impact any intangible asset we acquire in future transactions.

In May 2008, the FASB issued Statement of Financial Accounting Standards No. 162, The Hierarchy of Generally Accepted Accounting Principles (SFAS 162). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements that are presented in conformity with generally accepted accounting principles in the United States. This Statement is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” We do not expect SFAS 162 to have a material impact on our condensed consolidated financial statements.

 

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ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with our interim condensed consolidated financial statements and the related notes that appear elsewhere in this Form 10-Q. These discussions contain forward-looking statements reflecting our current expectations that involve risks and uncertainties. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue” or the negative of these terms or other comparable terminology. Forward-looking statements include, but are not limited to: statements regarding the extent and timing of future licensing, products and services revenue levels and mix, expenses, margins, net income per diluted share, income taxes, tax benefits, acquisition costs and related amortization, and other measures of results of operations; our expectations regarding demand and acceptance for our technologies; growth opportunities and trends in the market in which we operate; our plans, strategies and expected opportunities; the deployment of and demand for our products and products incorporating our technologies; and future competition. Actual results may differ materially from those discussed in these forward-looking statements due to a number of factors, including the risks set forth in the section entitled “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q and elsewhere in this filing. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of these forward-looking statements. We are under no duty to update any of the forward-looking statements after the date of this Quarterly Report on Form 10-Q to conform our prior statements to actual results.

Overview

Dolby Laboratories develops and delivers innovative products and technologies that improve the entertainment experience. Since Ray Dolby founded Dolby Laboratories in 1965, we have been at the forefront of delivering sound technologies that are employed throughout the entertainment creation, distribution and playback process to enhance the entertainment experience. Today, Dolby technologies are standard in a wide range of entertainment platforms. Our technologies are used in virtually all DVD players and personal computer DVD playback software, increasingly in digital televisions, set top boxes, portable media devices and in a wide array of consumer electronic products such as gaming systems and audio/video receivers. Movie theatres and broadcasters around the world use Dolby’s products.

Our objective is to be an essential element in the best entertainment technologies by delivering innovative and enduring technologies that enrich the entertainment experience. We believe that our well recognized brand and established history of successful innovations position us to expand the use of our technologies in existing and new markets and to capitalize on key trends in digital entertainment, such as the transition to digital television, digital cinema, high definition home theater systems, portable media devices and downloadable content services.

We deliver innovative technologies, products and services throughout the entertainment industry, including content creation, content distribution and content playback. We work with consumer electronics manufacturers and media software vendors to help develop and incorporate innovations that are designed to improve the entertainment experience at home and on-the-go. Similarly, we focus on developing and delivering new innovations for the professional community. This community includes filmmakers and exhibitors, television producers, music producers and video game designers, who use Dolby technologies to generate a more realistic and immersive entertainment experience. We believe that our involvement across the entertainment industry has resulted in a globally recognized brand and helps position us to meet our long-term objective of being an essential element in the best entertainment technologies.

We are a global organization. We generate revenue by licensing our technologies to manufacturers of consumer electronics products and media software vendors, and selling our professional products and related services to entertainment content creators, producers and distributors. We have licensed our technologies to manufacturers in approximately 35 countries and our licensees distribute products incorporating our technologies throughout the world. We sell our products and services in over 50 countries. In fiscal 2007, 2008 and the fiscal year-to-date period ended March 27, 2009, revenue from outside the United States was 70%, 66% and 65% of our total revenue, respectively. Licensing, products and services revenue from outside the United States is based on the location of the corporate headquarters of the licensee, the location where products are shipped or where services are performed.

 

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Opportunities, Challenges and Risks

Recent deteriorating macroeconomic conditions are creating uncertainty regarding consumer demand in the markets into which we license and sell products and the timing and availability of funding for system integrators to finance digital cinema rollouts in which we could participate. The extent to which these conditions will persist and the overall impact they will have on consumer spending is not clear. Our business is exposed to adverse changes in general economic conditions because products that incorporate our technologies are entertainment-oriented and generally discretionary goods, such as DVD players, personal computers, digital televisions, mobile devices, set top boxes, home-theaters-in-a-box, camcorders, portable media devices, gaming systems, audio/video receivers and in-car DVD players. We believe that to some extent our revenues have been affected by recent macroeconomic conditions. However, we do not believe that the full effects of recent macroeconomic conditions are reflected in our fiscal year-to-date period ended March 27, 2009 licensing results as the majority of our licensing revenue is recognized one quarter after our licensees ship products to their customers. As a result, we expect that our licensing revenue for the remainder of fiscal 2009 will reflect customer shipments primarily taking place after December, 2008, which is when retail sales further declined following the weak holiday season. We expect that the slowdown in consumer spending could result in a lower percentage of PCs sold with our technologies, a continued decline in sales of standard definition DVD players and a potential decline in sales of game consoles, each of which would contribute to a decline in annual revenue growth.

Licensing revenue constitutes the majority of our total revenue, representing 80%, 84% and 82% of total revenue in fiscal 2007, 2008 and the fiscal year-to-date period ended March 27, 2009, respectively. We categorize our licensing revenue into the following markets:

 

   

Personal computer (PC) market – primarily comprised of software DVD players, Microsoft Windows Vista Home Premium and Ultimate Editions as well as the PC Entertainment Experience.

 

   

Consumer electronics (CE) market – primarily comprised of DVD players, DVD recorders, camcorders, audio/video receivers, home-theaters-in-a-box and Blu-ray Disc players.

 

   

Broadcast market – primarily comprised of televisions and set top boxes.

 

   

Gaming market – primarily comprised of video game consoles.

 

   

Mobile market – primarily comprised of mobile devices.

 

   

Automotive market – primarily comprised of in-car DVD players.

 

   

Licensing services – revenue from the administration of joint licensing programs.

Our personal computer market, which represented just over 30% of our licensing revenue in fiscal 2006, approximately 35% in fiscal 2007 and just over 40% in fiscal 2008, has been primarily driven by the inclusion of our technologies in media applications that are often included in PC shipments. These applications include DVD playback and/or DVD authoring software made by third party software vendors, as well as operating systems which contain similar media applications. Our PC market also includes revenue from our “PC Entertainment Experience” program.

Today, Microsoft includes Dolby technologies in two SKUs of its Vista operating system, Vista Home Premium and Vista Ultimate, which are primarily aimed at the consumer market. In addition, Microsoft recently announced that it will include Dolby technologies in four of the six SKUs of its new operating system, Windows 7. In Windows 7, Dolby technologies will again be included in the Home Premium and Ultimate SKUs, but in addition, will also be included in the Professional and Enterprise SKUs, which are aimed at the business market. This increases the potential for Dolby to receive royalties on a greater percentage of personal computers. However, there are also uncertainties associated with this opportunity. Microsoft has not yet announced when Windows 7 will be available for commercial sale and consumers may delay purchasing personal computers until Windows 7 is available. In addition, business customers may take several years to upgrade to Windows 7 given the longer adoption cycles associated with enterprise customers and the effects the current economy may have on information technology budgets. Finally, we currently receive royalties from a certain percentage of business PCs that include third party DVD playback software, and it is unclear whether enterprise customers will substitute such software out, when they upgrade to versions of Windows 7 containing similar functionality.

 

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In the future, PC manufacturers may elect to exclude additional DVD software applications on personal computers that include Windows 7. In addition, a growing number of low cost PCs, particularly netbooks, are being sold which do not have Microsoft Vista Home Premium or Ultimate Edition operating systems and do not always have DVD playback functionality or Dolby technologies. It is uncertain whether Windows 7 operating systems with Dolby technologies will be adopted in netbooks in the future. We expect an increasing number of consumers will elect to purchase these netbooks which could cause our PC revenue growth rate to decline.

Our consumer electronics market, which is driven primarily by revenue attributable to sales of DVD players, represented approximately 45% of licensing revenue in fiscal 2006, just under 40% in fiscal 2007 and just over 25% in fiscal 2008. The decrease in the consumer electronics market as a percentage of total licensing revenue has been due primarily to faster revenue growth in our other markets, mainly the PC and broadcast markets, as well as decreased sales of standard definition DVD players. We expect Blu-ray Disc players for high definition content to be a potential growth opportunity in the consumer electronics market. Dolby Digital has been selected as a mandatory audio standard, Dolby Digital Plus has been selected as a mandatory audio standard for secondary track playback and Dolby TrueHD has been selected as an optional audio standard in the Blu-ray Disc format. However, future revenue from Blu-ray Disc players may not offset future declines in revenue from standard definition DVD players.

Our broadcast market, which is primarily driven by demand for Dolby Digital in set top boxes and televisions, represented just over 10% of our licensing revenue in fiscal 2006, just over 15% in fiscal 2007 and just under 20% in fiscal 2008. Our broadcast market has benefited from increased global shipments of set top boxes, including the contribution of revenue from digital converter boxes, and digital televisions in Europe and North America that contain Dolby Digital. We also view broadcast services operating under particular bandwidth constraints, such as terrestrial broadcast or IPTV services, as an area of opportunity for us to offer Dolby Digital Plus and HE-AAC, which are able to deliver multi channel surround sound at reduced bit rates. We expect revenue from our broadcast market to increase as a percentage of licensing revenue in fiscal 2009. Notwithstanding our success in the broadcast market to date, we may not be able to capitalize on these opportunities and actual results may differ from our expectations.

Revenue generated from the gaming and automotive markets has primarily been driven by sales of video game consoles, portable gaming devices and in-car entertainment systems with Dolby Digital, ATRAC or Dolby TrueHD technologies. Revenue generated by our licensing services market has primarily been driven by demand for MPEG 4 audio and MPEG 2 audio technologies used in portable media devices. Revenue from our mobile market is primarily driven by demand for our HE-AAC technology incorporated into mobile devices. We view the mobile market as an area of opportunity to increase revenue from mobile devices, however actual results may differ from our expectations.

We have also introduced new technologies for the broadcast, consumer electronics and mobile markets, including Dolby Volume, dynamic range image technologies and Dolby Mobile. Dolby Volume is a sound leveling technology that performs measurement and analysis of signals according to a model based on the characteristics of human hearing, in order to provide consistency of volume and quality across various programs. Our dynamic range imaging technologies include Dolby Contrast and Dolby Vision. Dolby Contrast provides enhanced contrast, while Dolby Vision combines enhanced contrast with extended brightness and dynamic range for LCD televisions with LED backlit technology. Dolby Mobile is a suite of post-processing technologies optimized for mobile devices and designed to enhance the audio quality of media delivered on the device. We do not anticipate generating significant revenue from these technologies in fiscal 2009.

Our technologies are incorporated in consumer electronics and digital entertainment products throughout the world. We expect that sales of products incorporating our technologies in emerging economies, such as China and India, will increase in the future as consumers in these geographical markets have more disposable income available to purchase entertainment products, although there can be no assurance that this will occur. We also expect that manufacturers from lower cost manufacturing countries, including China, will increase production of consumer electronics and digital entertainment products in the future to satisfy this increased demand. There are risks associated with opportunities of doing business in these emerging economies, such as China, that have affected and will continue to affect our operating results, such as manufacturers failing to report or underreporting product shipments.

 

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Product sales consist of revenue from sales of equipment to cinema operators and broadcasters representing 14%, 11% and 14% of total revenue in fiscal 2007, 2008 and the fiscal year-to-date period ended March 27, 2009, respectively.

Our cinema products represented approximately 75% of product sales in fiscal 2006, 71% of product sales in fiscal 2007 and 68% of product sales in fiscal 2008. Our traditional cinema products are primarily used to read and decode a film’s soundtrack, calibrate cinema sound systems and to adapt analog cinema audio systems to digital audio formats. Our digital cinema servers load, store, decrypt and decode encrypted digital film files for presentation on a digital projector, and our digital 3D products provide 3D image capabilities. Sales of our cinema products and services tend to fluctuate based on the underlying trends in the motion picture industry. There is a current trend in the cinema industry towards the adoption of digital cinema. Digital cinema offers the motion picture industry a possible means to achieve substantial cost savings in printing and distributing movies, to combat piracy, and to enable movies to be played repeatedly without degradation in image and audio quality. In fiscal 2005, we introduced our Dolby Digital Cinema server, which allows for the storage and playback of digital content and in fiscal 2007 we introduced Dolby 3D Digital Cinema technology, which delivers a 3D experience when combined with an exhibitor’s existing digital cinema server. We expect that exhibitors constructing new theatres or upgrading existing theatres will generally choose digital cinema over traditional film cinema. Digital cinema is based on open standards, which unlike traditional cinema, does not include our proprietary audio formats. As the market for digital cinema grows, we continue to face more competitive pricing pressure than we have historically experienced for traditional cinema products, which adversely impacts our product sales gross margins and potentially our digital cinema market share. If our digital cinema servers are not widely deployed, our future prospects in digital cinema will be limited and our business could be materially and adversely affected. In addition to our current digital cinema offerings, we continue to research and develop new technologies for the digital cinema market. Generally, as the film industry has adopted digital cinema, the demand for our traditional cinema products and services has declined, and we anticipate that the demand for film based products will continue to decline in future periods.

Our broadcast products, which represented approximately 21% of product sales in fiscal 2006, 23% of product sales in fiscal 2007 and 24% of product sales in fiscal 2008, are used to encode, transmit and decode multiple channels of high quality audio for DTV and HDTV program production and broadcast distribution and to measure the subjective loudness of audio content within broadcast programming. In recent years, growth in consumer demand for high quality television content has increased the demand from broadcasters to deliver more content in Dolby Digital 5.1 surround sound which has contributed to sales of our professional broadcast products.

Our services revenue, which represented 6%, 5% and 4% of total revenue in fiscal 2007, 2008 and the fiscal year-to-date period ended March 27, 2009, respectively, is primarily tied to the motion picture production industry and, in particular, to the number of films being made by studios and independent filmmakers. The number of films that are produced can be affected by a number of factors, including strikes and work stoppages within the motion picture industry as well as by the tax incentive arrangements that many foreign governments provide filmmakers to promote local filmmaking.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations are based on our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. The preparation of these financial statements in accordance with U.S. GAAP requires us to utilize accounting policies and make certain estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingencies as of the date of the financial statements and the reported amounts of revenue and expenses during a fiscal period. The SEC considers an accounting policy to be critical if it is both important to a company’s financial condition and results of operations and it requires significant judgment and estimates on the part of management in its application. We have discussed the selection and development of the critical accounting policies with the audit committee of our board of directors, and the audit committee has reviewed our related disclosures in this Quarterly Report on Form 10-Q. Although we believe that our judgments and estimates are appropriate and correct, actual results may differ from those estimates.

The following are our critical accounting policies because we believe they are both important to the portrayal of our financial condition and results of operations and require critical management judgments and estimates about matters that are uncertain. If actual results or events differ materially from those contemplated by us in making these estimates, our reported financial condition and results of operations for future periods could be materially affected. See “Risk Factors” for certain matters bearing risks on our future results of operations.

 

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Revenue Recognition

We evaluate revenue recognition for transactions to license technologies, trademarks and know how, and to sell products and services using the criteria set forth by the SEC in Staff Accounting Bulletin 104, Revenue Recognition (SAB 104). For revenue transactions that involve software or software related products, such as fees we earn from integrated software vendors, certain product sales with software elements and certain other transactions, we recognize revenue under the guidance established by Statement of Position No. 97-2, Software Revenue Recognition (SOP 97-2). Both SAB 104 and SOP 97-2 state that revenue is recognized when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the seller’s price to the buyer is fixed or determinable and collectibility is probable. Judgment is required to assess whether collectibility is probable. We determine collectibility based on an evaluation of our customer’s recent payment history, the existence of a standby letter of credit between the customer’s financial institution and our financial institution and other factors.

The application of SOP 97-2 requires judgment, including whether the software element included with a hardware product is more-than-incidental to the hardware, whether a software arrangement includes multiple elements, and if so, whether vendor specific objective evidence, or VSOE of fair value exists for those elements. For some of our arrangements, customers receive certain elements of the arrangement over a period of time or after delivery of the initial product. These elements may include support and maintenance and/or the right to receive product upgrades. The fair value of these elements is recognized over the estimated period for which these elements will be delivered, which is sometimes the estimated life of the product. If we do not have VSOE of fair value for any undelivered element included in a multiple element arrangement containing software, we defer revenue until all elements are delivered and/or services have been performed, or until we have VSOE of fair value for all remaining undelivered elements. If the undelivered element is support and we do not have fair value for the support element, revenue for the entire arrangement is bundled and recognized ratably over the support period.

Goodwill

We account for goodwill in accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142). We evaluate and test our goodwill for impairment in accordance with the provisions of SFAS 142 at a reporting unit level. A reporting unit is an operating segment or one level below an operating segment. The goodwill impairment test is a two-step process. In the first step, the carrying value of the net assets of a reporting unit, including goodwill, is compared to the fair value of the reporting unit. If the fair value of the reporting unit is determined to be less than the carrying value, a second step is performed to compute the amount of the impairment. We test goodwill for impairment annually during our third fiscal quarter and when an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value.

During our last annual goodwill impairment test performed in the third quarter of fiscal 2008, we had three reporting units – Via, Cinea and Dolby Entertainment Technology. Our Via reporting unit pertains to the operations of a wholly owned subsidiary that administers joint licensing programs for Dolby and other patent holders and has no goodwill. Our Cinea reporting unit pertains to the operations of a content-protection and anti-piracy technology company that we acquired in our fourth quarter of fiscal 2003. We assigned the goodwill recognized on the acquisition to the Cinea reporting unit. Cinea was operated as a stand alone business with its own dedicated resources and facilities. Over recent quarters, we undertook steps to restructure the organization to streamline our worldwide operations and align resources based on function and targeted markets. In line with this strategy, we ceased using Cinea’s facilities, terminated certain employees and integrated Cinea with our Dolby Entertainment Technology reporting unit in our first quarter of fiscal 2009. Accordingly, the goodwill that was assigned to the Cinea reporting unit was reassigned to the Dolby Entertainment Technology reporting unit. As a result, we now have two reporting units – Via with no goodwill and Dolby Entertainment Technology with goodwill.

We use the income approach to determine the fair value of our reporting units based on the estimated future cash flows for the reporting units. The cash flow model is based on our best estimate of future revenues and operating costs. Future revenues are estimated over the period we expect to earn such cash flows, at growth rates consistent with our internal forecasts. The revenue and cost estimates are based on several sources including our historical information, third party industry data and review of our internal operations. The cash flow forecasts are adjusted by a discount rate of approximately 13% based on our weighted average cost of capital (WACC) derived through a capital asset pricing model. The primary components of this model include our considerations of the relative

 

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weighting of our total asset structure between our equity and debt, the risk-free rate of return given by the rate of return on U.S. Treasury bonds, an average market risk premium based on a range of historical returns and forward looking estimates, and our beta. Our model utilizes an effective tax rate ranging from the mid to high thirties. Historically, our model has indicated a fair value significantly in excess of the carrying value of the net assets of our Dolby Entertainment Technology reporting unit.

Once we determine the fair values of our reporting units under the income approach, we then compare the aggregated values to our market capitalization to test the reasonableness of our valuation under the income approach. Our market capitalization at the end of our third quarter of fiscal 2008, the period of our annual impairment test, was approximately equal to the aggregate fair value of our reporting units determined under the income approach. Both values approximated $4.7 billion, representing an excess of approximately 350% over the aggregate carrying value of our reporting units.

Our market capitalization has declined since our annual impairment test performed in our third quarter of fiscal 2008. We are required to evaluate goodwill for impairment when an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. In light of declines in our market capitalization, we reviewed our market capitalization compared to the aggregate carrying value of the net assets of our Dolby Entertainment Technology and Via reporting units during the interim quarters prior to our annual impairment test, which will be performed in the third quarter of fiscal 2009. Due to the low fair value of our Via reporting unit, we have assumed that the reduction in our market capitalization is primarily attributed to a reduction in the fair value of our Dolby Entertainment Technology reporting unit. Accordingly, we have compared our market capitalization to the aggregate carrying value of our two reporting units in our first quarter of fiscal 2009 and noted that our market capitalization continued to significantly exceed the carrying value of our reporting units. Therefore, in conjunction with our review of our most recent internal cash flow projections, we believe that the decline in market capitalization does not represent a triggering event that would require an interim impairment test.

We regularly assess our assumptions and methodologies utilized in our fair value calculations for reasonableness. We have not changed our methodologies since our previous annual impairment test. However, as part of the assessment of our assumptions, we reduced our near-term outlook and we revised our revenue forecast in our first and second quarters of fiscal 2009. This near-term revision did not reduce our revenue forecasts to a level that would represent a triggering event requiring an interim impairment test. We will consider the current state of the debt and equity markets in determining the market risk premiums included within our WACC during our fiscal 2009 impairment test.

Accounting for Income Taxes

In preparing our condensed consolidated financial statements, we are required to make estimates and judgments that affect our accounting for income taxes. This process includes estimating actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences, including the timing of recognition of stock-based compensation expense, result in deferred tax assets and liabilities, which are included in our condensed consolidated balance sheets. We also assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent that we believe that recovery is not likely, we have established a valuation allowance.

Significant judgment is required in determining the provision for income taxes, deferred tax assets and liabilities, the valuation allowance against our deferred tax assets and uncertainty in income tax positions. Our financial position and results of operations may be materially impacted if actual results significantly differ from these estimates or the estimates are adjusted in future periods.

Stock-Based Compensation

We account for stock-based compensation under the provisions of Statement of Financial Accounting Standards No. 123(R), Share-Based Payment (SFAS 123R). SFAS 123R requires measurement of all employee stock-based compensation awards using a fair-value method and recording of such expense in the condensed consolidated financial statements over the requisite service period. We utilize the Black-Scholes option pricing model to determine the fair value of employee stock options at the date of grant. To determine the fair value of a stock-based award using the Black-Scholes option pricing model requires that we make certain assumptions

 

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regarding the expected term of the award, the expected future volatility of our stock price over the expected term of the award and the risk-free interest rate over the expected term. We develop our assumptions for the Black-Scholes pricing model in accordance with guidelines set forth by the SEC in Staff Accounting Bulletin No. 107, Share-Based Payment (SAB 107). We estimate the expected term of stock-based awards by evaluating historical exercise patterns of our employees and applying an assumption of future exercise patterns. We utilize a blend of our historical volatility of our common stock and implied volatility based on traded options with similar terms as an estimate of the expected volatility of our stock price over the expected term of the awards. We use an average interest rate based on U.S. Treasury instruments with terms consistent with the expected term of our awards to estimate the risk-free interest rate. The amount of stock-based compensation expense is reduced for estimated forfeitures based on historical experience. Forfeitures are required to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

Investments

As of March 27, 2009, we had investments in United States government agency securities, variable rate demand notes, auction rate certificates, corporate bonds and municipal debt securities. We account for these instruments under the provisions of Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities. Investments that have original maturities between 91 days and one year from the date of purchase are classified as short-term investments and investments that have maturities of more than one year from the date of purchase are classified as long-term investments. All of our investments, except for an equity investment, investments held in our supplemental retirement plan for certain executives and auction rate certificates are classified as available-for-sale securities. Our investments, with the exception of the equity investment, are recorded at fair value in the condensed consolidated balance sheet. Unrealized gains or losses on our available-for-sale securities are reported as a component of accumulated other comprehensive income (loss) while realized gains or losses are reported as a component of net income.

Our equity investment represents an equity security that we have accounted for under the cost method and classified as long-term investments based on our ability and intent to hold for more than one year. Investments held in our supplemental retirement plan for certain executives and auction rate certificates are classified as long-term trading securities. Unrealized gains or losses on trading securities are reported as a component of net income.

Our investments in auction rate securities have been illiquid since February 2008 due to failed auctions. The observable market information to determine the fair value of our auction rate certificates continues to be insufficient and therefore we continue to estimate the fair value by incorporating assumptions that market participants would use in their estimates of fair value. These assumptions included the collateral underlying the securities, the creditworthiness of the counterparty, the timing of expected future cash flows, the likelihood of a successful auction in a future period and the final stated maturities.

Results of Operations

Revenue

 

     Fiscal Quarter Ended     Change     Fiscal Year-to-Date Ended     Change  
     March 28,
2008
    March 27,
2009
    $    %     March 28,
2008
    March 27,
2009
    $    %  
     ($ in thousands)  

Revenue:

                  

Licensing

   $ 149,619     $ 159,879     $ 10,260    7 %   $ 272,049     $ 313,935     $ 41,886    15 %

Percentage of total revenue

     87 %     78 %          84 %     82 %     

Product sales

     15,628       36,008       20,380    130 %     35,638       53,954       18,316    51 %

Percentage of total revenue

     9 %     18 %          11 %     14 %     

Services

     7,310       8,237       927    13 %     15,097       16,493       1,396    9 %

Percentage of total revenue

     4 %     4 %          5 %     4 %     
                                                          

Total revenue

   $ 172,557     $ 204,124     $ 31,567    18 %   $ 322,784     $ 384,382     $ 61,598    19 %
                                                          

Licensing. The 7% increase in licensing revenue from the second quarter of fiscal 2008 to the second quarter of fiscal 2009 was primarily driven by increased revenue in our broadcast market, and to a lesser extent, our mobile and PC markets, partially offset by a decrease in revenue from our consumer electronics market. The increase in revenue from our broadcast market was primarily driven by shipments of set top boxes, including Digital Transport

 

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Adapters (“DTA devices”) and National Telecommunications and Information Administration (“NTIA”) converter boxes, and an increase in the number of digital televisions in Europe that incorporate Dolby Digital compared to a year ago, all driven by the continued conversion from analog to digital. The decrease in revenue from our consumer electronics market is largely attributable to significantly lower sales of standard definition DVD players, home-theater-in-a-box systems and portable DVD players. By June 12, 2009, television stations in the U.S. are required to fully transition to digital broadcast. Accordingly, we expect that the revenue from NTIA converter boxes will significantly decline during the second half of fiscal 2009 and will not recur in fiscal 2010. We believe that to some extent we have been affected by recent deterioration in macroeconomic conditions. However, we do not believe that the full effects of these conditions are reflected in our second quarter of fiscal 2009 licensing results, as the majority of our licensing revenue is recognized one quarter after our licensees ship products to their customers. As a result, we expect that our licensing revenue for the remainder of fiscal 2009 will reflect customer shipments primarily taking place after December, 2008, which is when retail sales further declined following the weak holiday season. Consequently, we do not expect to sustain such levels of licensing growth and we expect that licensing revenue will decrease in the remainder of fiscal 2009 due to a slowdown in consumer spending, an expected lower percentage of PCs sold with our technologies due to increased growth in netbooks that do not have Microsoft Vista operating systems or software DVD players, and an expected continued decline in sales of DVD players.

The 15% increase in licensing revenue from the fiscal year-to-date period ended March 28, 2008 to the fiscal year-to-date period ended March 27, 2009 was primarily driven by increases in our broadcast market for the same reasons discussed above with respect to the second quarter of fiscal 2009. Increases in our PC, gaming and mobile markets also contributed to an increase in revenue from the fiscal year-to-date period ended March 28, 2008 to the fiscal year-to-date period ended March 27, 2009.

Product Sales. The 130% increase in product sales from the second quarter of fiscal 2008 to the second quarter of fiscal 2009 was primarily due to the recognition of $22.4 million of previously deferred product sales that were tied to sales of digital cinema servers. We had deferred this revenue due to our obligation to upgrade our equipment to be compliant with the DCI specifications. During the second quarter of fiscal 2009, we achieved compliance with these specifications by making certain software upgrades available. We continue to have ongoing product support obligations and, as a result, currently have approximately $18.0 million of deferred revenue related to digital cinema related equipment. We expect to recognize the majority of the $18.0 million of deferred revenue throughout the remainder of fiscal 2009 and fiscal 2010. Increases in product sales were partially offset by a decrease in sales of our traditional cinema and broadcast products.

The 51% increase in product sales from the fiscal year-to-date period ended March 28, 2008 to the fiscal year-to-date period ended March 27, 2009, was driven mainly by the recognition of deferred revenue related to sales of digital cinema related products partially offset by a decrease in sales of our traditional cinema.

Services. The 13% increase in services revenue from the second quarter of fiscal 2008 to the second quarter of fiscal 2009 and the 9% increase in services revenue from the fiscal year-to-date period ended March 28, 2008 to the fiscal year-to-date period ended March 27, 2009 was primarily attributable to the recognition of digital cinema virtual print fees from our agreement with Walt Disney Studios. These virtual print fees had previously been deferred due to us not meeting the DCI specifications, which were met in the second quarter of fiscal 2009.

Gross Margin

 

     Fiscal Quarter Ended     Fiscal Year-to-Date Ended  
     March 28,
2008
    March 27,
2009
    March 28,
2008
    March 27,
2009
 

Gross margin:

        

Licensing gross margin percentage

   96 %   97 %   97 %   104 %

Licensing gross margin percentage excluding gain from amended patent licensing

   96 %   97 %   97 %   97 %

Product sales gross margin percentage

   45 %   33 %   43 %   38 %

Services gross margin percentage

   57 %   62 %   59 %   62 %
                        

Total gross margin percentage

   90 %   84 %   89 %   93 %
                        

Licensing Gross Margin. We license to our customers intellectual property that may be internally developed, acquired by us or licensed from other parties. Our cost of licensing consists principally of royalty obligations to third parties for the licensing of intellectual property rights that we sublicense as part of our licensing arrangements with

 

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our customers. Our cost of licensing also includes amortization expenses associated with purchased intangible assets. Licensing gross margin from the second quarter of fiscal 2008 to the second quarter of fiscal 2009 was essentially flat. Licensing gross margin from the fiscal year-to-date period ended March 28, 2008 to the fiscal year-to-date period ended March 27, 2009 increased 7 points due to a gain from an amended patent licensing agreement. The gain from the amended patent licensing agreement was recorded within cost of revenue in our condensed consolidated statement of operations in the first quarter of fiscal 2009.

Product Sales Gross Margin. Cost of product sales primarily consists of material costs related to the products sold, applied labor and manufacturing overhead and, to a lesser extent, amortization of certain intangible assets. Product sales gross margin decreased by 12 points from the second quarter of fiscal 2008 to the second quarter of fiscal 2009 primarily due to the recognition of revenue and associated costs related to a number of digital cinema related equipment with significantly lower margins than our traditional cinema and broadcast products. Prior to the second quarter of fiscal 2009, we had not recognized revenue related to sales of our digital cinema related products as we had not yet achieved compliance with the DCI specifications. In the second quarter of fiscal 2009, we fulfilled our obligation and therefore began recognizing this revenue and related costs.

Product sales gross margin in the second quarter of fiscal 2009 of 33% was about 15 points lower than our product sales gross margin of 48% in the first quarter of fiscal 2009, primarily due to the recognition of $22.4 million of deferred digital cinema and 3D revenue. Product margins for products other than the deferred digital cinema related equipment were lower than our historical trends, largely due to certain period charges and higher proportionate sales of lower margin products.

The total amount of previously deferred products revenue which we recognized in the second quarter of fiscal 2009 was $22.4 million. The product margins related to the digital cinema related equipment revenue recognized in the second quarter of fiscal 2009 were particularly low due to a combination of factors that are common with new product launches, which includes higher initial per unit costs resulting from low manufacturing volumes. Additionally, field upgrade costs were incurred after the initial shipment of the products to the end users to ensure our products complied with our contractual obligations. At March 27, 2009, we had $18.0 million of deferred revenue related to this digital cinema related equipment, and a corresponding $11.9 million of associated costs. We expect to recognize the majority of the $18.0 million of deferred revenue and associated costs throughout the remainder of fiscal 2009 and fiscal 2010.

In the second quarter of fiscal 2009, we decided to consolidate our Wootton Bassett, U.K. manufacturing operations into our Brisbane, California facility. As a result of the consolidation, we plan to focus our internal manufacturing capacity on lower volume products and engineering prototypes and we will work with contract manufacturers to support higher volume products as necessary. This hybrid model, which is based on using internal and contract manufacturing resources, is designed to provide us the capacity to scale production when needed. We anticipate that this will favorably impact our product sales gross margin in future periods due to lower manufacturing costs and increased flexibility as market demands change. However, actual results may differ from our expectations. As of April 30, 2009, we have fully transitioned the manufacturing operations to our Brisbane facility.

Services Gross Margin. Cost of services primarily consists of the payroll and benefits costs of employees performing our professional services, the cost of outside consultants and reimbursable expenses incurred on behalf of customers. Services gross margin increased in fiscal 2009 due to a higher percentage of revenue from digital cinema virtual print fees which has minimal associated costs.

Operating Expenses

 

     Fiscal Quarter Ended     Change     Fiscal Year-to-Date Ended     Change  
     March 28,
2008
    March 27,
2009
    $     %     March 28,
2008
    March 27,
2009
    $    %  
     ($ in thousands)  

Operating expenses:

                 

Selling, general and administrative

   $ 55,310     $ 53,420     $ (1,890 )   (3 )%   $ 106,296     $ 107,400     $ 1,104    1 %

Percentage of total revenue

     32 %     26 %         33 %     28 %     

Research and development

     15,725       16,244       519     3 %     29,632       31,409       1,777    6 %

Percentage of total revenue

     9 %     8 %         9 %     8 %     

Restructuring charges, net

     —         1,866       1,866     n/a       —         2,734       2,734    n/a  

Percentage of total revenue

     n/a       n/a           n/a       n/a       

 

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     Fiscal Quarter Ended     Change     Fiscal Year-to-Date Ended     Change  
     March 28,
2008
    March 27,
2009
    $     %     March 28,
2008
    March 27,
2009
    $     %  

Gain on settlements

     (249 )     (4,900 )     (4,651 )   n/a       (249 )     (4,900 )     (4,651 )   n/a  

Percentage of total revenue

     n/a       n/a           n/a       n/a      
                                                            

Total operating expenses

   $ 70,786     $ 66,630     $ (4,156 )   6 %   $ 135,679     $ 136,643     $ 964     1 %
                                                            

Selling, General and Administrative. Selling, general and administrative expense consists primarily of personnel and personnel-related expenses, professional service fees and facility costs for our sales, marketing and administrative functions. The 3% decrease in selling, general and administrative expense from the second quarter of fiscal 2008 to the second quarter of fiscal 2009 was primarily due to a decrease in personnel expenses relating to a decrease in bonus expense, which was higher in the second quarter of fiscal 2008 as a result of our exceeding targeted expectations and a decrease in stock-based compensation expense in the second quarter of fiscal 2009 as a result of increased forfeitures and fully vested incentive stock option grants not incurring further expense. These decreases were partially offset by annual pay increases that took effect in the second quarter of fiscal 2009.

The 1% increase in selling, general and administrative expenses from the fiscal year-to-date period ended March 28, 2008 to the fiscal year-to-date period ended March 27, 2009 was primarily due to an increase in professional consulting expenses, partially offset by a decrease in advertising and promotional costs.

Research and Development. Research and development expense consists primarily of compensation and benefits related costs for personnel responsible for the research and development of new technologies and products. The 3% increase in research and development expense from the second quarter of fiscal 2008 to the second quarter of fiscal 2009 was primarily driven by an increase in professional consulting expenses driven by an increase in research and development projects, partially offset by a decrease in bonus expense.

The increase in research and development expenses from the fiscal year-to-date period ended March 28, 2008 to the fiscal year-to-date period ended March 27, 2009 was due to the same factors discussed above with respect to the second quarter of fiscal 2009.

Restructuring Charges, net. Restructuring charges consist primarily of severance and other charges attributable to the termination of employees and to a lesser extent facility charges relating to non-cancelable lease costs, net of expected sublease income. Restructuring charges in the second quarter of fiscal 2009 are primarily due to the consolidation of our Wootton Bassett, U.K. manufacturing operations into our Brisbane, California facility and to a lesser extent charges related to Cinea’s integration. In the second quarter of fiscal 2009, we recorded charges of $1.8 million related to the consolidation of our manufacturing operations and $0.1 million related to Cinea’s integration.

For the fiscal year-to-date period ended March 27, 2009, restructuring charges of $2.7 million included $1.8 million related to the consolidation of our manufacturing operations and the remaining $0.9 million related to severance and non-cancelable lease costs, net of expected sublease income, for two of Cinea’s leased facilities in Virginia.

Gain on Settlements. Gain on settlements includes payments received related to the resolution of disputes with implementation licensees from which we typically do not earn royalties.

Other Income, Net

 

     Fiscal Quarter Ended     Change     Fiscal Year-to-Date Ended     Change  
     March 28,
2008
    March 27,
2009
    $     %     March 28,
2008
    March 27,
2009
    $     %  
     ($ in thousands)  

Interest income

   $ 4,475     $ 2,620     $ (1,855 )   (41 )%   $ 10,296     $ 6,752     $ (3,544 )   (34 )%

Interest expense

     (632 )     (149 )     483     76 %     (995 )     (412 )     583     59 %

Other expenses, net

     (1,439 )     236       1,675     n/a       (1,693 )     (1,146 )     547     n/a  
                                                            

Total other income, net

   $ 2,404     $ 2,707     $ 303     13 %   $ 7,608     $ 5,194     $ (2,414 )   (32 )%
                                                            

Other income, net, primarily consists of interest income earned on cash, cash equivalent and investments, offset by interest expense principally attributable to the outstanding balances on our facility debt obligations. Interest

 

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income declined 41% in the second quarter of fiscal 2009 from the second quarter of fiscal 2008, primarily driven by lower yields generated on our investment portfolio driven by lower interest rates, partially offset by an increase in cash, cash equivalents and investments balances. Additionally, gains or losses from foreign currency transactions are included in the balances for periods presented.

Income Taxes

 

     Fiscal Quarter Ended     Fiscal Year-to-Date Ended  
     March 28,
2008
    March 27,
2009
    March 28,
2008
    March 27,
2009
 
     ($ in thousands)  

Income taxes:

        

Provision for income taxes

   $ 29,792     $ 38,430     $ 54,399     $ 77,053  

Effective tax rate

     34.3 %     35.5 %     34.1 %     34.2 %

Our effective tax rate is based upon a projection of our annual fiscal year results. Our effective tax rate for the second quarter of fiscal 2008 was 34.3% compared to 35.5% for the second quarter of fiscal 2009. Our effective tax rate was 34.1% and 34.2% for the fiscal year-to-date periods ended March 28, 2008 and March 27, 2009, respectively. In the second quarter of fiscal 2009, a reduction in forecasted tax exempt interest income and Internal Revenue Code’s Section 199 manufacturer’s deduction resulted in a higher tax rate in comparison to the second quarter of fiscal 2008.

On February 19, 2009, the State of California enacted new legislation which will allow us to make an annual election to use a single sales factor based apportionment formula to allocate income beginning with our fiscal year ended 2012. We expect this change to impact our fiscal 2011 by reducing current deferred tax assets which are expected to reverse in periods in which the election is effective, likely resulting in an increase in our fiscal 2011 tax provision. Beginning in fiscal 2012 and thereafter, the likely impact of this change will also be a reduction to current California income tax expense. In addition, since certain of our existing long-term deferred tax assets are expected to reverse in fiscal 2012 and thereafter when the election is effective, we have recorded additional tax expense of $0.3 million in our second quarter of fiscal 2009 to reflect the estimated impact.

Liquidity, Capital Resources and Financial Condition

 

     September 26,
2008
    March 27,
2009
 
     (in thousands)  

Cash and cash equivalents

   $ 394,761     $ 372,528  

Short-term investments

     119,667       193,543  

Long-term investments

     180,996       244,535  

Accounts receivable, net

     27,650       45,245  

Accounts payable and accrued liabilities

     156,925       119,636  

Working capital(a)

     491,196       577,555  

Net cash provided by operating activities

     264,474       130,067  

Capital expenditures (b)

     (13,610 )     (3,552 )

Net cash used in investing activities

     (271,338 )     (153,140 )

Net cash provided by financing activities

     34,896       5,545  

 

(a)

Working capital consists of total current assets less total current liabilities.

(b)

Capital expenditures consist of purchases of office equipment, building fixtures, computer hardware and software, leasehold improvements, production and test equipment.

As of March 27, 2009, we had cash and cash equivalents of $372.5 million, compared to $394.8 million at September 26, 2008. In addition, at March 27, 2009, we had short-term and long-term investments of $438.1 million, compared to $300.7 million at September 26, 2008. Our principal sources of liquidity are our cash, cash equivalents and investments, as well as cash flows from our operations. We believe that our cash, cash equivalents and potential cash flows from operations will be sufficient to satisfy our currently anticipated cash requirements through at least the next 12 months.

 

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Cash provided by operating activities was $130.1 million for the fiscal year-to-date period ended March 27, 2009, compared to $110.8 million for the fiscal year-to-date period ended March 28, 2008. Cash flows from operating activities consisted of net income adjusted for certain non-cash items, including stock-based compensation, depreciation and amortization, and the effect of changes in working capital and other operating activities. Cash flows from operating activities for the fiscal year-to-date period ended March 27, 2009 were primarily driven by net income of $147.5 million. Adjustments for non-cash items included stock-based compensation expense of $9.2 million, deferred taxes of $17.0 million and depreciation and amortization expense of $14.6 million, offset by the gain from amended patent licensing agreement of $20.0 million. Changes in working capital were primarily driven by increases in current assets of $17.2 million and decreases in accounts payable and accrued liabilities of $15.6 million and deferred revenues of $7.0 million.

Cash used in investing activities for the fiscal year-to-date period ended March, 27, 2009 was primarily driven by purchases of available-for-sale securities of $141.3 million, net of sales, and cash paid for the purchase of intangible assets of $8.3 million. Capital expenditures were $3.6 million for the fiscal year-to-date period ended March 27, 2009.

Cash provided by financing activities was $5.5 million for the fiscal year-to-date period ended March 27, 2009, compared to $19.3 million for the fiscal year-to-date period ended March 28, 2008. Cash flows from financing activities were primarily driven by proceeds from the exercise of stock options and issuance of stock under our employee stock purchase plan.

As of March 27, 2009, we held auction rate certificates with a par value totaling $70.1 million. In the event we need access to the funds invested in these securities, we will not be able to liquidate these securities until a future auction of these securities is successful, they are refinanced and redeemed by the issuers, or a buyer is found outside of the auction process. On November 11, 2008, we accepted an offer from UBS AG, which we refer to, along with its wholly owned subsidiaries UBS Financial Services, Inc. and UBS Securities LLC, as UBS, to liquidate our auction rate certificates held in UBS accounts on February 13, 2008. The UBS offer entitles us to sell our auction rate certificates for a price equal to the liquidation preference of the auction rate certificates plus accrued but unpaid dividends or interest, if any, at any time during a two year period from June 30, 2010 through July 2, 2012. There is a risk that UBS will not perform its obligations in accordance with their offer. Furthermore, there is no assurance that we will be able to recoup our investments in the auction rate certificates.

Contractual Obligations and Commitments

The following table presents a summary of our contractual obligations and commitments as of March 27, 2009.

 

     Payments Due By Period
     Remainder
of Fiscal
2009
   Fiscal 2010
to 2011
   Fiscal 2012
to 2013
   After
Fiscal 2013
   Total
     (in thousands)

Long-term debt (1)

   $ 763    $ 3,268    $ 3,224    $ 738    $ 7,993

Operating leases (2)

     3,174      11,886      9,614      5,518      30,192

Payments on litigation settlement (3)

     3,000      6,000      —        —        9,000
                                  

Total

   $ 6,937    $ 21,154    $ 12,838    $ 6,256    $ 47,185
                                  

 

(1) We maintain three term loans through our consolidated affiliates Dolby Properties, LLC, Dolby Properties Burbank, LLC and Dolby Properties United Kingdom, LLC, for financing commercial and real property at various locations in which we are the primary tenant.
(2) Operating lease payments include future minimum rental commitments, including those payable to our principal stockholder, for non-cancelable operating leases of office space as of March 27, 2009.
(3) In April 2002, we settled a dispute with an unrelated third party and agreed to pay a total of $30.0 million in ten equal annual installments of $3.0 million per year beginning in June 2002. Refer to Note 6 “Legal Proceedings” for further discussion.

Other Cash Obligations. Under the terms of the agreement to acquire all outstanding shares of our subsidiary, Cinea, in September 2003, we have future payment obligations that equal approximately 5% to 8% of the revenue generated from products incorporating certain technologies we acquired in the transaction through 2022. As of March 27, 2009, no additional purchase consideration had been paid and no liability is reflected on our balance sheet.

 

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Recently Issued Accounting Standards

See Note 8 of the Condensed Consolidated Financial Statements “Recently Issued Accounting Standards.”

 

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ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Sensitivity

Cash, Cash Equivalents and Investments.

As of March 27, 2009, we had cash and cash equivalents of $372.5 million, which consisted of cash and highly-liquid money market funds. In addition, we had short-term and long-term investments of $438.1 million, which consisted primarily of municipal debt securities, auction rate certificates, variable rate demand notes, corporate bonds and United States government agency securities with original maturities greater than 90 days. Many of these investments are subject to fluctuations in interest rates, which could impact our results. Based on our investment portfolio balance as of March 27, 2009, a hypothetical change in interest rates of 1% would have approximately a $4.1 million impact, and a change of 0.5% would have approximately a $2.0 million impact on the carrying value of our portfolio. Furthermore, a hypothetical change in interest rates of 1% would have approximately a $4.1 million impact, and a change of 0.5% would have approximately a $2.0 million impact on interest income over a one-year period.

As of March 27, 2009, we held auction rate certificates with a par value totaling $70.1 million. Auctions for these instruments have failed and there is no assurance that future auctions will succeed. In the event we need access to the funds invested in these securities, we will not be able to liquidate these securities until a future auction of these securities is successful, they are refinanced and redeemed by the issuers, or a buyer is found outside of the auction process. On November 11, 2008, we accepted an offer from UBS AG, which we refer to, along with its wholly owned subsidiaries UBS Financial Services, Inc. and UBS Securities LLC, as UBS, to liquidate our auction rate certificates held in UBS accounts on February 13, 2008. The UBS offer entitles us to sell our auction rate certificates for a price equal to the liquidation preference of the auction rate certificates plus accrued but unpaid dividends or interest, if any, at any time during a two year period from June 30, 2010 through July 2, 2012. There is a risk that UBS will not perform its obligations in accordance with their offer. Furthermore, there is no assurance that we will be able to recoup our investments in the auction rate certificates.

We do not utilize financial instruments for trading or other speculative purposes, nor do we utilize leveraged financial instruments.

Foreign Currency Exchange Risk

We maintain sales, marketing and business operations in foreign countries, most significantly in the United Kingdom. We also conduct a growing portion of our business outside the United States through subsidiaries with functional currencies other than the U.S. dollar (primarily Euros and British Pounds). As a result, we face exposure to adverse movements in currency exchange rates as the financial results of our international operations are translated from local currency into U.S. dollars upon consolidation. Most of our revenue from international markets is denominated in U.S. dollars, while the operating expenses of our international subsidiaries are predominantly denominated in local currency. Therefore, if the U.S. dollar weakens against the local currency, we will have increased operating expenses which are only partially offset by net revenues. Conversely, if the U.S. dollar strengthens against the local currency, our net assets, net revenues and operating expenses will decrease and affect our net income. Additionally, foreign exchange rate fluctuations on transactions denominated in currencies other than the functional currency result in gains or losses that are reflected in our condensed consolidated statement of operations. Our international operations are subject to risks typical of international business, including, but not limited to, differing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions, and foreign exchange rate volatility.

 

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ITEM 4 – CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain “disclosure controls and procedures,” as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Interim Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Subject to the limitations noted above, our management, with the participation of our Chief Executive Officer and Interim Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the fiscal period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, the Chief Executive Officer and Interim Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures were effective to meet the objective for which they were designed and operate at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the fiscal quarter ended March 27, 2009, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are involved in various legal proceedings from time to time arising from the normal course of business activities, including claims of alleged infringement of intellectual property rights, commercial, employment and other matters. In our opinion, resolution of these proceedings is not expected to have a material adverse effect on our operating results or financial condition. However, it is possible that an unfavorable resolution of one or more such proceedings could materially affect our future operating results or financial condition in a particular period.

ITEM 1A. RISK FACTORS

The following risk factors and other information included in this Quarterly Report on Form 10-Q should be carefully considered. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we presently deem less significant may also impair our business operations. If any of the following risks actually occur, our business, operating results and financial condition could be materially adversely affected.

General economic conditions may reduce our revenues and harm our business.

Our business is particularly exposed to adverse changes in general economic conditions, because products that incorporate our technologies are entertainment-oriented and generally discretionary goods, such as DVD players, personal computers, digital televisions, mobile devices, set top boxes, home-theaters-in-a-box, camcorders, portable media devices, gaming systems, audio/video receivers and in-car DVD players. The current slowdown or decline in U.S. and foreign economic growth has adversely affected consumer confidence, disposable income and spending. These conditions may persist or worsen. The overall impact they will have on consumer spending is not clear. Sales by our licensees of consumer electronics and other products incorporating our technologies may not grow as rapidly as in prior periods or may even decrease, which would adversely affect our licensing revenue. We believe that to some extent our revenues have been affected by recent macroeconomic conditions. However, we do not believe that the full effects of recent macroeconomic conditions are reflected in our financial results to date as the majority of our licensing revenue is recognized one quarter after our licensees ship products to their customers. As a result, we expect that our licensing revenue for the remainder of fiscal 2009 will reflect customer shipments primarily taking place after December, 2008, which is when retail sales further declined following the weak holiday season. We do not expect to sustain historical levels of licensing growth, and we expect licensing revenue will decrease, in the remainder of fiscal 2009 due to a slowdown in consumer spending. A continued decline in sales of standard definition DVD players and a potential decline in sales of game consoles along with an expected lower percentage of PCs sold with our technologies, will contribute to an expected decline in revenue growth or even a decline in revenue. In addition, any slowdown in consumer spending will likely negatively impact the motion picture industry and cinema owners, which could result in decreased growth, or a decrease in product sales and services, which could adversely affect our revenue. Furthermore, deteriorating economic conditions result in a greater likelihood that more of our licensees and customers will become delinquent on their obligations to us or be unable to pay, which in turn, could result in a higher level of write-offs, all of which would adversely affect our earnings. Moreover, deteriorating economic conditions and other factors may result in increased underreporting and non-reporting of royalty bearing revenues by our licensees as well as increased unauthorized use of our technologies, which would adversely affect our earnings.

To the extent that sales of personal computers with Dolby technologies level off or decline, our licensing revenue will be adversely affected.

Historically, PC manufacturers have frequently included DVD playback functionality as part of the software applications included in their products. Two of six editions of Microsoft’s Windows Vista operating system, the Windows Vista Home Premium Edition and the Windows Vista Ultimate Edition, include Dolby technologies which help enable DVD playback functionality and DVD authoring capabilities. In addition, many major PC manufacturers continue to include additional DVD software applications which offer added DVD functionality not

 

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included in the Microsoft operating systems. Microsoft recently announced that it will include Dolby technologies in four of six editions of Microsoft’s new Windows 7 operating system, which will include DVD software applications. There are risks and uncertainties associated with this opportunity. Microsoft has not yet announced when Windows 7 will be available for commercial sale and consumers may delay purchasing personal computers until Windows 7 is available. It is uncertain whether major PC manufacturers will continue to include additional branded software applications with DVD playback capabilities and other features, such as Blu-ray Disc playback, which will not be provided in the Windows 7 operating system. In the future, PC manufacturers may elect to exclude additional DVD software applications on personal computers that include Windows 7. Additionally, it is uncertain at what pace consumer and business customers will migrate from their current operating systems to the Windows 7 operating system and what the adoption rate of the editions with Dolby technologies will be. In addition, a growing number of lower priced PCs, particularly netbooks, are being sold which do not have Microsoft Vista Home Premium or Ultimate Edition operating systems or contain optical disc drives and do not always have DVD playback functionality or Dolby technologies. It is uncertain whether Windows 7 operating systems with Dolby technologies will be adopted in netbooks in the future. Consumers may elect to purchase these lower priced PCs instead of computers with DVD playback functionality and Dolby technologies. Further, equipment manufacturers experiencing pricing pressure may elect to exclude optional DVD playback functionality from their products, thereby requiring an additional cost to add this capability, which would adversely affect demand for our technologies. Future shipments of PCs with Dolby technologies could also decline. If any of the foregoing occur, our licensing revenue will be adversely affected.

Our business and prospects depend on the strength of our brand, and if we do not maintain and strengthen our brand, our business will be materially harmed.

Maintaining and strengthening the “Dolby” brand is critical to maintaining and expanding our licensing, products and services, as well as to our ability to enter new markets for our sound and other technologies. Our continued success depends, in part, on our reputation for providing high quality products, services and technologies across a wide range of entertainment industries, including the consumer electronics products industry. If we fail to promote and maintain the Dolby brand successfully in licensing, products or services, our business and prospects will suffer. Moreover, we believe that the likelihood that our technologies will be adopted as industry standards in various markets and for various applications depends, in part, upon the strength of our brand, because professional organizations and industry participants are more likely to accept, as an industry standard, technologies developed by a well-respected and well-known brand. Our ability to maintain and strengthen our brand will depend heavily on our ability to continue to develop innovative technologies for the entertainment industry, successfully enter into new markets and to continue to provide high quality products and services, which we may not do successfully.

Sales of component DVD players have declined significantly and we expect them to decline further. To the extent that sales of component DVD players continue to decline or alternative technologies in which we do not participate replace DVDs or Blu-ray Disc as a dominant medium for consumer video entertainment, our licensing revenue will be adversely affected.

Growth in our revenue over the past several years had been the result, in large part, of the rapid growth in sales of component DVD players and home theater systems incorporating our technologies. However, as the markets for DVD players have matured, sales of component DVD players have declined significantly and we expect future sales of component consumer DVD players to continue to decline. As sales of component DVD players decline our licensing revenue will be adversely affected. Additionally, future revenue from Blu-ray Disc player may not offset future declines in revenue from standard definition DVD players, which would adversely affect our licensing revenue. In addition, if new technologies are developed for use with DVDs or new technologies are developed that substantially compete with or replace DVDs and Blu-ray Disc players as a dominant medium for consumer video entertainment, and if we are unable to develop and successfully market technologies that are incorporated into or compatible with those new technologies, our business, operating results and prospects will be adversely affected.

We depend on the sale by our licensees of products that incorporate our technologies, and a reduction in those sales would adversely affect our licensing revenue.

We derive most of our revenue from the licensing of our technologies to consumer electronics product manufacturers. Licensing revenue represented 80%, 84% and 82% of our total revenue in fiscal 2007, 2008 and the fiscal year-to-date period ended March 27, 2009, respectively. We do not manufacture consumer electronics products ourselves and our licensing revenue is dependent on sales by our licensees of products that incorporate our

 

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technologies. We cannot control these manufacturers’ product development or commercialization efforts or predict their success. In addition, our license agreements, which typically require manufacturers of consumer electronics products and media software vendors to pay us a specified royalty for every electronics product shipped that incorporates our technologies, do not require these manufacturers to include our technologies in any specific number or percentage of units, and only a few of these agreements guarantee us a minimum aggregate licensing fee. Accordingly, if our licensees sell fewer products incorporating our technologies, or otherwise face significant economic difficulties, our revenue will decline. Moreover, we have a widespread presence in markets for electronics products, such as the consumer electronics product market, which includes DVD players, audio/video receivers and other home theater consumer electronics products, and, as a result, there is little room for us to further penetrate such markets. Lower sales of products incorporating our technologies could occur for a number of reasons. Changes in consumer tastes or trends, changes in industry standards or adverse changes in business and economic conditions, may adversely affect our licensing revenue. Increasing market saturation, durability of products in the marketplace, competing products and alternate consumer entertainment options could adversely affect demand for new products incorporating our technologies.

Our future success depends, in part, upon the growth of new and existing markets for our technologies and our ability to develop and adapt our technologies for those markets. If those markets do not grow or we are not able to develop successful products for them, our business prospects could be limited.

We expect that the future growth of our licensing revenue will depend, in part, upon the growth of, and our successful participation in, new opportunities for our technologies, including:

 

   

Digital television and radio broadcasting;

 

   

HDTV;

 

   

Personal computer technology;

 

   

Blu-ray Disc;

 

   

Video game consoles and video games;

 

   

Imaging;

 

   

Home DVD recording;

 

   

Personal audio and video players, including internet music applications;

 

   

Broadband internet; and

 

   

Mobile devices.

Our ability to penetrate these markets depends on increased consumer demand for products that contain our technologies, which may not occur. If these markets do not develop or consumer demand does not grow, it would have a material adverse effect on our business and prospects. Whether our revenue from digital broadcast networks and broadband internet services increases depends upon the expansion of digital broadcast technologies and broadband internet as a medium of entertainment, which may not occur. In addition, even when our technologies are adopted as industry standards for a particular market, such market may not fully develop. In such case, our success depends not only on whether our technologies are adopted as industry standards for such market, but also on the development of that market, which may not occur. Demand for our technologies in any of these developing markets may not continue to grow, and a sufficiently broad base of consumers and professionals may not adopt or continue to use these technologies. In addition, our ability to generate revenue from these markets may be limited to the extent that service providers in these markets choose to provide select technologies and entertainment for little or no cost, such as many of the services provided in connection with broadband internet services. Moreover, some of these markets are ones in which we have not previously participated and, because of our limited experience, we may not be able to adequately adapt our business and our technologies to the needs of customers in these fields.

 

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If we fail to deliver innovative technologies in response to changes in the entertainment industry, our business could decline.

The markets for our products and the markets for consumer electronics products using our licensed technologies are characterized by rapid change and technological evolution. We will need to expend considerable resources on research and development, or acquisitions, in the future in order to continue to design and deliver enduring, innovative entertainment products and technologies. Despite our efforts, we may not be able to develop, or acquire, and effectively market new products, technologies and services that adequately or competitively address the needs of the changing marketplace. For example, we cannot provide assurance that Dolby Volume, Dolby’s volume leveling solution designed to address the annoyances of inconsistent loudness, Dolby 3D Digital Cinema, Dolby’s 3D digital cinema solution, Dolby Contrast or Dolby Vision, Dolby’s dynamic range image technologies for LED backlit LCD televisions, will address the needs of the marketplace, be effectively marketed or be successful technologies. In addition, we may not correctly identify new or changing market trends at an early enough stage to capitalize on market opportunities. At times such changes can be dramatic, such as the shift from VHS tapes to DVDs for consumer playback of movies in homes and elsewhere. Our future success depends to a great extent on our ability to develop, or acquire, and deliver innovative technologies that are widely adopted in response to changes in the entertainment industry and that are compatible with the technologies or products introduced by other entertainment industry participants.

If we are unable to expand our business into non-sound technologies, our future growth could be limited.

Our future growth will depend, in part, upon our expansion into areas beyond sound technologies. For example, in addition to our digital cinema initiative, we are exploring other areas that facilitate delivery of digital entertainment, such as technologies for processing digital moving images. We will need to spend considerable resources on research and development or acquisitions in the future in order to deliver innovative non-sound technologies. Our April 2007 acquisition of Brightside Technologies Inc., a development-stage technology company focused on enabling the capture, distribution, and display of more vibrant video on LED backlit LCD televisions, is an example of our efforts to expand into areas beyond sound technologies. However, we have limited experience in non-sound technology markets and, despite our efforts, we cannot predict whether we will be successful in developing, or acquiring and marketing non-sound products, technologies and services. We will face significant risks in integrating non-sound businesses that we acquire into our business.

In addition, many of the non-sound technology markets are relatively new and may not develop as we currently anticipate. Moreover, although we believe that many of the technological advances we may develop or acquire for digital cinema may have applicability in other areas, such as broadcasting or consumer electronics products, we may not ever be able to achieve these anticipated benefits in these other markets. A number of competitors and potential competitors may develop non-sound technologies similar to those that we develop or acquire, some of which may provide advantages over our products, technologies and services. Some of these competitors have much greater experience and expertise than we do in the non-sound fields we may enter. The non-sound products, technologies and services we expect to market may not achieve or sustain market acceptance, may not meet industry needs, and may not be accepted as industry standards. If we are unsuccessful in selling non-sound products, technologies and services, the future growth of our business may be limited. In addition, our efforts to enter or strengthen our positions in non-sound markets may be tied to the success of specific programs.

We face significant competition in various markets, and if we are unable to compete successfully, our business will suffer.

The markets for entertainment industry technologies are highly competitive, and we face competitive threats and pricing pressure in our markets. Competitors for our licensed technologies include: DivX, DTS, Fraunhofer Institute for Integrated Circuits, Microsoft, Philips, RealNetworks, Sony, SRS Labs and Thomson. Competitors for our products include: Avica, Audyssey Laboratories, Doremi, DTS, EVS, GDC, Kodak, Linear Acoustic, NEC, Panastereo, Qube, QuVis, REAL D, Sony, Texas Instruments and USL. Competitors for our services include DTS and Sony. In addition, other companies may become competitors in the future. Some people may perceive the quality of sound produced by some of our competitors’ technologies to be equivalent or superior to that produced by ours. In addition, some of our current and/or future competitors may have significantly greater financial, technical, marketing and other resources than we do, or may have more experience or advantages in the markets in which they compete. For example, Microsoft and RealNetworks may have an advantage over us in the market for internet technologies because of their greater experience and presence in that market. In addition, some of our current or potential competitors, such as Microsoft and RealNetworks, may be able to offer integrated system solutions in

 

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markets for sound or non-sound entertainment technologies, including audio, video and rights management technologies related to personal computers or the internet, which could make competing technologies that we develop unnecessary. By offering an integrated system solution, these potential competitors also may be able to offer competing technologies at lower prices than our technologies, which could adversely affect our operating results. Further, many of the consumer electronics products that include our sound technologies also include sound technologies developed by our competitors. As a result, we must continue to invest significant resources in research and development in order to enhance our technologies and our existing products and services and introduce new high quality technologies, products and services to meet the wide variety of such competitive pressures. Our business will suffer if we fail to do so successfully.

Our operating results may fluctuate depending upon the timing of when we receive royalty reports from our licensees and of the satisfaction of our revenue recognition criteria.

Our quarterly operating results may fluctuate depending upon the timing of when we receive royalty reports from our licensees and of the satisfaction of our revenue recognition criteria. We recognize license revenue only after we receive royalty reports from our licensees regarding the shipment of their products that incorporate our technologies. As a result, the timing of our revenue depends upon the timing of our receipt of those reports. In addition, it is not uncommon for royalty reports to include positive or negative corrective or retroactive royalties that cover extended periods of time. Furthermore, there have been times in the past when we have recognized an unusually large amount of licensing revenue from a licensee in a given quarter because not all of our revenue recognition criteria were met in prior periods. This can result in a large amount of licensing revenue from a licensee being recorded in a given quarter that is not necessarily indicative of the amounts of licensing revenue to be received from that licensee in future quarters, thus causing fluctuations in our operating results. For example, in the first quarter of fiscal 2009 we recognized approximately $6.5 million in licensing revenue from a licensee related to royalties on shipments in prior periods. Moreover, there have been times in the past when we have not recognized large amounts of products and services revenue in a given quarter, or over several quarters, because not all of our revenue recognition criteria were met in prior periods. For example, in the second quarter of fiscal 2009 we recognized approximately $22.4 million in deferred products revenue and $1.2 million in services revenue relating to digital cinema related equipment sold in prior periods.

If our products and technologies fail to be adopted as industry standards, our business prospects could be limited and our operating results could be adversely affected.

The entertainment industry depends upon industry standards to ensure the compatibility of its content across a wide variety of entertainment systems and products. Accordingly, we make significant efforts to design our products and technologies to address capability, quality and cost considerations so that they either meet, or, more importantly, are adopted as, industry standards across the broad range of entertainment industry markets in which we participate, as well as the markets in which we hope to compete in the future, including digital cinema. To have our products and technologies adopted as industry standards, we must convince a broad spectrum of professional organizations throughout the world, as well as our major customers and licensees who are members of such organizations, to adopt them as such and to ensure that other industry standards are consistent with our products and technologies. If our technologies are not adopted or do not remain as industry standards, our business, operating results and prospects could be materially and adversely affected. We expect that meeting, maintaining and establishing industry standard technologies will continue to be critical to our business in the future. In addition, the market for broadcast technologies has traditionally been heavily based upon industry standards, often set by governments or other regulatory bodies, and we expect this to continue to be the case in the future. If our technologies are not chosen as industry standards for broadcasting in particular geographic areas, this could adversely affect our ability to compete in these markets.

It may be more difficult for us, in the future, to have our technologies adopted as individual industry standards to the extent that entertainment industry participants collaborate on the development of industry standard technologies.

Increasingly, standards-setting organizations are adopting or establishing technology standards for use in a wide range of consumer electronics products. As a result, it is more difficult for individual companies to have their technologies adopted wholesale as an informal industry standard. We call this type of standard a “de facto” industry standard, meaning that the standard is not explicitly mandated by any industry standards-setting body but is nonetheless widely adopted. In addition, increasingly there are a large number of companies, including ones that typically compete against one another, involved in the development of new technologies for use in consumer

 

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entertainment products. As a result, these companies often license their collective intellectual property rights as a group, making it more difficult for any single company to have its technologies adopted widely as a de facto industry standard or to have its technologies adopted as an exclusive, explicit industry standard for consumer electronics products.

Even if our technologies are adopted as an industry standard for a particular market, market participants may not widely adopt our technologies.

Even when a standards-setting body mandates our technologies for a particular market, which we call an “explicit” industry standard, our technologies may not be the sole technologies adopted for that market as an industry standard. Accordingly, our operating results depend upon participants in that market choosing to adopt our technologies instead of competitive technologies that also may be acceptable under such standard. For example, the continued growth of our revenue from the broadcast market will depend upon both the continued adoption of digital television generally and the choice to use our technologies where it is an optional industry standard.

Our licensing of industry standard technologies can be subject to limitations that could adversely affect our business and prospects.

When a standards-setting body mandates our technologies as explicit industry standards, we generally must agree to license such technologies on a fair, reasonable and non-discriminatory basis, which could limit our control over the use of these technologies. In these situations, we must often limit the royalty rates we charge for these technologies, which could adversely affect our gross margins. Furthermore, we may be unable to limit to whom we license such technologies, and may be unable to restrict many terms of the license. From time to time we may be subject to claims that our licenses of our industry standard technologies may not conform to the requirements of the standards-setting body. Private parties have raised this type of issue with us in the past. Allegations such as these could be asserted in private actions seeking monetary damages and injunctive relief, or in regulatory actions. Claimants in such cases could seek to restrict or change our licensing practices or our ability to license our technologies in ways that could injure our reputation and otherwise materially and adversely affect our business, operating results and prospects.

Third parties from whom we license technologies may challenge our calculation of the royalties we owe them for inclusion of their technologies in our products and licensed technologies, which could adversely affect our operating results, business and prospects.

In some cases, primarily in connection with the licensing of our Dolby Digital technologies, the products we sell and the technologies we license to our customers include intellectual property that we have licensed from third parties. Our agreements with these third parties generally require us to pay them royalties for that use, and give the third parties the right to audit our calculation of those royalties. A third party may disagree with our interpretation of the terms of a license agreement or, as a result of an audit, a third party could challenge the accuracy of our calculation. We have in the past been, and may in the future be, involved in disputes with third party technology licensors regarding license terms.

A successful challenge by a third party could increase the amount of royalties we have to pay to the third party, decrease our gross margin and adversely affect our operating results. Such a challenge could result in the termination of the license agreement which would impair our ability to continue to use and re-license intellectual property from that third party which, in turn, could adversely affect our business and prospects.

Inaccurate licensee royalty reporting and unauthorized use of our intellectual property could materially adversely affect our operating results.

Our licensing revenue is generated primarily from consumer electronics product manufacturers and media software vendors who license our technologies and incorporate them in their products. Under our existing arrangements, these licensees typically pay us a specified royalty for every product they ship that incorporates our technologies. We rely on our licensees to accurately report the number of units shipped that incorporate our technologies. We calculate our license fees, prepare our financial reports, projections and budgets, and direct our sales and product development efforts based on these reports we receive from our licensees. However, it is often difficult for us to independently determine whether or not our licensees are reporting shipments accurately. This is especially true with respect to software incorporating our technologies because software can be copied relatively easily and we often do not have easy ways to determine how many copies have been made. Most of our license

 

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agreements permit us to audit our licensees’ records, but audits are generally expensive and time consuming and initiating audits could harm our customer relationships. In the past, licensees, particularly in emerging economies, such as China, have understated or failed to report the number of products incorporating our technologies that they shipped, and we have not been able to collect and recognize revenue to which we were entitled. We expect that we will continue to experience understatement and non-reporting of royalty bearing revenues by licensees, which could adversely affect our operating results. Conversely, to the extent that our licensees overstate the number of products incorporating our technologies, or report the products under the wrong categories, negative corrections could result in reductions of royalty revenue in subsequent periods. In addition, some of our licensees may begin to more closely scrutinize their past or future licensing statements which may result in an increased receipt of negative corrective statements.

We also have often experienced, and expect to continue to experience, problems with non-licensee consumer electronics product manufacturers and media software vendors, particularly in emerging economies, such as China, incorporating our technologies or incorporating our technologies and trademarks into their products without our authorization and without paying us any licensing fees. This unauthorized use of our intellectual property could adversely affect our operating results.

We face risks in conducting business in emerging economies, such as China, particularly due to the limited recognition and enforcement of intellectual property and contractual rights in these countries.

We believe that various trends will continue to increase our exposure to the risks of conducting business in emerging economies. For example, we expect consumer electronics product manufacturing in emerging economies, such as China, to continue to increase due to the availability of lower manufacturing costs as compared to those of other industrial countries and the continued industry shift by discount retailers towards lower end DVD player offerings. We also believe that our sales of products and services in emerging economies will expand in the future to the extent that the use of digital surround sound technologies increases in these countries, including in movies and broadcast television. We further expect that the sale of products incorporating our technologies will increase in emerging economies to the extent that consumers there become more affluent. We face many risks associated with operating in these emerging economies, in large part due to limited recognition and enforcement of contractual and intellectual property rights. As a result, we may experience difficulties in enforcing our intellectual property rights in these emerging economies, where intellectual property rights are not as respected as they are in the United States, Japan and Europe. We believe that it is critical that we strengthen existing relationships and develop new relationships with entertainment industry participants worldwide to increase our ability to enforce our intellectual property and contractual rights without relying solely on the legal systems in the countries in which we operate. If we are unable to develop, maintain and strengthen these relationships, our revenue from these countries could be adversely affected.

Our licensing revenue depends in large part upon semiconductor manufacturers incorporating our technologies into integrated circuits, or ICs, for sale to our electronics product licensees and if, for any reason, our technologies are not incorporated in these ICs or fewer ICs are sold that incorporate our technologies, our operating results would be adversely affected.

Our licensing revenue from consumer electronics product manufacturers depends in large part upon the availability of integrated circuits, or ICs, that implement our technologies. IC manufacturers incorporate our technologies into these ICs, which are then incorporated in consumer electronics products. We do not manufacture these ICs, but rather depend on IC manufacturers to develop, produce and then sell them to licensed consumer electronics product manufacturers. We do not control the IC manufacturers’ decisions whether or not to incorporate our technologies into their ICs, and we do not control their product development or commercialization efforts nor predict their success. As a result, if these IC manufacturers are unable or unwilling, for any reason, to implement our technologies into their ICs, or if, for any reason, they sell fewer ICs incorporating our technologies, our operating results will be adversely affected.

Our inability to deploy our digital cinema servers in significant numbers in the early stages of the transition to digital cinema, coupled with the price of our products, could limit our future prospects in the digital cinema market and could materially and adversely affect our business.

The cinema industry is still in the early stages of the adoption of digital cinema for the distribution and exhibition of movies. A number of companies offer competing products for digital cinema, some of which are priced lower than our products or offer features that exhibitors may perceive to be potentially advantageous to our products. At

 

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least one competitor has a significantly greater installed base of its competing digital cinema playback servers than we do and another competitor has a significantly greater installed base of its competing 3D products than we do, either of which could limit our eventual share of the digital cinema market and materially and adversely affect our operating results. As the market for digital cinema has grown, we have faced more competitive pricing pressures than we have traditionally experienced for our traditional cinema products. As a result, we have implemented and may have to continue to implement pricing strategies which will have an adverse impact on our product sales gross margins in the future.

If the market for digital cinema develops more slowly than expected, our future prospects could be limited and our business could be materially and adversely affected.

If the major motion picture studios and the cinema exhibition industry cannot agree on one or more business models for digital cinema equipment financing or if funding is not available on favorable terms or at all, the broad adoption of digital cinema will be delayed further. The conversion of movie theatres from film to digital cinema will require significant capital investment and recent events in the lending market have resulted in system integrator difficulty in obtaining funding delaying broader adoption of digital cinema. We cannot predict how quickly digital cinema will become widely adopted. At present only a small percentage of movie theatres have been converted to digital cinema, and we expect the conversion of theatres to digital cinema technologies, if it occurs, to be a multi year process due to both technological and financial obstacles. If the demand for digital cinema equipment develops more slowly than expected, or if there is significant and sustained resistance by the motion picture studios or cinema exhibitors to this technology or the cost of implementation, or if funding is not available on favorable terms or at all, the broad adoption of digital cinema will continue to be delayed which could adversely affect our revenue.

If we do not identify opportunities and successfully execute our initiatives to participate in the emerging digital cinema market, our future prospects could be limited and our business could be adversely affected.

The cinema industry is in the early stages of the adoption of digital cinema for the distribution and exhibition of movies. Industry participants continue to discuss business models to facilitate adoption of digital cinema by allocating the costs among industry participants, and the business models that ultimately emerge may vary from country to country. Participating in some of the models under discussion may require us to depart from our traditional model of selling our cinema products pursuant to one time contracts, and could expose us to various risks we have not faced in the past. For example, we have participated in one model by deploying, at our expense, fully integrated digital cinema systems and seeking payment from motion picture distributors for films presented on the systems. In fiscal 2007, we introduced Dolby 3D Digital Cinema technology, providing us with an additional opportunity to participate in digital cinema. However, there is a risk that recent renewed interest in 3D cinema could be a fad and may not be long lasting. If we do not identify and successfully execute on opportunities to generate revenues from our digital cinema products and services, our future prospects in this market will be limited and our business could be materially and adversely affected.

If our digital cinema initiatives do not perform to expectations, our reputation may suffer and demand for our digital cinema products and services may not develop.

As we participate in the digital cinema transition, if we or our equipment do not perform to expectations, our relationships with cinema exhibitors or other digital cinema industry participants may be adversely affected and our reputation may suffer, affecting the demand for our digital cinema products and services. Any negative publicity or significant problems with our digital cinema products and services could materially and adversely affect our relationships with the motion picture studios and cinema exhibition industry or the perception of our brand.

Acquisition activities could result in operating difficulties, dilution to our stockholders and other harmful consequences.

We have evaluated, and expect to continue to evaluate, a wide array of possible strategic transactions, including acquisitions. For example, in November 2007 we acquired Coding Technologies, a privately held provider of audio compression technologies for the mobile, digital broadcast and internet markets and in April 2007 we acquired Brightside, a development stage company focused on enabling the capture, distribution, and display of more vibrant video on LED backlit LCD televisions. We consider these types of transactions in connection with our efforts to expand our business beyond sound technologies to other technologies related to the delivery of digital entertainment. Although we cannot predict whether or not we will complete any such acquisition or other transactions in the future, any of these transactions could be material in relation to our market capitalization, financial condition or results of operations. The process of integrating an acquired company, business or technology may create unforeseen difficulties and expenditures. The areas where we may face risks in integrating acquired businesses include:

 

   

Diversion of management time and focus from operating our business to acquisition integration challenges;

 

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Cultural and logistical challenges associated with integrating employees from acquired businesses into our organization;

 

   

Retaining employees from businesses we acquire;

 

   

The need to implement or improve internal controls, procedures and policies appropriate for a public company at businesses that prior to the acquisition may have lacked effective controls, procedures and policies;

 

   

Possible write-offs or impairment charges resulting from acquisitions;

 

   

Unanticipated or unknown liabilities relating to acquired businesses; and

 

   

The need to integrate acquired businesses’ accounting, management information, manufacturing, human resources and other administrative systems to permit effective management.

Foreign acquisitions involve unique risks in addition to those mentioned above, including those related to integration of operations across different geographies, cultures and languages, currency risks and risks associated with the particular economic, political and regulatory environment in specific countries. Also, the anticipated benefit of our acquisitions may not materialize. Future acquisitions could result in potentially dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities or amortization expenses, or write-offs of goodwill, any of which could harm our operating results or financial condition. Future acquisitions may also require us to obtain additional equity or debt financing, which may not be available on favorable terms or at all. Moreover, acquisitions may have an adverse impact on our financial condition and results of operations, including a potential adverse impact on our gross margins.

Pricing pressures on the electronics product manufacturers who incorporate our technologies into their products could limit the licensing fees we charge for our technologies, which could adversely affect our revenues.

The markets for the consumer electronics products in which our technologies are incorporated are intensely competitive and price sensitive. Retail prices for consumer electronics products that include our sound technology, such as DVD players and home theater systems, have decreased significantly, and we expect prices to continue to decrease for the foreseeable future. In response, manufacturers have sought to reduce their product costs, which can result in downward pressure on the licensing fees we charge our customers who incorporate our technologies into the consumer electronics products that they sell. Further, while we have contractual rights with many of our licensees for cost of living adjustments to our royalty rights, we may not be able to negotiate those terms in future contracts with existing and new licensees. A decline in, or the loss of the contractual right to increase, the licensing fees we charge could materially and adversely affect our operating results.

If sales of consumer electronics products incorporating our technologies do not grow in emerging markets, our ability to increase our licensing revenue may be limited.

We also expect that growth in our licensing revenue will depend, in part, upon the growth of sales of consumer electronics products incorporating our technologies in emerging economies, as consumers in these markets have more disposable income and are increasingly purchasing entertainment products with surround sound capabilities. However, if our licensing revenue from the use of our technologies in these new markets or geographic areas does not expand, our prospects could be adversely affected.

 

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Our relationships with entertainment industry participants are particularly important to our products, services and technology licensing, and if we fail to maintain such relationships our business could be materially harmed.

If we fail to maintain and expand our relationships with a broad range of participants throughout the entertainment chain, including motion picture studios, broadcasters, video game designers, music producers and manufacturers of consumer electronics products, our business and prospects could be materially harmed. Relationships have historically played an important role in the entertainment industries that we serve. For example, sales of our products and services are particularly dependent upon our relationships with the major motion picture studios and broadcasters, and licensing of our technology is particularly dependent upon our relationships with consumer electronics product manufacturers, media software vendors and integrated circuit, or IC, manufacturers. If we fail to maintain and strengthen these relationships, these entertainment industry participants may be more likely not to purchase and use our products, services and technologies, or create content incorporating our technologies, which could materially harm our business and prospects. In addition to directly providing substantially all of our revenue, these relationships are also critical to our ability to have our technologies adopted as industry standards. In addition, if major industry participants form strategic relationships that exclude us, whether in products, services or licensing, our business and prospects could be materially adversely affected.

We have limited or no patent protection for some of our technologies in particular countries, including China and India, which could limit our ability to grow our business in these markets.

We have a relatively limited number of issued patents in particular countries, including China and India. For example, in China we have only limited patent protection, especially with respect to our Dolby Digital technologies. In India, we have no issued patents for Dolby Digital technologies. Consequently, growing our licensing revenue in these emerging countries will depend on our ability to obtain patent rights in these countries for existing and new technologies, which is uncertain. Moreover, because of the limitations of the legal systems in many of these countries, the effectiveness of patents obtained or that may in the future be obtained, if any, is likewise uncertain.

We face diverse risks in our international business, which could adversely affect our operating results.

We are dependent on international sales for a substantial amount of our total revenue. For fiscal 2007, 2008 and the year-to-date period ended March 27, 2009, revenue from outside the United States was 70%, 66% and 65% of our total revenue, respectively. We expect that international and export sales will continue to represent a substantial portion of our revenue for the foreseeable future. This future revenue will depend to a large extent on the continued use and expansion of our technologies in entertainment industries worldwide. Increased worldwide use of our technologies is also an important factor in our future growth.

Due to our reliance on sales to customers outside the United States, we are subject to the risks of conducting business internationally, including:

 

   

Our ability to enforce our contractual and intellectual property rights, especially in those foreign countries that do not respect and protect intellectual property rights to the same extent as do the United States, Japan and European countries, which increases the risk of unauthorized, and uncompensated, use of our technology;

 

   

United States and foreign government trade restrictions, including those which may impose restrictions on importation of programming, technology or components to or from the United States;

 

   

Foreign government taxes, regulations and permit requirements, including foreign taxes that we may not be able to offset against taxes imposed upon us in the United States, and foreign tax and other laws limiting our ability to repatriate funds to the United States;

 

   

Foreign labor laws, regulations and restrictions;

 

   

Changes in diplomatic and trade relationships;

 

   

Difficulty in staffing and managing foreign operations;

 

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Adverse fluctuations in foreign currency exchange rates and interest rates, including risks related to any interest rate swap or other hedging activities we undertake;

 

   

Political instability, natural disasters, war or events of terrorism; and

 

   

The strength of international economies.

We are, and may in the future be, subject to intellectual property rights claims, which are costly to defend, could require us to pay damages and could limit our ability to use particular technologies in the future.

Companies in the technology and entertainment industries own large numbers of patents, copyrights, trademarks and trade secrets and frequently enter into litigation based on allegations of infringement or other violations of intellectual property rights. We have faced such claims in the past and we expect to face similar claims in the future.

Any intellectual property claims, with or without merit, could be time consuming, expensive to litigate or settle and could divert management resources and attention. In the past we have settled claims relating to infringement allegations and agreed to make payments in connection with such settlements. We expect that similar claims will be asserted against us in the future in the ordinary course of our business. An adverse determination in any intellectual property claim could require that we pay damages or stop using technologies found to be in violation of a third party’s rights and could prevent us from offering our products and services to others. In order to avoid these restrictions, we may have to seek a license for the technology. This license may not be available on reasonable terms, could require us to pay significant royalties and may significantly increase our operating expenses. The technologies also may not be available for license to us at all. As a result, we may be required to develop alternative non-infringing technologies, which could require significant effort and expense. If we cannot license or develop technologies for any infringing aspects of our business, we may be forced to limit our product and service offerings and may be unable to compete effectively. In addition, at times in the past, we have chosen to defend our licensees from third party intellectual property infringement claims even where such defense was not contractually required, and we may choose to take on such defense in the future. Any of these results could harm our brand, our operating results and our financial condition. In addition, from time to time we are engaged in disputes regarding the licensing of our intellectual property rights, including matters related to our royalty rates and other terms of our licensing arrangements. These types of disputes can be asserted by our customers or prospective customers or by other third parties as part of negotiations with us or in private actions seeking monetary damages or injunctive relief, or in regulatory actions. In the past, licensees have threatened to initiate litigation against us regarding our licensing royalty rate practices, including potential antitrust claims. Damages and requests for injunctive relief asserted in claims like these could be material, and could have a significant impact on our business. Any disputes with our customers or potential customers or other third parties could adversely affect our business, results of operations and prospects.

The licensing of patents constitutes a significant source of our revenue. If we are unable to replace expiring patents with new patents or proprietary technologies, our revenue could decline.

We hold patents covering much of the technology that we license to consumer electronics product manufacturers, and our licensing revenue is tied in large part to the life of those patents. Our right to receive royalties related to our patents terminates with the expiration of the last patent covering the relevant technologies. However, many of our licensees choose to continue to pay royalties for continued use of our trademarks and know how even after the licensed patents have expired, although at a reduced royalty rate. Accordingly, to the extent that we do not continue to replace licensing revenue from technologies covered by expiring patents with licensing revenue based on new patents and proprietary technologies, our revenue could decline.

As of March 27, 2009, we had approximately 1,600 individual issued patents and nearly 1,940 pending patent applications in nearly 45 jurisdictions throughout the world. Our issued patents are scheduled to expire at various times through April 2027. Of these, two patents are scheduled to expire in the remainder of calendar year 2009, 110 patents are scheduled to expire in calendar year 2010 and 34 patents are scheduled to expire in calendar year 2011. We derive our licensing revenue principally from our Dolby Digital technologies. Patents relating to our Dolby Digital technologies generally expire between 2009 and 2017, and patents relating to our Dolby Digital Plus technologies, an extension of Dolby Digital, expire between 2019 and 2026. In addition, the remaining patents relating to Dolby Digital Live technologies, an extension of Dolby Digital, are scheduled to expire in 2021.

 

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The impact of potential domestic patent reform legislation, USPTO reforms, imposed international patent rules and third party legal proceedings may impact our patent prosecution and licensing strategies.

Changes to certain U.S. patent laws and regulations may occur in the future, some or all of which may impact our patent costs, the scope of future patent coverage we secure, and damages we may be awarded in patent litigation, and may require us to re-evaluate and modify our patent prosecution, licensing and enforcement strategies. Specifically, on August 21, 2007, the United States Patent and Trademark Office issued final administrative rule changes affecting the U.S. patent application process, including among other things, the current practice regarding continuation applications. The rule changes were set to take effect on November 1, 2007; however, in the course of a lawsuit filed by GlaxoSmithKline on Tuesday, October 9, 2007, in the United Stated Federal District Court for the Eastern District of Virginia, one day before the rules changes were to take effect, the judge in that case ruled to preliminarily enjoin the USPTO from implementing these changes. The U.S. Congress is also considering modification of select patent laws relating to, among other things, how patent damages are calculated and the procedures for challenging issued patents and where patent lawsuits can be filed in the U.S. Specifically, The Patent Reform Act of 2007 (S.1145 and H.R.1908) is currently being considered for passage by the Congress. S.1145, as amended, was reported out of committee on July 19, 2007. H.R.1908, as amended, was reported out of committee on July 18, 2007, and was debated and passed by the House on September 7, 2007. Additionally, there have been recent U.S. Supreme Court and other court rulings relating to, among other things, the standard for determining whether an invention is obvious, which is a key issue when assessing patentability, the ability of a patent holder to obtain injunctive relief against infringers, and the ability of patent licensees to challenge the patents under which they are licensed. The ruling concerning injunctions may make it more difficult, under some circumstances, for us to obtain injunctive relief against a party that has been found to infringe one or more of our patents, and the ruling regarding patent challenges by licensees could potentially make it easier for our licensees to challenge our patents even though they have already agreed to take a license. In addition, the potential effect of rulings in legal proceedings between third parties may impact our licensing program. We continue to monitor and evaluate our prosecution and licensing strategies with regard to these proposals and changes.

Our ability to develop proprietary technology in markets in which “open standards” are adopted may be limited, which could adversely affect our ability to generate revenue.

Standards-setting bodies, such as those for digital cinema technologies, may require the use of so-called “open standards,” meaning that the technologies necessary to meet those standards are publicly available. The use of open standards may reduce our opportunity to generate revenue, as open standards technologies are based upon non-proprietary technology platforms in which no one company maintains ownership over the dominant technologies.

Events and conditions in the motion picture and broadcast industries may affect sales of our cinema products and services.

Sales of our cinema products and services tend to fluctuate based on the underlying trends in the motion picture industry. For example, when box office receipts for the motion picture industry increase, we have typically seen sales of our cinema products increase as well, as cinema owners are more likely to build new theatres and upgrade existing theatres with our more advanced products when they are doing well financially. Conversely, when box office receipts are down cinema owners tend to scale back on plans to expand or upgrade their systems. Our cinema product sales are also subject to fluctuations based on events and conditions in the cinema exhibition industry generally that may or may not be tied to box office receipts in particular time periods. For example, the growth in piracy of motion pictures adversely affects the construction of new screens, the renovation of existing theatres and the continued production of new motion pictures. Technological advances and the conversion of motion pictures into digital formats have made it easier to create, transmit and “share” high quality unauthorized copies of motion pictures, including on pirated DVDs and on the internet. The launch of new high definition digital services by broadcasters may also influence the sale of our cinema products if consumers decide to watch content at home rather than going to the cinema to watch motion pictures. On the other hand, our services revenue, both in the United States and internationally, is tied to the number of films being made by major studios and independent filmmakers. A number of factors can affect the number of films that are produced, including strikes and work stoppages within the motion picture industry, as well as by the tax incentive arrangements that many foreign governments provide filmmakers to promote local filmmaking.

We may be unable to significantly expand our current product sales in the cinema industry because our products are already used by the vast majority of major cinema operators and major motion picture studios in the United States and much of the rest of the world. If the cinema industry does not expand, or if it contracts, the demand for our cinema products will be adversely affected.

 

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Our ability to further penetrate the market for motion picture sound playback is limited because of the widespread use of our current cinema products by major motion picture content creators, distributors and cinema exhibitors. As a result, our future revenue from our products for the cinema industry will depend, in part, upon events and conditions in that industry, specifically, the continued production and distribution of motion pictures, and the construction of new theatres and the renovation of existing theatres, using our products and services. For example, in the late 1990s cinema operators in the United States built a large number of new cinema megaplexes. This initially resulted in increased sales of our cinema processors, but also resulted in an oversupply of screens in some markets. This oversupply led to significant declines in new theatre construction in the United States in the early 2000s, resulting in a corresponding decline in sales of our cinema processors. As a result, future growth in sales of our existing cinema products may be limited, and may decrease in the future, as the number of new cinemas being built and the number of existing cinemas without our products continues to decline.

The demand for our cinema products and services could decline as the film industry adopts digital cinema.

Although the cinema industry is still in the early stages of the transition to digital cinema technologies for the distribution and exhibition of motion pictures, the number of cinema exhibitors adopting digital cinema for new theatre construction or existing theatre upgrades continues to grow. As exhibitors have constructed new theatres or upgraded existing theatres they have generally chosen digital cinema over traditional film cinema and we expect this trend to continue. While our film sound formats are the de facto standard and our film soundtrack cinema processors are widely used around the world, digital cinema, which is based on open standards, does not include our proprietary audio formats. Generally, as the film industry continues to adopt digital cinema, the demand for our traditional cinema products and services has declined and we anticipate that the demand for film based products will continue to decline in future periods. Furthermore, exhibitors adopting digital cinema can choose from multiple digital cinema playback servers other than ours, none of which contain our technologies. A decrease in the demand for our traditional film cinema products and services that is not accompanied by a meaningful increase in revenue from digital cinema products and services would adversely affect our revenue stream from the cinema industry.

In addition, a decrease in the demand for our products and services could adversely affect licensing of our consumer technology, because the strength of our brand and our ability to use professional product developments to introduce new technologies, which can later be licensed to consumer product manufacturers and service providers, would be impaired. If, in such circumstances, we are unable to adapt our products and services or introduce new products for the digital cinema market successfully, our business could be materially adversely affected.

Fluctuations in our quarterly and annual operating results may significantly affect the value of our stock.

A number of factors, many of which are outside our control, may cause or contribute to significant fluctuations in our quarterly and annual revenue and operating results. These fluctuations may make financial planning and forecasting more difficult. In addition, these fluctuations may result in unanticipated decreases in our available cash, which could negatively impact our business and prospects. As discussed more fully below, these fluctuations also could increase the volatility of our stock price. Factors that may cause or contribute to fluctuations in our operating results and revenue include:

 

   

Fluctuations in demand for our products and for the consumer electronics products of our licensees;

 

   

Fluctuations in the timing of royalty reports we receive from our licensees, including late, sporadic or inaccurate reports;

 

   

Sporadic payments we may be able to recover from companies utilizing our technologies without licenses;

 

   

Corrections to licensees’ reports received in periods subsequent to those in which the original revenue was reported;

 

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Introduction or enhancement of products, services and technologies by us, our licensees and our competitors, and market acceptance of these new or enhanced products, services and technologies;

 

   

Rapid, wholesale changes in technology in the entertainment industries in which we compete;

 

   

Events and conditions in the motion picture industry, including box office receipts that affect the number of theatres constructed, the number of movies produced and exhibited, the general popularity of motion pictures and strikes by motion picture industry participants;

 

   

The financial resources of cinema operators available to buy our products or to equip their theatres to accommodate upgraded or new technologies;

 

   

Adverse developments in general macroeconomic conditions;

 

   

Consolidation by participants in the markets in which we compete, which could result among other things in pricing pressure;

 

   

The amount and timing of our operating costs, capital expenditures and related charges, including those related to the expansion or consolidation of our business, operations and infrastructure;

 

   

Variations in the time-to-market of our technologies in the entertainment industries in which we operate;

 

   

Seasonal electronics product shipment patterns by our consumer electronics product licensees, particularly in the first quarter, which generally result in revenue in the second quarter;

 

   

The impact of, and our ability to react to, interruptions in the entertainment distribution chain, including as a result of work stoppages at our facilities, our customers’ facilities and other points throughout the entertainment distribution chain;

 

   

Changes in business cycles that affect the markets in which we sell our products and services or the markets for consumer electronics products incorporating our technologies;

 

   

Adverse outcomes of litigation or governmental proceedings, including any foreign, federal, state or local tax assessments or audits;

 

   

Costs of litigation and intellectual property protection; and

 

   

Seasonal demand for services in the motion picture industry, which could result in reduced revenue.

One or more of the foregoing or other factors may cause our operating expenses to be disproportionately higher or lower or may cause our revenue and operating results to fluctuate significantly in any particular quarterly or annual period. Results from prior periods are thus not necessarily indicative of the results of future periods.

Some of our customers are also our current or potential competitors, and if those customers were to choose to use their competing technologies rather than ours, our business and operating results would be adversely affected.

We face competitive risks in situations where our customers are also current or potential competitors. For example, Sony and Microsoft are significant licensee customers and Sony is a significant purchaser of our broadcast products and services, but Sony and Microsoft are also competitors with respect to some of our broadcast and consumer technologies. To the extent that our customers choose to utilize competing technologies they have developed or in which they have an interest, rather than use our technologies, our business and operating results could be adversely affected.

 

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Surround sound technologies could be treated as a commodity in the future, which could adversely affect our business, operating results and prospects.

We believe that the success we have had licensing our surround sound technologies to consumer electronics product manufacturers is due, in part, to the strength of our brand and the perception that our technologies provide a high quality solution for surround sound. However, as applications that incorporate surround sound technologies become increasingly prevalent, we expect more competitors to enter this field with other solutions. Furthermore, to the extent that competitors’ solutions are perceived, accurately or not, to provide the same advantages as our technologies, at a lower or comparable price, there is a risk that sound encoding technologies such as ours will be treated as commodities, resulting in loss of status of our technologies, decline in their use, and significant pricing pressure. To the extent that our audio technologies become a commodity, rather than a premium solution, our business, operating results and prospects could be adversely affected.

Licensing some of our technologies in joint licensing programs, or “patent pools,” is a different business model for us, and we may face many challenges in conducting this business.

We license some of our patents through our wholly owned subsidiary Via Licensing Corporation in joint licensing programs, or “patent pools,” with other companies in an effort to ensure that our technologies are compatible with other technologies in the entertainment industry and to promote our technologies as industry standards. These patent pools allow product manufacturers streamlined access to selected foundational technologies and are comprised of a group of patents held by a number of companies, including us in some cases, and administered by Via Licensing. If we do not identify new or changing market trends and technologies at an early enough stage to capitalize on market opportunities for joint licensing programs, we may not continue to be successful with this business model. Also, to the extent that Dolby technologies are included in patent pools, we have less control over the licensing of those technologies through the patent pools compared to licensing through our traditional business model in which we license our patents as bundles of technologies and interact directly with our customers. In addition, we may have less control over the application and quality control of our technologies included in these pools.

The loss of or interruption in operations of one or more of our key suppliers could materially delay or stop the production of our products and impair our ability to generate revenue.

Our reliance on outside suppliers for some of the key materials and components we use in manufacturing our products involves risks, including limited control over the price, timely delivery and quality of such components. We have no agreements with our suppliers to ensure continued supply of materials and components. Although we have identified alternate suppliers for most of our key materials and components, any required changes in our suppliers could cause material delays in our production operations and increase our production costs. In addition, our suppliers may not be able to meet our future production demands as to volume, quality or timeliness. Moreover, we rely on sole source suppliers for some of the components that we use to manufacture our products, including specific charged coupled devices, light emitting diodes and digital signal processors. These sole source suppliers may become unable or unwilling to deliver these components to us at an acceptable cost or at all, which could force us to redesign those specific products. Our inability to obtain timely delivery of key components of acceptable quality, any significant increases in the prices of components, or the redesign of our products could result in material production delays, increased costs and reductions in shipments of our products, any of which could increase our operating costs, harm our customer relationships or materially and adversely affect our business and operating results.

Revenue from our products may suffer if our production processes encounter problems or if we are not able to match our production capacity to fluctuating levels of demand.

Our products are highly complex, and production difficulties or inefficiencies can interrupt production, resulting in our inability to deliver products on time in a cost effective manner, which could harm our competitive position. We recently decided to consolidate our manufacturing operations into a single location and work with a contract manufacturer for higher volume production as necessary. If production of our products is interrupted as a result of this consolidation or otherwise, we may not be able to manufacture products on a timely basis, and customers may purchase products from our competitors. A shortage of manufacturing capacity for our products could adversely affect our operating results and damage our customer relationships. We generally cannot quickly adapt our manufacturing capacity to rapidly changing market conditions and a contract manufacturer may encounter difficulties as well. Likewise, we may be unable to respond to fluctuations in customer demand. At times we underutilize our manufacturing facilities as a result of reduced demand for some of our products. Any inability to respond to fluctuations in customer demand for our products may adversely affect our gross margins.

 

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Our products, from time to time, experience quality problems that can result in decreased sales and higher operating expenses.

Our products are complex and sometimes contain undetected software or hardware errors, particularly when first introduced or when new versions are released. In addition, to the extent that we engage contract manufacturers we will not have as much control over manufacturing which could result in quality problems. Furthermore, our products are sometimes combined with or incorporated into products from other vendors, sometimes making it difficult to identify the source of a problem. These errors could result in a loss of or delay in market acceptance of our products or cause delays in delivering them and meeting customer demands, any of which could reduce our revenue and raise significant customer relations issues. In addition, if our products contain errors we could be required to replace or reengineer them, which would increase our costs. Moreover, if any such errors cause unintended consequences, we could face claims for product liability. Although we generally attempt to contractually limit liability for defective products to the cost of repairing or replacing these products, if these contract provisions are not enforced, or are unenforceable for any reason, or if liabilities arise that are not effectively limited, we could incur substantial costs in defending and settling product liability claims.

Awareness of our brand depends to a significant extent upon decisions by our customers to display our trademarks on their products, and if our customers do not display our trademarks on their products, our ability to increase our brand awareness may be harmed.

Because we engage in relatively little direct brand advertising, the promotion of our brand depends upon entertainment industry participants displaying our trademarks on their products that incorporate our technologies, such as film prints and consumer electronics products. Although we do not require our customers to place our brand on their products, we actively encourage them to do so. For example, we rely on consumer electronics product manufacturers that license our technologies to display our trademarks on their products in order to promote our brand. If our customers choose for any reason not to display our trademarks on their products, our ability to maintain or increase our brand awareness may be harmed, which would have an adverse effect on our business and prospects. In addition, if we fail to maintain high quality standards for our products, or the products that incorporate our technologies through the quality control evaluation process that we require of our licensees, the strength of our brand could be adversely affected.

Licensee products that incorporate our technologies, from time to time, experience quality problems that could damage our brand, decrease revenues and increase operating expenses.

Licensee products that incorporate our technologies often are complex and sometimes contain undetected software or hardware errors, particularly when first introduced or when new versions are released. In addition, those products are often combined with, or incorporated into, products from other companies, sometimes making it difficult to identify the source of a problem. Any negative publicity or negative impact relating to these product problems could adversely affect the perception of our brand. In addition, these errors could result in loss of, or delay in, market acceptance of those products or Dolby technologies, or cause delays in delivering them and meeting customer demands, any of which could reduce our revenue and raise significant customer relations issues. Although we generally attempt to contractually limit our liability for our licensees’ defective products, we may elect to help reengineer those products, which could adversely affect our operating results.

A loss of one or more of our key customers or licensees in any of our markets could adversely affect our operating results.

From time to time, one or a small number of our customers or licensees may represent a significant percentage of our products, services or licensing revenue. For example, revenue from our largest customer represented 11% of total revenue for the fiscal year-to-date period ended March 27, 2009. Although we have agreements with many of these customers, these agreements typically do not require any minimum purchases or minimum royalty fees and do not prohibit customers from purchasing products and services from competitors. A decision by any of our major customers or licensees not to use our technologies, or their failure or inability to pay amounts owed to us in a timely manner, or at all, whether due to strategic redirections or adverse changes in their businesses or for other reasons, could have a significant adverse effect on our operating results.

 

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We are subject to various environmental laws and regulations that could impose substantial costs upon us and may adversely affect our business, operating results and financial condition.

Some of our operations use substances regulated under various federal, state, local and international laws governing the environment, including those governing the discharge of pollutants into the air and water, the management, disposal and labeling of hazardous substances and wastes and the cleanup of contaminated sites. We could incur costs, fines and civil or criminal sanctions, third party property damage or personal injury claims, or could be required to incur substantial investigation or remediation costs, if we were to violate or become liable under environmental laws. Liability under environmental laws can be joint and several and without regard to comparative fault. The ultimate costs under environmental laws and the timing of these costs are difficult to predict.

We also face increasing complexity in our product design as we adjust to new and future requirements relating to the materials composition of our products. For example, we redesigned our products so we could continue to offer them for sale within the European Union, when restrictions on lead and other hazardous substances that apply to specified electronic products put on the market in the European Union became effective as of July 1, 2006. Similar requirements related to marking of electronic products became effective in China as of March 1, 2007. For some products, substituting particular components containing regulated hazardous substances is more difficult or costly, and additional redesign efforts could result in production delays. Selected electronic products that we maintain in inventory may be rendered obsolete if not in compliance with the new environmental laws, which could negatively impact our ability to generate revenue from those products.

We also expect that our operations, whether manufacturing or licensing, will be affected by other new environmental laws and regulations on an ongoing basis. Although we cannot predict the ultimate impact of any such new laws and regulations, they will likely result in additional costs or decreased revenue, and could require that we redesign or change how we manufacture our products, any of which could have a material adverse effect on our business.

Any inability to protect our intellectual property rights could reduce the value of our products, services and brand.

Our business is dependent upon our patents, trademarks, trade secrets, copyrights and other intellectual property rights. Licensing revenue represented 80%, 84% and 82% of our total revenue in the fiscal years 2007, 2008 and the fiscal year-to-date period ended March 27, 2009, respectively. Effective intellectual property rights protection, however, may not be available under the laws of every country in which our products and services and those of our licensees are distributed. Also, the efforts we have taken to protect our proprietary rights may not be sufficient or effective. Any significant impairment of our intellectual property rights could harm our business or our ability to compete. In addition, protecting our intellectual property rights is costly and time consuming. We have taken steps in the past to enforce our intellectual property rights and expect to continue to do so in the future. However, it may not be practicable or cost effective for us to enforce our intellectual property rights fully, particularly in particular countries or where the initiation of a claim might harm our business relationships. For example, we have many times experienced, and expect to continue to experience, problems with consumer electronics product manufacturers incorporating our technologies into their products without our authorization. If we are unable to successfully identify and stop unauthorized use of our intellectual property, we could experience increased operational and enforcement costs, which could adversely affect our financial condition and results of operations. We generally seek patent protection for our innovations. However, it is possible that some of these innovations may not be protectable. In addition, given the costs of obtaining patent protection, we may choose not to protect particular innovations that later turn out to be important. Moreover, we have limited or no patent protection in particular foreign jurisdictions. For example, in China we have only limited patent protection, especially with respect to our Dolby Digital technologies, and in India we have no issued patents. Furthermore, there is always the possibility, despite our efforts, that the scope of the protection gained will be insufficient or that an issued patent may later be found to be invalid or unenforceable. Moreover, we seek to maintain select intellectual property as trade secrets. These trade secrets could be compromised by third parties, or intentionally or accidentally by our employees, which would cause us to lose the competitive advantage resulting from them.

Continued global credit market weakness could negatively impact the value and liquidity of our investment portfolio.

We maintain an investment portfolio of various holdings, types and maturities, including money market funds, U.S. government agency securities, variable rate demand notes, auction rate certificates and municipal debt securities. These investments are subject to general credit, liquidity, market and interest rate risks.

 

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Our long-term investments include auction rate certificates at fair value. Auctions for these instruments began failing during the second quarter of fiscal 2008 and continued to fail through the end of our second quarter of fiscal 2009, resulting in our inability to liquidate these securities. Moreover, a liquid secondary market has not developed for these instruments. On November 11, 2008, we accepted an offer from UBS AG, which we refer to, along with its wholly owned subsidiaries UBS Financial Services, Inc. and UBS Securities LLC, as UBS, to liquidate our auction rate certificates held in UBS accounts on February 13, 2008. The UBS offer entitles us to sell our auction rate certificates for a price equal to the liquidation preference of the auction rate certificates plus accrued but unpaid dividends or interest, if any, at any time during a two year period from June 30, 2010 through July 2, 2012. There is a risk that UBS will not perform its obligations in accordance with their offer. Furthermore, there is no assurance that we will be able to recoup our investments in the auction rate certificates.

If the global credit market continues to deteriorate, other components of our investment portfolio may be adversely impacted. While as of the date of this filing, we are not aware of any other downgrades, losses, failed auctions or other significant deterioration in the fair value of our cash, cash equivalents or investments, no assurance can be given that any further deterioration of the global credit and financial markets will not negatively impact our investments or our ability to meet our investment objectives. Such negative impact, should it arise, could require an impairment charge, which would adversely impact our financial results.

We face risks associated with international trade and currency exchange.

We maintain sales, marketing and business operations in foreign countries, most significantly in the United Kingdom. Consequently, we are exposed to fluctuations in exchange rates associated with the local currencies of our foreign business operations. While nearly all of our revenue is derived from transactions denominated in U.S. dollars, nearly all of our costs from our foreign operations are denominated in the currency of that foreign location. As such, movements between the U.S. dollar and the other currencies could have a material impact on our profitability.

Failure to comply with applicable current and future government regulations could have a negative effect on our business.

Our operations and business practices are subject to federal, state and local government laws and regulations, as well as international laws and regulations, including those relating to consumer and other safety related compliance for electronic equipment, as well as compulsory license requirements as a prerequisite to being included as part of industry standards, such as the United States HDTV standard. Any failure by us to comply with the laws and regulations applicable to us or our products could result in our inability to sell those products, additional costs to redesign products to meet such laws and regulations, fines or other administrative actions by the agencies charged with enforcing compliance and, possibly, damages awarded to persons claiming injury as the result of our non-compliance. Changes in or enactment of new statutes, rules or regulations applicable to us could have a material adverse effect on our business.

The loss of members of our management team could substantially disrupt our business operations.

Our success depends to a significant degree upon the continued individual and collective contributions of our management team. A limited number of individuals have primary responsibility for managing our business, including our relationships with key customers and licensees. These individuals, as well as the rest of our management team and key employees, are at-will employees, and we do not maintain any key person life insurance policies. Losing the services of any key member of our team, whether from retirement, competing offers or other causes, could prevent us from executing our business strategy, cause us to lose key customer or licensee relationships, or otherwise materially affect our operations.

We rely on highly skilled personnel, and if we are unable to retain or motivate key personnel or hire qualified personnel, we may not be able to maintain our operations or grow effectively.

Our performance is largely dependent on the talents and efforts of highly skilled individuals. Our future success depends on our continuing ability to identify, hire, develop, motivate and retain highly skilled personnel for all areas of our organization. In this regard, we currently plan to hire a number of employees throughout fiscal 2009 in response to our growth and our current initiatives. We have maintained a rigorous, highly selective and time consuming hiring process, which we believe has significantly contributed to our success to date, but has made it

 

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more difficult for us to hire a sufficient number of qualified employees. As we grow, our hiring process may prevent us from hiring the personnel we need in a timely manner. In addition, we are aware that some of our competitors have directly targeted our employees. If we are unable to hire and train a sufficient number of qualified employees or retain and motivate existing employees, our existing operations may suffer and we may be unable to grow effectively.

If we fail to maintain proper and effective internal controls, our ability to produce accurate financial statements could be impaired, which could adversely affect our operating results, our ability to operate our business and our investors’ views of us.

We have a complex business organization that is international in scope. Ensuring that we have adequate internal financial and accounting controls and procedures in place to help ensure that we can produce accurate financial statements on a timely basis is a costly and time consuming effort that needs to be re-evaluated frequently. On an ongoing basis, we document, review and, if appropriate, improve our internal controls and procedures in connection with Section 404 of the Sarbanes-Oxley Act, which requires annual management assessments of the effectiveness of our internal controls over financial reporting and a report by our independent auditors addressing these assessments. For example, in the first quarter of fiscal 2009 we initiated the development phase of an upgrade to our existing enterprise resource planning system which is expected to be completed during fiscal 2009. Both we and our independent auditors periodically test our internal controls in connection with the Section 404 requirements and could, as part of that documentation and testing, identify areas for further attention or improvement. Implementing any appropriate changes to our internal controls may require specific compliance training of our directors, officers and employees, entail substantial costs in order to modify our existing accounting systems, and take a significant period of time to complete. Such changes may not, however, be effective in maintaining the adequacy of our internal controls, and any failure to maintain that adequacy, or consequent inability to produce accurate financial statements on a timely basis, could increase our operating costs and could materially impair our ability to operate our business. In addition, investors’ perceptions that our internal controls are inadequate or that we are unable to produce accurate financial statements may seriously affect our stock price.

For the foreseeable future, Ray Dolby or his affiliates will be able to control the selection of all members of our board of directors, as well as virtually every other matter that requires stockholder approval, which will severely limit the ability of other stockholders to influence corporate matters.

At March 27, 2009, Ray Dolby and his affiliates owned 100 shares of our Class A common stock and 60,000,000 shares of our Class B common stock. As of March 27, 2009, Ray Dolby and his affiliates, including his family members, had voting power of approximately 99% of our outstanding Class B common stock, which in the aggregate represented approximately 91% of the combined voting power of our outstanding Class A and Class B common stock. Under our certificate of incorporation, holders of Class B common stock are entitled to ten votes per share while holders of Class A common stock are entitled to one vote per share. Generally, shares of Class B common stock automatically convert into shares of Class A common stock upon transfer of such Class B common stock, other than transfers to certain specified persons and entities, including the spouse and descendants of Ray Dolby and the spouses and domestic partners of such descendants. Because of this dual class structure, Ray Dolby, his affiliates, and his family members and descendants will, for the foreseeable future, have significant influence over our management and affairs, and will be able to control virtually all matters requiring stockholder approval, including the election of directors and significant corporate transactions such as mergers or other sales of our company or assets, even if they come to own considerably less than 50% of the total number of outstanding shares of our Class A and Class B common stock. Ray Dolby, his affiliates, his family members and descendants will maintain this control even if in the future they come to own considerably less than 50% of the total number of outstanding shares of our Class A and Class B common stock. Moreover, these persons may take actions in their own interests that you or our other stockholders do not view as beneficial. Absent a transfer of Class B common stock that would trigger an automatic conversion as described above, there is no threshold or time deadline at which the shares of Class B common stock will automatically convert into shares of Class A common stock. Assuming conversion of all shares of Class B common stock held by persons not affiliated with Ray Dolby into shares of Class A common stock, so long as Ray Dolby and his affiliates, his family members and descendants continue to hold shares of Class B common stock representing approximately 10% or more of the total number of outstanding shares of our Class A and Class B common stock, they will hold a majority of the combined voting power of the Class A and Class B common stock.

 

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Future sales of shares by insiders could cause our stock price to decline.

If our founder, officers, directors or employees sell, or indicate an intention to sell, substantial amounts of our Class A common stock in the public market, including shares of Class A common stock issuable upon conversion of shares of Class B common stock, the trading price of our Class A common stock could decline. As of March 27, 2009, we had a total of 113,003,832 shares of Class A and Class B common stock outstanding. Of these shares, 31,625,000 shares of Class A common stock were sold in our initial public offering by us and the selling stockholders, and an additional 8,000,000 shares of Class A common stock were sold in a secondary offering in May 2007 by our principal stockholder.

As of March 27, 2009, our directors and executive officers beneficially held 60,180,000 shares of Class B common stock, 16,124 shares of Class A common stock, vested options to purchase 484,784 shares of Class B common stock and vested options to purchase 355,583 shares of Class A common stock. We expect that any sale of our Class A common stock by our directors and executive officers would be subject to compliance with Rule 144 under the Securities Act.

 

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Sales of Unregistered Securities

In the fiscal quarter ended March 27, 2009, we issued an aggregate of 185,202 shares of our Class B common stock to certain employees, officers and directors upon the exercise of options awarded under our 2000 Stock Incentive Plan and since March 28, 2009 through April 16, 2009, we issued an aggregate of 29,190 shares of our Class B common stock to certain employees and officers upon the exercise of options awarded under our 2000 Stock Incentive Plan. We received aggregate proceeds of approximately $0.4 million in the fiscal quarter ended March 27, 2009, and less than one hundred thousand dollars in the period since March 28, 2009 through April 16, 2009 as a result of the exercise of these options. We believe these transactions were exempt from the registration requirements of the Securities Act in reliance on Rule 701 thereunder as transactions pursuant to compensatory benefit plans and contracts relating to compensation as provided under Rule 701. As of April 16, 2009 options to purchase an aggregate of 2,088,589 shares of our Class B common stock remain outstanding. All issuances of shares of our Class B common stock pursuant to the exercise of these options will be made in reliance on Rule 701. All option grants made under the 2000 Stock Incentive Plan were made prior to the effectiveness of our initial public offering. No further option grants will be made under our 2000 Stock Incentive Plan.

None of the foregoing transactions involved any underwriters, underwriting discounts or commissions, or any public offering.

Each share of our Class B common stock is convertible into one share of our Class A common stock at any time at the option of the holder or upon the affirmative vote of the holders of a majority of the shares of Class B common stock. In addition, each share of Class B common stock shall convert automatically into one share of Class A common stock upon any transfer, except for certain transfers described in our amended and restated certificate of incorporation.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

We held our 2009 Annual Meeting of Stockholders (the “Annual Meeting”) on February 10, 2009 at our executive offices located at 100 Potrero Avenue, San Francisco, CA 94103-4813. At the Annual Meeting, our stockholders:

 

  1. Elected six directors to serve until the 2010 Annual Meeting of Stockholders or until their successors are duly elected and qualified;

 

  2. Approved the amendment and restatement of our Bylaws to change the procedures relating to special meetings of stockholders and stockholder advance notice of director nominations and proposals; and

 

  2. Ratified the appointment of KPMG LLP as our independent registered public accounting firm for our fiscal year ending September 25, 2009.

Each share of Class A common stock is entitled to one vote, and each share of Class B common stock is entitled to ten votes, on all matters submitted to a vote of stockholders, unless otherwise required by law. The Class A common stock and Class B common stock vote together as a single class. At the Annual Meeting, the holders of Class A common stock and Class B common stock voted as follows:

 

  1. Election of Directors

 

Directors

   Votes For    Votes Withheld

Ray Dolby

   651,143,936    578,683

Peter Gotcher

   651,442,229    280,320

Ted Hall

   651,444,762    277,857

Bill Jasper

   651,489,494    233,125

Sanford Robertson

   651,443,184    279,435

Roger Siboni

   651,460,326    262,293

 

  2. Amendment and Restatement of our Bylaws to change the procedures relating to special meetings of stockholders and stockholder advance notice of director nominations and proposals;

 

Votes For:

   646,779,218

Votes Against:

   4,828,397

Abstentions:

   115,004

 

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  3. Ratification of the appointment of KPMG LLP as our independent registered public accounting firm for our fiscal year ending September 25, 2009.

 

Votes For:

   651,467,415

Votes Against:

   219,749

Abstentions:

   35,455

 

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ITEM 6. EXHIBITS

 

Exhibit
Number

 

Description

  3.2

  Amended and Restated Bylaws

10.1*

  Amended and Restated 2009 Dolby Executive Annual Incentive Plan

10.2*

  Employment Agreement dated February 24, 2009, by and between Dolby Laboratories, Inc., a Delaware corporation, and Kevin Yeaman

10.3*

  Services Agreement dated February 24, 2009, by and between Dolby Laboratories, Inc., a Delaware corporation, and Peter Gotcher

10.4*

  Separation Agreement and Release dated March 3, 2009, by and between Dolby Laboratories, Inc., a Delaware corporation, and Timothy A. Partridge

10.5*

  Separation Agreement and Release dated March 4, 2009, by and between Dolby Laboratories, Inc., a Delaware corporation, and Martin A. Jaffe

10.6*

  Form of Stock Option Agreement—International under the 2005 Stock Plan

10.7*

  Form of Restricted Stock Unit Agreement—U.K. under the 2005 Stock Plan

31.1

  Certification by the Chief Executive Officer Pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

  Certification by the Interim Chief Financial Officer Pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1 ‡

  Certification by the Chief Executive Officer and the Interim Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

* Denotes a management contract or compensatory arrangement
Furnished herewith

 

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SIGNATURES

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.

Date: April 30, 2009

 

DOLBY LABORATORIES, INC.

By:

 

/s/ G. Michael Novelly

  G. Michael Novelly
  Interim Chief Financial Officer
  (Principal Financial and Accounting Officer and Duly Authorized Officer)

 

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INDEX TO EXHIBITS

 

Exhibit
Number

 

Description

  3.2

  Amended and Restated Bylaws

10.1*

  Amended and Restated 2009 Dolby Executive Annual Incentive Plan

10.2*

  Employment Agreement dated February 24, 2009, by and between Dolby Laboratories, Inc., a Delaware corporation, and Kevin Yeaman

10.3*

  Services Agreement dated February 24, 2009, by and between Dolby Laboratories, Inc., a Delaware corporation, and Peter Gotcher

10.4*

  Separation Agreement and Release dated March 3, 2009, by and between Dolby Laboratories, Inc., a Delaware corporation, and Timothy A. Partridge

10.5*

  Separation Agreement and Release dated March 4, 2009, by and between Dolby Laboratories, Inc., a Delaware corporation, and Martin A. Jaffe

10.6*

  Form of Stock Option Agreement—International under the 2005 Stock Plan

10.7*

  Form of Restricted Stock Unit Agreement—U.K. under the 2005 Stock Plan

31.1

  Certification by the Chief Executive Officer Pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

  Certification by the Interim Chief Financial Officer Pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1 ‡

  Certification by the Chief Executive Officer and the Interim Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

* Denotes a management contract or compensatory arrangement
Furnished herewith

 

58

Amended and Restated Bylaws

Exhibit 3.2

AMENDED AND RESTATED BYLAWS

OF

DOLBY LABORATORIES, INC.

(amended and restated on February 10, 2009)


TABLE OF CONTENTS

 

          Page

ARTICLE I — CORPORATE OFFICES

   1

            1.1

   REGISTERED OFFICE    1

            1.2

   OTHER OFFICES    1

ARTICLE II — MEETINGS OF STOCKHOLDERS

   1

            2.1

   PLACE OF MEETINGS    1

            2.2

   ANNUAL MEETING    1

            2.3

   SPECIAL MEETING    1

            2.4

   NOTICE OF STOCKHOLDERS’ MEETINGS    2

            2.5

   MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE    3

            2.6

   QUORUM    3

            2.7

   ADJOURNED MEETING; NOTICE    3

            2.8

   ADMINISTRATION OF THE MEETING    4

            2.9

   VOTING    4

            2.10

   STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING    5

            2.11

   RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS    5

            2.12

   PROXIES    6

            2.13

   LIST OF STOCKHOLDERS ENTITLED TO VOTE    6

            2.14

   ADVANCE NOTICE OF PROCEDURES    7

ARTICLE III — DIRECTORS

   11

            3.1

   POWERS    11

            3.2

   NUMBER OF DIRECTORS    11

            3.3

   ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS    11

            3.4

   RESIGNATION AND VACANCIES    11

            3.5

   PLACE OF MEETINGS; MEETINGS BY TELEPHONE    12

            3.6

   REGULAR MEETINGS    12

            3.7

   SPECIAL MEETINGS; NOTICE    12

            3.8

   QUORUM    13

            3.9

   WAIVER OF NOTICE    13

            3.10

   BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING    13

            3.11

   ADJOURNED MEETING; NOTICE    13

            3.12

   FEES AND COMPENSATION OF DIRECTORS    14

            3.13

   REMOVAL OF DIRECTORS    14

ARTICLE IV — COMMITTEES

   14

            4.1

   COMMITTEES OF DIRECTORS    14

            4.2

   COMMITTEE MINUTES    14

            4.3

   MEETINGS AND ACTION OF COMMITTEES    14

ARTICLE V — OFFICERS

   15

            5.1

   OFFICERS    15

            5.2

   APPOINTMENT OF OFFICERS    15

 

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TABLE OF CONTENTS

(continued)

 

          Page

            5.3

   SUBORDINATE OFFICERS    15

            5.4

   REMOVAL AND RESIGNATION OF OFFICERS    16

            5.5

   VACANCIES IN OFFICES    16

            5.6

   REPRESENTATION OF SHARES OF OTHER CORPORATIONS    16

            5.7

   AUTHORITY AND DUTIES OF OFFICERS    16

ARTICLE VI — RECORDS AND REPORTS

   16

            6.1

   MAINTENANCE AND INSPECTION OF RECORDS    16

            6.2

   INSPECTION BY DIRECTORS    17

ARTICLE VII — GENERAL MATTERS

   17

            7.1

   CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS    17

            7.2

   EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS    17

            7.3

   STOCK CERTIFICATES; PARTLY PAID SHARES    17

            7.4

   SPECIAL DESIGNATION ON CERTIFICATES    18

            7.5

   LOST CERTIFICATES    18

            7.6

   DIVIDENDS    19

            7.7

   FISCAL YEAR    19

            7.8

   SEAL    19

            7.9

   TRANSFER OF STOCK    19

            7.10

   STOCK TRANSFER AGREEMENTS    19

            7.11

   REGISTERED STOCKHOLDERS    19

            7.12

   WAIVER OF NOTICE    20

ARTICLE VIII — NOTICE BY ELECTRONIC TRANSMISSION

   20

            8.1

   NOTICE BY ELECTRONIC TRANSMISSION    20

            8.2

   DEFINITION OF ELECTRONIC TRANSMISSION    21

            8.3

   INAPPLICABILITY    21

ARTICLE IX — INDEMNIFICATION OF DIRECTORS AND OFFICERS

   21

            9.1

   POWER TO INDEMNIFY IN ACTIONS, SUITS OR PROCEEDINGS OTHER THAN THOSE BY OR IN THE RIGHT OF THE CORPORATION    21

            9.2

   POWER TO INDEMNIFY IN ACTIONS, SUITS OR PROCEEDINGS BY OR IN THE RIGHT OF THE CORPORATION    22

            9.3

   AUTHORIZATION OF INDEMNIFICATION    22

            9.4

   GOOD FAITH DEFINED    23

            9.5

   INDEMNIFICATION BY A COURT    23

            9.6

   EXPENSES PAYABLE IN ADVANCE    23

            9.7

   NONEXCLUSIVITY OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES    24

            9.8

   INSURANCE    24

            9.9

   CERTAIN DEFINITIONS    24

            9.10

   SURVIVAL OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES    25

 

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TABLE OF CONTENTS

(continued)

 

          Page

            9.11

   LIMITATION ON INDEMNIFICATION    25

            9.12

   INDEMNIFICATION OF EMPLOYEES AND AGENTS    25

            9.13

   EFFECT OF AMENDMENT OR REPEAL    25

ARTICLE X — MISCELLANEOUS

   25

            10.1

   PROVISIONS OF CERTIFICATE GOVERN    25

            10.2

   CONSTRUCTION; DEFINITIONS    26

            10.3

   SEVERABILITY    26

            10.4

   AMENDMENT    26

 

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BYLAWS OF DOLBY LABORATORIES, INC.

ARTICLE I — CORPORATE OFFICES

1.1 REGISTERED OFFICE.

The registered office of Dolby Laboratories, Inc. shall be fixed in the corporation’s certificate of incorporation, as the same may be amended and/or restated from time to time (as so amended and/or restated, the “Certificate”).

1.2 OTHER OFFICES.

The corporation’s Board of Directors (the “Board”) may at any time establish other offices at any place or places where the corporation is qualified to do business.

ARTICLE II — MEETINGS OF STOCKHOLDERS

2.1 PLACE OF MEETINGS.

Meetings of stockholders shall be held at any place within or outside the State of Delaware as designated by the Board. The Board may, in its sole discretion, determine that a meeting of stockholders shall not be held at any place, but may instead be held solely by means of remote communication as authorized by Section 211(a)(2) of the Delaware General Corporation Law (the “DGCL”). In the absence of any such designation or determination, stockholders’ meetings shall be held at the corporation’s principal executive office.

2.2 ANNUAL MEETING.

The annual meeting of stockholders shall be held each year on a date and at a time designated by the Board. At the annual meeting, directors shall be elected and any other proper business may be transacted.

2.3 SPECIAL MEETING.

(i) A special meeting of the stockholders, other than those required by statute, may be called at any time by the Board acting pursuant to a resolution adopted by a majority of the Board, chairperson of the Board, chief executive officer or president, but a special meeting may not be called by any other person or persons. The Board acting pursuant to a resolution adopted by a majority of the Board may cancel, postpone or reschedule any previously scheduled special meeting at any time, before or after the notice for such meeting has been sent to the stockholders.

(ii) The notice of a special meeting shall include the purpose for which the meeting is called. Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting by or at the direction of the Board, chairperson of the Board, chief executive officer or president. Nothing contained in this Section 2.3(ii) shall be construed as limiting, fixing, or affecting the time when a meeting of stockholders called by action of the Board may be held.


2.4 NOTICE OF STOCKHOLDERS’ MEETINGS.

All notices of meetings of stockholders shall be sent or otherwise given in accordance with either Section 2.5 or Section 8.1 of these bylaws not less than ten (10) nor more than 60 days before the date of the meeting to each stockholder entitled to vote at such meeting, except as otherwise required by applicable law. The notice shall specify the place, if any, date and hour of the meeting, the means of remote communication, if any, by which stockholders and proxy holders may be deemed to be present in person and vote at such meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. Any previously scheduled meeting of stockholders may be postponed, and, unless the Certificate provides otherwise, any special meeting of the stockholders may be cancelled by resolution duly adopted by a majority of the Board members then in office upon public notice given prior to the date previously scheduled for such meeting of stockholders.

Whenever notice is required to be given, under the DGCL, the Certificate or these bylaws, to any person with whom communication is unlawful, the giving of such notice to such person shall not be required and there shall be no duty to apply to any governmental authority or agency for a license or permit to give such notice to such person. Any action or meeting which shall be taken or held without notice to any such person with whom communication is unlawful shall have the same force and effect as if such notice had been duly given. In the event that the action taken by the corporation is such as to require the filing of a certificate with the Secretary of State of Delaware, the certificate shall state, if such is the fact and if notice is required, that notice was given to all persons entitled to receive notice except such persons with whom communication is unlawful.

Whenever notice is required to be given, under any provision of the DGCL, the Certificate or these bylaws, to any stockholder to whom (A) notice of two (2) consecutive annual meetings, or (B) all, and at least two (2), payments (if sent by first-class mail) of dividends or interest on securities during a 12 month period, have been mailed addressed to such person at such person’s address as shown on the records of the corporation and have been returned undeliverable, the giving of such notice to such person shall not be required. Any action or meeting which shall be taken or held without notice to such person shall have the same force and effect as if such notice had been duly given. If any such person shall deliver to the corporation a written notice setting forth such person’s then current address, the requirement that notice be given to such person shall be reinstated. In the event that the action taken by the corporation is such as to require the filing of a certificate with the Secretary of State of Delaware, the certificate need not state that notice was not given to persons to whom notice was not required to be given pursuant to Section 230(b) of the DGCL.

The exception in subsection (A) of the above paragraph to the requirement that notice be given shall not be applicable to any notice returned as undeliverable if the notice was given by electronic transmission.

 

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2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE.

Notice of any meeting of stockholders shall be given:

(a) if mailed, when deposited in the United States mail, postage prepaid, directed to the stockholder at his or her address as it appears on the corporation’s records;

(b) if electronically transmitted, as provided in Section 8.1 of these bylaws; or

(c) otherwise, when delivered.

An affidavit of the secretary or an assistant secretary of the corporation or of the transfer agent or any other agent of the corporation that the notice has been given shall, in the absence of fraud, be prima facie evidence of the facts stated therein.

Notice may be waived in accordance with Section 7.12 of these bylaws.

2.6 QUORUM.

Unless otherwise provided in the Certificate or required by law, stockholders representing a majority of the voting power of the issued and outstanding capital stock of the corporation, present in person or represented by proxy, shall constitute a quorum for the transaction of business at all meetings of the stockholders. If such quorum is not present or represented at any meeting of the stockholders, then the chairperson of the meeting, or the stockholders representing a majority of the voting power of the capital stock at the meeting, present in person or represented by proxy, shall have power to adjourn the meeting from time to time until a quorum is present or represented. At such adjourned meeting at which a quorum is present or represented, any business may be transacted that might have been transacted at the meeting as originally noticed. The stockholders present at a duly called meeting at which a quorum is present may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum unless the number of stockholders who withdrew does not permit action to be taken by the stockholders in accordance with DGCL.

2.7 ADJOURNED MEETING; NOTICE.

When a meeting is adjourned to another time or place, unless these bylaws otherwise require, notice need not be given of the adjourned meeting if the time, place if any thereof, and the means of remote communications if any by which stockholders and proxy holders may be deemed to be present in person and vote at such adjourned meeting are announced at the meeting at which the adjournment is taken. At the continuation of the adjourned meeting, the corporation may transact any business that might have been transacted at the original meeting. If the adjournment is for more than 30 days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting in accordance with the provisions of Section 2.4 and Section 2.5 of these bylaws.

 

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2.8 ADMINISTRATION OF THE MEETING.

Meetings of stockholders shall be presided over by the chief executive officer of the corporation. If the chief executive officer will not be present at a meeting of stockholders, such meeting shall be presided over by such chairperson as the Board shall appoint, or, in the event that the Board shall fail to make such appointment, any officer of the corporation elected by the Board. The secretary of the meeting shall be the secretary of the corporation, or, in the absence of the secretary of the corporation, such person as the chairperson of the meeting appoints.

The Board shall, in advance of any meeting of stockholders, appoint one (1) or more inspector(s), who may include individual(s) who serve the corporation in other capacities, including without limitation as officers, employees or agents, to act at the meeting of stockholders and make a written report thereof. The Board may designate one (1) or more persons as alternate inspector(s) to replace any inspector, who fails to act. If no inspector or alternate has been appointed or is able to act at a meeting of stockholders, the chairperson of the meeting shall appoint one (1) or more inspector(s) to act at the meeting. Each inspector, before discharging his or her duties, shall take and sign an oath to faithfully execute the duties of inspector with strict impartiality and according to the best of his or her ability. The inspector(s) or alternate(s) shall have the duties prescribed pursuant to Section 231 of the DGCL or other applicable law.

The Board shall be entitled to make such rules or regulations for the conduct of meetings of stockholders as it shall deem necessary, appropriate or convenient. Subject to such rules and regulations, if any, the chairperson of the meeting shall have the right and authority to prescribe such rules, regulations and procedures and to do all acts as, in the judgment of such chairperson, are necessary, appropriate or convenient for the proper conduct of the meeting, including without limitation establishing an agenda of business of the meeting, rules or regulations to maintain order, restrictions on entry to the meeting after the time fixed for commencement thereof and the fixing of the date and time of the opening and closing of the polls for each matter upon which the stockholders will vote at a meeting (and shall announce such at the meeting).

2.9 VOTING.

The stockholders entitled to vote at any meeting of stockholders shall be determined in accordance with the provisions of Section 2.11 of these bylaws, subject to Section 217 (relating to voting rights of fiduciaries, pledgors and joint owners of stock) and Section 218 (relating to voting trusts and other voting agreements) of the DGCL.

Except as otherwise provided in the provisions of Section 213 of the DGCL (relating to the fixing of a date for determination of stockholders of record), each stockholder shall be entitled to that number of votes for each share of capital stock held by such stockholder as set forth in the Certificate.

In all matters, other than the election of directors and except as otherwise required by law, the Certificate or these bylaws, the affirmative vote of a majority of the voting power of the shares present or represented by proxy at the meeting and entitled to vote on the subject matter shall be the act of the stockholders. Directors shall be elected by a plurality of the voting power of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of directors.

 

-4-


The stockholders of the corporation shall not have the right to cumulate their votes for the election of directors of the corporation.

2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING.

Unless otherwise provided in the Certificate, any action which may be taken at any annual or special meeting of stockholders may be taken without a meeting and without prior notice, if a consent in writing, setting forth the action so taken, is signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take that action at a meeting at which all shares entitled to vote on that action were present and voted.

Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. If the action which is consented to is such as would have required the filing of a certificate under any section of the DGCL if such action had been voted on by stockholders at a meeting thereof, then the certificate filed under such section shall state, in lieu of any statement required by such section concerning any vote of stockholders, that written notice and written consent have been given as provided in Section 228 of the DGCL.

2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS.

In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board may fix, in advance, a record date, which record date shall not precede the date on which the resolution fixing the record date is adopted and which shall not be more than 60 nor less than ten (10) days before the date of such meeting, nor more than 60 days prior to any other such action.

If the Board does not fix a record date in accordance with these bylaws and applicable law:

(a) The record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held.

(b) The record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board is necessary, shall be the first day on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the corporation.

 

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(c) The record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board adopts the resolution relating thereto.

A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board may fix a new record date for the adjourned meeting.

2.12 PROXIES.

Each stockholder entitled to vote at a meeting of stockholders may authorize another person or persons to act for such stockholder by proxy authorized by an instrument in writing or by a transmission permitted by law and filed with the secretary of the corporation, but no such proxy shall be voted or acted upon after three (3) years from its date, unless the proxy provides for a longer period. A stockholder may also authorize another person or persons to act for him, her or it as proxy in the manner(s) provided under Section 212(c) of the DGCL or as otherwise provided under Delaware law. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Section 212 of the DGCL.

2.13 LIST OF STOCKHOLDERS ENTITLED TO VOTE.

The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. The corporation shall not be required to include electronic mail addresses or other electronic contact information on such list. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting for a period of at least ten (10) days prior to the meeting: (a) on a reasonably accessible electronic network, provided that the information required to gain access to such list is provided with the notice of the meeting, or (b) during ordinary business hours, at the corporation’s principal place of business.

In the event that the corporation determines to make the list available on an electronic network, the corporation may take reasonable steps to ensure that such information is available only to stockholders of the corporation. If the meeting is to be held at a place, then the list shall be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. If the meeting is to be held solely by means of remote communication, then the list shall also be open to the examination of any stockholder during the whole time of the meeting on a reasonably accessible electronic network, and the information required to access such list shall be provided with the notice of the meeting.

 

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2.14 ADVANCE NOTICE PROCEDURES.

(i) Advance Notice of Stockholder Business.

At an annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be brought: (A) pursuant to the corporation’s proxy materials with respect to such meeting, (B) by or at the direction of the Board, or (C) by a stockholder of the corporation who (1) is a stockholder of record at the time of the giving of the notice provided for in these bylaws and on the record date for the determination of stockholders entitled to vote at the annual meeting and (2) has timely complied in proper written form with the notice procedures set forth in this Section 2.14(i). In addition, for business to be properly brought before an annual meeting by a stockholder, such business must be a proper matter for stockholder action pursuant to these bylaws and applicable law. For the avoidance of doubt, clause (C) above shall be the exclusive means for a stockholder to bring business before an annual meeting of stockholders.

(a) To comply with clause (C) of Section 2.14(i) above, a stockholder’s notice must set forth all information required under this Section 2.14(i) and must be timely received by the secretary of the corporation. To be timely, a stockholder’s notice must be received by the secretary at the principal executive offices of the corporation not later than the 45th day nor earlier than the 75th day before the one-year anniversary of the date on which the corporation first mailed its proxy materials or a notice of availability of proxy materials (whichever is earlier) for the preceding year’s annual meeting; provided, however, that in the event that no annual meeting was held in the previous year or if the date of the annual meeting is advanced by more than 30 days prior to or delayed by more than 60 days after the one-year anniversary of the date of the previous year’s annual meeting, then notice by the stockholder to be timely must be so received by the secretary not earlier than the close of business on the 120th day prior to such annual meeting and not later than the close of business on the later of (i) the 90th day prior to such annual meeting, or (ii) the tenth day following the day on which Public Announcement (as defined below) of the date of such annual meeting is first made. In no event shall any adjournment or postponement of an annual meeting or the announcement thereof commence a new time period for the giving of a stockholder’s notice as described in this Section 2.14(i)(a). “Public Announcement” shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or a comparable national news service or in a document publicly filed by the corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Securities Exchange Act of 1934, as amended, or any successor thereto (the “1934 Act”).

(b) To be in proper written form, a stockholder’s notice to the secretary must set forth as to each matter of business the stockholder intends to bring before the annual meeting: (1) a brief description of the business intended to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (2) the name and address, as they appear on the corporation’s books, of the stockholder proposing such business and any Stockholder Associated Person (as defined below), (3) the class and number of shares of the corporation that are held of record or are beneficially owned by the stockholder or any Stockholder Associated Person and any derivative positions held or beneficially held by the stockholder or any Stockholder Associated Person, (4) whether and the extent to which any hedging or other transaction or series of transactions has been entered into by or on behalf of such stockholder or any Stockholder Associated Person with respect to any securities of the corporation, and a description of any other agreement, arrangement or understanding (including any short position or any borrowing or lending of shares), the effect or intent of which is to mitigate loss to or manage risk or benefit from share price changes for, or to increase or decrease the voting power of,

 

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such stockholder or any Stockholder Associated Person with respect to any securities of the corporation, (5) any material interest of the stockholder or a Stockholder Associated Person in such business and (6) a statement whether either such stockholder or any Stockholder Associated Person will deliver a proxy statement and form of proxy to holders of at least the percentage of the corporation’s voting shares required under applicable law to carry the proposal (such information provided and statements made as required by clauses (1) through (6), a “Business Solicitation Statement”). In addition, to be in proper written form, a stockholder’s notice to the secretary must be supplemented not later than ten days following the record date to disclose the information contained in clauses (3) and (4) above as of the record date. For purposes of this Section 2.14, a “Stockholder Associated Person” of any stockholder shall mean (i) any person controlling, directly or indirectly, or acting in concert with, such stockholder, (ii) any beneficial owner of shares of stock of the corporation owned of record or beneficially by such stockholder and on whose behalf the proposal or nomination, as the case may be, is being made (iii) any person controlling, controlled by or under common control with such person referred to in the preceding clauses (i) and (ii).

(c) Without exception, no business shall be conducted at any annual meeting except in accordance with the provisions set forth in this Section 2.14(i) and, if applicable, Section 2.14(ii). In addition, business proposed to be brought by a stockholder may not be brought before the annual meeting if such stockholder or a Stockholder Associated Person, as applicable, takes action contrary to the representations made in the Business Solicitation Statement applicable to such business or if the Business Solicitation Statement applicable to such business contains an untrue statement of a material fact or omits to state a material fact necessary to make the statements therein not misleading. The chairperson of the annual meeting shall, if the facts warrant, determine and declare at the annual meeting that business was not properly brought before the annual meeting and in accordance with the provisions of this Section 2.14(i), and, if the chairperson should so determine, he or she shall so declare at the annual meeting that any such business not properly brought before the annual meeting shall not be conducted.

(ii) Advance Notice of Director Nominations at Annual Meetings.

Notwithstanding anything in these bylaws to the contrary, only persons who are nominated in accordance with the procedures set forth in this Section 2.14(ii) shall be eligible for election or re-election as directors at an annual meeting of stockholders. Nominations of persons for election to the Board of the corporation shall be made at an annual meeting of stockholders only (A) by or at the direction of the Board or (B) by a stockholder of the corporation who (1) was a stockholder of record at the time of the giving of the notice provided for in these bylaws and on the record date for the determination of stockholders entitled to vote at the annual meeting and (2) has complied with the notice procedures set forth in this Section 2.14(ii). In addition to any other applicable requirements, for a nomination to be made by a stockholder, the stockholder must have given timely notice thereof in proper written form to the secretary of the corporation.

(a) To comply with clause (B) of Section 2.14(ii) above, a nomination to be made by a stockholder must set forth all information required under this Section 2.14(ii) and must be received by the secretary of the corporation at the principal executive offices of the corporation at the time and in accordance with the final three sentences of Section 2.14(i)(a) above.

 

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(b) To be in proper written form, such stockholder’s notice to the secretary must set forth:

(1) as to each person (a “nominee”) whom the stockholder proposes to nominate for election or re-election as a director: (A) the name, age, business address and residence address of the nominee, (B) the principal occupation or employment of the nominee, (C) the class and number of shares of the corporation that are held of record or are beneficially owned by the nominee and any derivative positions held or beneficially held by the nominee, (D) whether and the extent to which any hedging or other transaction or series of transactions has been entered into by or on behalf of the nominee with respect to any securities of the corporation, and a description of any other agreement, arrangement or understanding (including any short position or any borrowing or lending of shares), the effect or intent of which is to mitigate loss to or manage risk or benefit of share price changes for, or to increase or decrease the voting power of the nominee, (E) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nominations are to be made by the stockholder, (F) a written statement executed by the nominee acknowledging that as a director of the corporation, the nominee will owe a fiduciary duty under Delaware law with respect to the corporation and its stockholders, and (G) any other information relating to the nominee that would be required to be disclosed about such nominee if proxies were being solicited for the election of the nominee as a director, or that is otherwise required, in each case pursuant to Regulation 14A under the 1934 Act (including without limitation the nominee’s written consent to being named in the proxy statement, if any, as a nominee and to serving as a director if elected); and

(2) as to such stockholder giving notice, (A) the information required to be provided pursuant to clauses 2 through 5 of Section 2.14(i)(b) above, and the supplement referenced in the second sentence of Section 2.14(i)(b) above (except that the references to “business” in such clauses shall instead refer to nominations of directors for purposes of this paragraph), and (B) a statement whether either such stockholder or Stockholder Associated Person will deliver a proxy statement and form of proxy to holders of a number of the corporation’s voting shares reasonably believed by such stockholder or Stockholder Associated Person to be necessary to elect such nominee(s) (such information provided and statements made as required by clauses (A) and (B) above, a “Nominee Solicitation Statement”).

(c) At the request of the Board, any person nominated by a stockholder for election as a director must furnish to the secretary of the corporation (1) that information required to be set forth in the stockholder’s notice of nomination of such person as a director as of a date subsequent to the date on which the notice of such person’s nomination was given and (2) such other information as may reasonably be required by the corporation to determine the eligibility of such proposed nominee to serve as an independent director of the corporation or that could be material to a reasonable stockholder’s understanding of the independence, or lack thereof, of such nominee; in the absence of the furnishing of such information if requested, such stockholder’s nomination shall not be considered in proper form pursuant to this Section 2.14(ii).

(d) Without exception, no person shall be eligible for election or re-election as a director of the corporation at an annual meeting of stockholders unless nominated in accordance with the

 

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provisions set forth in this Section 2.14(ii). In addition, a nominee shall not be eligible for election or re-election if a stockholder or Stockholder Associated Person, as applicable, takes action contrary to the representations made in the Nominee Solicitation Statement applicable to such nominee or if the Nominee Solicitation Statement applicable to such nominee contains an untrue statement of a material fact or omits to state a material fact necessary to make the statements therein not misleading. The chairperson of the annual meeting shall, if the facts warrant, determine and declare at the annual meeting that a nomination was not made in accordance with the provisions prescribed by these bylaws, and if the chairperson should so determine, he or she shall so declare at the annual meeting, and the defective nomination shall be disregarded.

(iii) Advance Notice of Director Nominations for Special Meetings.

(a) For a special meeting of stockholders at which directors are to be elected pursuant to Section 2.14, nominations of persons for election to the Board shall be made only (1) by or at the direction of the Board or (2) by any stockholder of the corporation who (A) is a stockholder of record at the time of the giving of the notice provided for in these bylaws and on the record date for the determination of stockholders entitled to vote at the special meeting and (B) delivers a timely written notice of the nomination to the secretary of the corporation that includes the information set forth in Sections 2.14(ii)(b) and (c) above. To be timely, such notice must be received by the secretary at the principal executive offices of the corporation not later than the close of business on the later of the 90th day prior to such special meeting or the tenth day following the day on which Public Announcement is first made of the date of the special meeting and of the nominees proposed by the Board to be elected at such meeting. A person shall not be eligible for election or re-election as a director at a special meeting unless the person is nominated (i) by or at the direction of the Board or (ii) by a stockholder in accordance with the notice procedures set forth in this Section 2.14(iii). In addition, a nominee shall not be eligible for election or re-election if a stockholder or Stockholder Associated Person, as applicable, takes action contrary to the representations made in the Nominee Solicitation Statement applicable to such nominee or if the Nominee Solicitation Statement applicable to such nominee contains an untrue statement of a material fact or omits to state a material fact necessary to make the statements therein not misleading.

(b) The chairperson of the special meeting shall, if the facts warrant, determine and declare at the meeting that a nomination or business was not made in accordance with the procedures prescribed by these bylaws, and if the chairperson should so determine, he or she shall so declare at the meeting, and the defective nomination or business shall be disregarded.

 

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(iv) Other Requirements and Rights.

In addition to the foregoing provisions of this Section 2.14, a stockholder must also comply with all applicable requirements of state law and of the 1934 Act and the rules and regulations thereunder with respect to the matters set forth in this Section 2.14, including, with respect to business such stockholder intends to bring before the annual meeting that involves a proposal that such stockholder requests to be included in the corporation’s proxy statement, the requirements of Rule 14a-8 (or any successor provision) under the 1934 Act. Nothing in this Section 2.14 shall be deemed to affect any right of the corporation to omit a proposal from the corporation’s proxy statement pursuant to Rule 14a-8 (or any successor provision) under the 1934 Act.

ARTICLE III — DIRECTORS

3.1 POWERS.

Subject to the provisions of the DGCL and any limitations in the Certificate, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the Board.

3.2 NUMBER OF DIRECTORS.

The authorized number of directors shall be determined from time to time by resolution of the Board, provided the Board shall consist of at least one member. No reduction of the authorized number of directors shall have the effect of removing any director before that director’s term of office expires.

3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS.

Except as provided in Section 3.4 and Section 3.13 of these bylaws, directors shall be elected at each annual meeting of stockholders to hold office until the next annual meeting. Directors need not be stockholders unless so required by the Certificate or these bylaws. The Certificate or these bylaws may prescribe other qualifications for directors. Each director, including a director elected to fill a vacancy, shall hold office until such director’s successor is elected and qualified or until such director’s earlier death, resignation or removal.

All elections of directors shall be by written ballot, unless otherwise provided in the Certificate. If authorized by the Board, such requirement of a written ballot shall be satisfied by a ballot submitted by electronic transmission, provided that any such electronic transmission must be either set forth or be submitted with information from which it can be determined that the electronic transmission was authorized.

3.4 RESIGNATION AND VACANCIES.

Any director may resign at any time upon written notice or by electronic transmission to the corporation.

Unless the Board otherwise determines, newly created directorships resulting from any increase in the authorized number of directors, or any vacancies on the Board resulting from the death,

 

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resignation, retirement, disqualification, removal from office or other cause shall, unless otherwise required by law, be filled by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum of the Board, or by a sole remaining director. When one or more directors resigns and the resignation is effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each director so chosen shall hold office as provided in this Section 3.4 in the filling of other vacancies.

3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE.

The Board may hold meetings, both regular and special, either within or outside the State of Delaware.

Unless otherwise restricted by the Certificate or these bylaws, members of the Board, or any committee designated by the Board, may participate in a meeting of the Board, or any committee, by means of conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting.

3.6 REGULAR MEETINGS.

Regular meetings of the Board may be held without notice at such time and at such place as shall from time to time be determined by the Board.

3.7 SPECIAL MEETINGS; NOTICE.

Special meetings of the Board for any purpose or purposes may be called at any time by the chairperson of the Board, the chief executive officer, the president, the secretary or a majority of the authorized number of directors. The person(s) authorized to call special meetings of the Board may fix the place and time of the meeting.

Notice of the time and place of special meetings shall be:

(a) delivered personally by hand, by courier or by telephone;

(b) sent by United States first-class mail, postage prepaid;

(c) sent by facsimile; or

(d) sent by electronic mail,

directed to each director at that director’s address, telephone number, facsimile number or electronic mail address, as the case may be, as shown on the corporation’s records.

If the notice is (i) delivered personally by hand, by courier or by telephone, (ii) sent by facsimile or (iii) sent by electronic mail, it shall be delivered or sent at least 24 hours before the time of the

 

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holding of the meeting. If the notice is sent by United States mail, it shall be deposited in the United States mail at least four days before the time of the holding of the meeting. Any oral notice may be communicated either to the director or to a person at the office of the director who the person giving notice has reason to believe will promptly communicate such notice to the director. The notice need not specify the place of the meeting if the meeting is to be held at the corporation’s principal executive office nor the purpose of the meeting.

3.8 QUORUM.

Except as otherwise required by law or the Certificate, at all meetings of the Board, a majority of the authorized number of directors (as determined pursuant to Section 3.2 of these bylaws) shall constitute a quorum for the transaction of business, except to adjourn as provided in Section 3.11 of these bylaws. The vote of a majority of the directors present at any meeting at which a quorum is present shall be the act of the Board, except as may be otherwise specifically provided by statute, the Certificate or these bylaws.

3.9 WAIVER OF NOTICE.

Whenever notice is required to be given under any provisions of the DGCL, the Certificate or these bylaws, a written waiver thereof, signed by the person entitled to notice, or a waiver by electronic transmission by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting solely for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the directors, or members of a committee of directors, need be specified in any written waiver of notice or any waiver by electronic transmission unless so required by the Certificate or these bylaws.

3.10 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING.

Unless otherwise restricted by the Certificate or these bylaws, any action required or permitted to be taken at any meeting of the Board, or of any committee thereof, may be taken without a meeting if all members of the Board or committee, as the case may be, consent thereto in writing or by electronic transmission and the writing or writings or electronic transmission or transmissions are filed with the minutes of proceedings of the Board or committee. Such filing shall be in paper form if the minutes are maintained in paper form and shall be in electronic form if the minutes are maintained in electronic form.

3.11 ADJOURNED MEETING; NOTICE.

If a quorum is not present at any meeting of the Board, then a majority of the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present.

 

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3.12 FEES AND COMPENSATION OF DIRECTORS.

Unless otherwise restricted by the Certificate or these bylaws, the Board shall have the authority to fix the compensation of directors.

3.13 REMOVAL OF DIRECTORS.

Any director or the entire Board may be removed from office at any time, with or without cause, by the affirmative vote of the holders of at least a majority of the voting power of the issued and outstanding shares of capital stock of the corporation then entitled to vote in the election of directors.

ARTICLE IV — COMMITTEES

4.1 COMMITTEES OF DIRECTORS.

The Board may designate one or more committees, each committee to consist of one or more of the directors of the corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the Board to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board or in these bylaws, shall have and may exercise such lawfully delegable powers and duties as the Board may confer.

4.2 COMMITTEE MINUTES.

Each committee shall keep regular minutes of its meetings and report to the Board when required.

4.3 MEETINGS AND ACTION OF COMMITTEES.

Meetings and actions of committees shall be governed by, and held and taken in accordance with, the provisions of:

(a) Section 3.5 (relating to place of meetings and meetings by telephone);

(b) Section 3.6 (relating to regular meetings);

(c) Section 3.7 (relating to special meetings and notice);

(d) Section 3.8 (relating to quorum);

(e) Section 3.9 (relating to waiver of notice);

(f) Section 3.10 (relating to action without a meeting); and

 

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(g) Section 3.11 (relating to adjournment and notice of adjournment)

of these bylaws, with such changes in the context of those bylaws as are necessary to substitute the committee and its members for the Board and its members.

Notwithstanding the foregoing:

(i) the time of regular meetings of committees may be determined either by resolution of the Board or by resolution of the committee;

(ii) special meetings of committees may also be called by resolution of the Board; and

(iii) notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The Board may adopt rules for the government of any committee not inconsistent with the provisions of these bylaws.

ARTICLE V — OFFICERS

5.1 OFFICERS.

The officers of the corporation shall be a president and a secretary. The corporation may also have, at the discretion of the Board, a chairperson of the Board, a vice chairperson of the Board, a chief executive officer, a chief financial officer or treasurer, one or more vice presidents, one or more assistant vice presidents, one or more assistant treasurers, one or more assistant secretaries, and any such other officers as may be appointed in accordance with the provisions of these bylaws.

Any number of offices may be held by the same person.

5.2 APPOINTMENT OF OFFICERS.

The Board shall appoint the officers of the corporation, except such officers as may be appointed in accordance with the provisions of Section 5.3 of these bylaws, subject to the rights, if any, of an officer under any contract of employment. Each officer shall hold office until his or her successor is elected and qualified or until his or her earlier resignation or removal. A failure to elect officers shall not dissolve or otherwise affect the corporation.

5.3 SUBORDINATE OFFICERS.

The Board may appoint, or empower the chief executive officer or, in the absence of a chief executive officer, the president, to appoint, such other officers and agents as the business of the corporation may require. Each of such officers and agents shall hold office for such period, have such authority, and perform such duties as are provided in these bylaws or as the Board may from time to time determine.

 

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5.4 REMOVAL AND RESIGNATION OF OFFICERS.

Any officer may be removed, either with or without cause, by an affirmative vote of the majority of the Board at any regular or special meeting of the Board or, except in the case of an officer appointed by the Board, by any officer upon whom such power of removal may be conferred by the Board.

Any officer may resign at any time by giving written notice to the corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice. Unless otherwise specified in the notice of resignation, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party.

5.5 VACANCIES IN OFFICES.

Any vacancy occurring in any office of the corporation may only be filled by the Board or as provided in Section 5.3 of these bylaws.

5.6 REPRESENTATION OF SHARES OF OTHER CORPORATIONS.

The chairperson of the Board, the chief executive officer, the president, any vice president, the treasurer, the secretary or assistant secretary of this corporation, or any other person authorized by the Board, the chief executive officer, the president or a vice president, is authorized to vote, represent, and exercise on behalf of this corporation all rights incident to any and all shares or other equity interests of any other corporation or entity standing in the name of this corporation. The authority granted herein may be exercised either by such person directly or by any other person authorized to do so by proxy or power of attorney duly executed by such person having the authority.

5.7 AUTHORITY AND DUTIES OF OFFICERS.

In addition to the foregoing authority and duties, all officers of the corporation shall respectively have such authority and perform such duties in the management of the business of the corporation as may be designated from time to time by the Board.

ARTICLE VI — RECORDS AND REPORTS

6.1 MAINTENANCE AND INSPECTION OF RECORDS.

The corporation shall, either at its principal executive office or at such place or places as designated by the Board, keep a record of its stockholders listing their names and addresses and the number and class of shares held by each stockholder, a copy of these bylaws, as may be amended to date, minute books, accounting books and other records.

Any such records maintained by the corporation may be kept on, or by means of, or be in the form of, any information storage device or method, provided that the records so kept can be converted into clearly legible paper form within a reasonable time. The corporation shall so convert any records so

 

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kept upon the request of any person entitled to inspect such records pursuant to the provisions of the DGCL. When records are kept in such manner, a clearly legible paper form produced from or by means of the information storage device or method shall be admissible in evidence, and accepted for all other purposes, to the same extent as an original paper form accurately portrays the record.

Any stockholder of record, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose the corporation’s stock ledger, a list of its stockholders, and its other books and records and to make copies or extracts therefrom. A proper purpose shall mean a purpose reasonably related to such person’s interest as a stockholder. In every instance where an attorney or other agent is the person who seeks the right to inspection, the demand under oath shall be accompanied by a power of attorney or such other writing that authorizes the attorney or other agent to so act on behalf of the stockholder. The demand under oath shall be directed to the corporation at its registered office in Delaware or at its principal executive office.

6.2 INSPECTION BY DIRECTORS.

Any director shall have the right to examine the corporation’s stock ledger, a list of its stockholders, and its other books and records for a purpose reasonably related to his or her position as a director.

ARTICLE VII — GENERAL MATTERS

7.1 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS.

From time to time, the Board shall determine by resolution which person or persons may sign or endorse all checks, drafts, other orders for payment of money, notes or other evidences of indebtedness that are issued in the name of or payable to the corporation, and only the persons so authorized shall sign or endorse those instruments.

7.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS.

Except as otherwise provided in these bylaws, the Board, or any officers of the corporation authorized thereby, may authorize any officer or officers, or agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation; such authority may be general or confined to specific instances.

7.3 STOCK CERTIFICATES; PARTLY PAID SHARES.

The shares of the corporation shall be represented by certificates, provided that the Board may provide by resolution or resolutions that some or all of any or all classes or series of its stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the corporation. Notwithstanding the adoption of such a resolution by the Board, every holder of stock represented by certificates and upon request every holder of uncertificated shares shall be entitled to have a certificate signed by, or in the name of the corporation by

 

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the chairperson or vice-chairperson of the Board, or the president or vice-president, and by the treasurer or an assistant treasurer, or the secretary or an assistant secretary of the corporation representing the number of shares registered in certificate form. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate has ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he or she were such officer, transfer agent or registrar at the date of issue.

The corporation may issue the whole or any part of its shares as partly paid and subject to call for the remainder of the consideration to be paid therefor. Upon the face or back of each stock certificate issued to represent any such partly paid shares, and upon the books and records of the corporation in the case of uncertificated partly paid shares, the total amount of the consideration to be paid therefor and the amount paid thereon shall be stated. Upon the declaration of any dividend on fully paid shares, the corporation shall declare a dividend upon partly paid shares of the same class, but only upon the basis of the percentage of the consideration actually paid thereon.

7.4 SPECIAL DESIGNATION ON CERTIFICATES.

If the corporation is authorized to issue more than one class of stock or more than one series of any class, then the powers, designations, preferences, and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate that the corporation shall issue to represent such class or series of stock; provided, however, that, except as otherwise provided in Section 202 of the DGCL, in lieu of the foregoing requirements there may be set forth on the face or back of the certificate that the corporation shall issue to represent such class or series of stock a statement that the corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences, and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights.

7.5 LOST CERTIFICATES.

Except as provided in this Section 7.5, no new certificates for shares shall be issued to replace a previously issued certificate unless the latter is surrendered to the corporation and cancelled at the same time. The corporation may issue a new certificate of stock or uncertificated shares in the place of any certificate theretofore issued by it, alleged to have been lost, stolen or destroyed, and the corporation may require the owner of the lost, stolen or destroyed certificate, or such owner’s legal representative, to give the corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate or uncertificated shares.

 

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7.6 DIVIDENDS.

The Board, subject to any restrictions contained in either (a) the DGCL or (b) the Certificate, may declare and pay dividends upon the shares of its capital stock. Dividends may be paid in cash, in property, or in shares of the corporation’s capital stock.

The Board may set apart out of any of the funds of the corporation available for dividends a reserve or reserves for any proper purpose and may abolish any such reserve.

7.7 FISCAL YEAR.

The fiscal year of the corporation shall be fixed by resolution of the Board and may be changed by the Board.

7.8 SEAL.

The corporation may adopt a corporate seal, which shall be adopted and which may be altered by the Board. The corporation may use the corporate seal by causing it or a facsimile thereof to be impressed or affixed or in any other manner reproduced.

7.9 TRANSFER OF STOCK.

Transfers of stock shall be made only upon the transfer books of the corporation kept at an office of the corporation or by transfer agents designated to transfer shares of the stock of the corporation. Except where a certificate is issued in accordance with Section 7.5 of these bylaws, an outstanding certificate for the number of shares involved shall be surrendered for cancellation before a new certificate is issued therefore. Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate, and record the transaction in its books.

7.10 STOCK TRANSFER AGREEMENTS.

The corporation shall have power to enter into and perform any agreement with any number of stockholders of any one or more classes or series of stock of the corporation to restrict the transfer of shares of stock of the corporation of any one or more classes or series owned by such stockholders in any manner not prohibited by the DGCL.

7.11 REGISTERED STOCKHOLDERS.

The corporation:

(a) shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends and to vote as such owner;

 

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(b) shall be entitled to hold liable for calls and assessments on partly paid shares the person registered on its books as the owner of shares; and

(c) shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of another person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware.

7.12 WAIVER OF NOTICE.

Whenever notice is required to be given under any provision of the DGCL, the Certificate or these bylaws, a written waiver, signed by the person entitled to notice, or a waiver by electronic transmission by the person entitled to notice, whether before or after the time of the event for which notice is to be given, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting solely for the express purpose of objecting at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders need be specified in any written waiver of notice or any waiver by electronic transmission unless so required by the Certificate or these bylaws.

ARTICLE VIII — NOTICE BY ELECTRONIC TRANSMISSION

8.1 NOTICE BY ELECTRONIC TRANSMISSION.

Without limiting the manner by which notice otherwise may be given effectively to stockholders pursuant to the DGCL, the Certificate or these bylaws, any notice to stockholders given by the corporation under any provision of the DGCL, the Certificate or these bylaws shall be effective if given by a form of electronic transmission consented to by the stockholder to whom the notice is given. Any such consent shall be revocable by the stockholder by written notice to the corporation. Any such consent shall be deemed revoked if:

(a) the corporation is unable to deliver by electronic transmission two consecutive notices given by the corporation in accordance with such consent; and

(b) such inability becomes known to the secretary or an assistant secretary of the corporation or to the transfer agent, or other person responsible for the giving of notice.

However, the inadvertent failure to treat such inability as a revocation shall not invalidate any meeting or other action.

Any notice given pursuant to the preceding paragraph shall be deemed given:

(i) if by facsimile telecommunication, when directed to a number at which the stockholder has consented to receive notice;

 

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(ii) if by electronic mail, when directed to an electronic mail address at which the stockholder has consented to receive notice;

(iii) if by a posting on an electronic network together with separate notice to the stockholder of such specific posting, upon the later of (A) such posting and (B) the giving of such separate notice; and

(iv) if by any other form of electronic transmission, when directed to the stockholder.

An affidavit of the secretary or an assistant secretary or of the transfer agent or other agent of the corporation that the notice has been given by a form of electronic transmission shall, in the absence of fraud, be prima facie evidence of the facts stated therein.

8.2 DEFINITION OF ELECTRONIC TRANSMISSION.

An “electronic transmission” means any form of communication, not directly involving the physical transmission of paper, that creates a record that may be retained, retrieved, and reviewed by a recipient thereof, and that may be directly reproduced in paper form by such a recipient through an automated process.

8.3 INAPPLICABILITY.

Notice by a form of electronic transmission shall not apply to Section 164 (relating to failure to pay for stock; remedies), Section 296 (relating to adjudication of claims; appeal), Section 311 (relating to revocation of voluntary dissolution), Section 312 (relating to renewal, revival, extension and restoration of certificate of incorporation) or Section 324 (relating to attachment of shares of stock or any option, right or interest therein) of the DGCL.

ARTICLE IX — INDEMNIFICATION OF DIRECTORS AND OFFICERS

9.1 POWER TO INDEMNIFY IN ACTIONS, SUITS OR PROCEEDINGS OTHER THAN THOSE BY OR IN THE RIGHT OF THE CORPORATION.

Subject to Section 9.3 of these bylaws, the corporation shall indemnify, to the fullest extent permitted by the DGCL, as now or hereafter in effect, any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that such person (or the legal representative of such person) is or was a director or officer of the corporation or any predecessor of the corporation, or is or was a director or officer of the corporation serving at the request of the corporation as a director or officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable

 

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cause to believe such person’s conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which such person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that such person’s conduct was unlawful.

9.2 POWER TO INDEMNIFY IN ACTIONS, SUITS OR PROCEEDINGS BY OR IN THE RIGHT OF THE CORPORATION.

Subject to Section 9.3 of these bylaws, the corporation shall indemnify, to the fullest extent permitted by the DGCL, as now or hereafter in effect, any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that such person (or the legal representative of such person) is or was a director or officer of the corporation or any predecessor of the corporation, or is or was a director or officer of the corporation serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise against expenses (including attorneys’ fees) actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the corporation; except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper.

9.3 AUTHORIZATION OF INDEMNIFICATION.

Any indemnification under this Article IX (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the director or officer is proper in the circumstances because such person has met the applicable standard of conduct set forth in Section 9.1 or Section 9.2 of these bylaws, as the case may be. Such determination shall be made, with respect to a person who is either a director or officer at the time of such determination or a former director or officer, (i) by a majority vote of the directors who are not parties to such action, suit or proceeding, even though less than a quorum, or (ii) by a committee of such directors designated by a majority vote of such directors, even though less than a quorum, or (iii) if there are no such directors, or if such directors so direct, by independent legal counsel in a written opinion or (iv) by the stockholders (but only if a majority of the directors who are not parties to such action, suit or proceeding, if they constitute a quorum of the board of directors, presents the issue of entitlement to indemnification to the stockholders for their determination). To the extent, however, that a present or former director or officer of the corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding described above, or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys’ fees) actually and reasonably incurred by such person in connection therewith, without the necessity of authorization in the specific case.

 

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9.4 GOOD FAITH DEFINED.

For purposes of any determination under Section 9.3 of these bylaws, to the fullest extent permitted by applicable law, a person shall be deemed to have acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the corporation, or, with respect to any criminal action or proceeding, to have had no reasonable cause to believe such person’s conduct was unlawful, if such person’s action is based on the records or books of account of the corporation or another enterprise, or on information supplied to such person by the officers of the corporation or another enterprise in the course of their duties, or on the advice of legal counsel for the corporation or another enterprise or on information or records given or reports made to the corporation or another enterprise by an independent certified public accountant or by an appraiser or other expert selected with reasonable care by the corporation or another enterprise. The term “another enterprise” as used in this Section 9.4 shall mean any other corporation or any partnership, joint venture, trust, employee benefit plan or other enterprise of which such person is or was serving at the request of the corporation as a director, officer, employee or agent. The provisions of this Section 9.4 shall not be deemed to be exclusive or to limit in any way the circumstances in which a person may be deemed to have met the applicable standard of conduct set forth in Section 9.1 or 9.2 of these bylaws, as the case may be.

9.5 INDEMNIFICATION BY A COURT.

Notwithstanding any contrary determination in the specific case under Section 9.3 of this Article IX, and notwithstanding the absence of any determination thereunder, any director or officer may apply to the Court of Chancery in the State of Delaware for indemnification to the extent otherwise permissible under Section 9.1 and Section 9.2 of these bylaws. The basis of such indemnification by a court shall be a determination by such court that indemnification of the director or officer is proper in the circumstances because such person has met the applicable standards of conduct set forth in Section 9.1 or Section 9.2 of these bylaws, as the case may be. Neither a contrary determination in the specific case under Section 9.3 of these bylaws nor the absence of any determination thereunder shall be a defense to such application or create a presumption that the director or officer seeking indemnification has not met any applicable standard of conduct. Notice of any application for indemnification pursuant to this Section 9.5 shall be given to the corporation promptly upon the filing of such application. If successful, in whole or in part, the director or officer seeking indemnification shall also be entitled to be paid the expense of prosecuting such application.

9.6 EXPENSES PAYABLE IN ADVANCE.

To the fullest extent not prohibited by the DGCL, or by any other applicable law, expenses incurred by a person who is or was a director or officer in defending any civil, criminal, administrative or investigative action, suit or proceeding shall be paid by the corporation in advance of the final disposition of such action, suit or proceeding; provided, however, that if the DGCL requires, an advance of expenses incurred by any person in his or her capacity as a director or officer (and not in any other

 

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capacity) shall be made only upon receipt of an undertaking by or on behalf of such person to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by the corporation as authorized in this Article IX.

9.7 NONEXCLUSIVITY OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES.

The indemnification and advancement of expenses provided by or granted pursuant to this Article IX shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under the Certificate, any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in such person’s official capacity and as to action in another capacity while holding such office, it being the policy of the corporation that indemnification of the persons specified in Section 9.1 and Section 9.2 of these bylaws shall be made to the fullest extent permitted by law. The provisions of this Article IX shall not be deemed to preclude the indemnification of any person who is not specified in Section 9.1 or Section 9.2 of these bylaws but whom the corporation has the power or obligation to indemnify under the provisions of the DGCL, or otherwise. The corporation is specifically authorized to enter into individual contracts with any or all of its directors, officers, employees or agents respecting indemnification and advances, to the fullest extent not prohibited by the DGCL, or by any other applicable law.

9.8 INSURANCE.

To the fullest extent permitted by the DGCL or any other applicable law, the corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was a director, officer, employee or agent of the corporation serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person’s status as such, whether or not the corporation would have the power or the obligation to indemnify such person against such liability under the provisions of this Article IX.

9.9 CERTAIN DEFINITIONS.

For purposes of this Article IX, references to “the corporation” shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors or officers, so that any person who is or was a director or officer of such constituent corporation, or is or was a director or officer of such constituent corporation serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, shall stand in the same position under the provisions of this Article IX with respect to the resulting or surviving corporation as such person would have with respect to such constituent corporation if its separate existence had continued. For purposes of this Article IX, references to “fines” shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to “serving at the request of the corporation” shall include any service as a director, officer, employee or agent of the

 

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corporation which imposes duties on, or involves services by, such director or officer with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner such person reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner “not opposed to the best interests of the corporation” as referred to in this Article IX.

9.10 SURVIVAL OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES.

The rights to indemnification and advancement of expenses conferred by this Article IX shall continue as to a person who has ceased to be a director or officer and shall inure to the benefit of the heirs, executors, administrators and other personal and legal representatives of such a person.

9.11 LIMITATION ON INDEMNIFICATION.

Notwithstanding anything contained in this Article IX to the contrary, except for proceedings to enforce rights to indemnification (which shall be governed by Section 9.5 of these bylaws), the corporation shall not be obligated to indemnify any director or officer in connection with a proceeding (or part thereof) initiated by such person unless such proceeding (or part thereof) was authorized or consented to by the board of directors of the corporation.

9.12 INDEMNIFICATION OF EMPLOYEES AND AGENTS.

The corporation may, to the extent authorized from time to time by the board of directors, provide rights to indemnification and to the advancement of expenses to employees and agents of the corporation similar to those conferred in this Article IX to directors and officers of the corporation.

9.13 EFFECT OF AMENDMENT OR REPEAL.

Neither any amendment or repeal of any Section of this Article IX, nor the adoption of any provision of the Certificate or the bylaws inconsistent with this Article IX, shall adversely affect any right or protection of any director, officer, employee or other agent established pursuant to this Article IX existing at the time of such amendment, repeal or adoption of an inconsistent provision, including without limitation by eliminating or reducing the effect of this Article IX, for or in respect of any act, omission or other matter occurring, or any action or proceeding accruing or arising (or that, but for this Article IX, would accrue or arise), prior to such amendment, repeal or adoption of an inconsistent provision.

ARTICLE X — MISCELLANEOUS

10.1 PROVISIONS OF CERTIFICATE GOVERN.

In the event of any inconsistency between the terms of these bylaws and the Certificate, the terms of the Certificate will govern.

 

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10.2 CONSTRUCTION; DEFINITIONS.

Unless the context requires otherwise, the general provisions, rules of construction, and definitions in the DGCL shall govern the construction of these bylaws. Without limiting the generality of this provision, the singular number includes the plural, the plural number includes the singular, and the term “person” includes both a corporation and a natural person.

10.3 SEVERABILITY.

In the event that any bylaw or the application thereof becomes or is declared by a court of competent jurisdiction to be illegal, void or unenforceable, the remaining bylaws will continue in full force and effect.

10.4 AMENDMENT.

The bylaws of the corporation may be adopted, amended or repealed by a majority of the voting power of the stockholders entitled to vote; provided, however, that the corporation may, in its Certificate, also confer the power to adopt, amend or repeal bylaws upon the Board. The fact that such power has been so conferred upon the Board shall not divest the stockholders of the power, nor limit their power to adopt, amend or repeal bylaws. Notwithstanding the foregoing and any provision of law that might otherwise permit a lesser vote or no vote, the Board acting pursuant to a resolution adopted by a majority of the Board and the affirmative vote of the holders at least sixty-six and two-thirds percent (66  2/3%) of the voting power of the issued and outstanding shares of capital stock of the corporation then entitled to vote shall be required to amend or repeal Section 2.3, the last paragraph of Section 2.9 (relating to no cumulative voting), Section 2.10, Section 2.14 and Section 2.15 of these bylaws, or this sentence of this Section 10.4.

 

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DOLBY LABORATORIES, INC.

a Delaware corporation

CERTIFICATE OF ADOPTION OF AMENDED AND RESTATED BYLAWS

The undersigned hereby certifies that he or she is the duly elected, qualified, and acting Secretary of Dolby Laboratories, Inc., a Delaware corporation, and that the foregoing amended and restated bylaws, comprising 26 pages, were adopted as the corporation’s bylaws effective February 10, 2009 pursuant to approvals (i) on November 4, 2008 by the board of directors of the corporation and (ii) on February 10, 2009 by the stockholders of the corporation.

IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand this 5th day of March, 2009.

 

By:  

/s/ Mark S. Anderson

Print Name:  

Mark S. Anderson

Title:  

Secretary

Amended and Restated 2009 Dolby Executive Annual Incentive Plan

Exhibit 10.1

2009 DOLBY EXECUTIVE ANNUAL INCENTIVE PLAN

 

Eligibility:

   Eligible employees are the executive officers of the Company and its subsidiaries who are selected by the Compensation Committee.

Bonus Amounts:

   The amount each executive officer may be eligible to receive under the 2009 Dolby Executive Annual Incentive Plan (the “Executive Plan”) will be determined as summarized below and pursuant to the level of achievement by the Company of certain pre-tax income and revenue goals during the 2009 fiscal year.

Target Bonus:

   Target bonuses for executives will be established and approved by the Compensation Committee. Each executive’s target bonus will be a percentage of the executive’s base salary at the applicable fiscal year-end.

Actual Bonus:

   The principal executive officer’s actual bonus will be determined by multiplying his base salary by his target bonus percentage, but the actual bonus amount may be less than, or exceed, the principal executive’s target bonus, depending on the extent to which the Company meets the pre-tax income and revenue goals.
   The actual bonuses for all other eligible executive officers will be determined by multiplying base salary by the applicable target bonus percentage and then adjusting such number to reflect the executive’s individual performance and the extent to which such executive achieved individual pre-determined performance objectives. However, the actual bonus amount may be less than, or exceed, the executive’s target bonus, depending on (i) the extent to which the Company meets the pre-tax income and revenue goals, (ii) the extent to which each executive satisfies the appropriate pre-determined performance objectives, or (iii) based upon such other criteria as the Compensation Committee, in its sole and absolute discretion, determines is appropriate to calculate and determine such final bonus amount for any such eligible executive officer. To the extent that the aggregate bonus amounts to be paid to the participating executive officers exceed an amount equal to their (i) aggregate target bonus amounts multiplied by (ii) the plan funding, then such executive officers’ actual bonus amounts will be reduced to amounts determined by multiplying (a) each participating executive officers’ bonus amount by (b) a fraction, (1) the numerator of which shall be their aggregate target bonus amounts multiplied by the plan funding, and (2) the denominator of which shall be the aggregate bonus amounts otherwise to be paid to the participating executive officers absent the reduction.

Bonus Payment Approval:

   Specific measurable Company revenue and pre-tax income targets and executive individual objectives will be established by the Compensation Committee after the commencement of the 2009 fiscal year. All individual executive bonuses must be approved and certified by the Compensation Committee prior to payment.
   Payment of the actual bonuses under the Executive Plan will be made no later than: (i) the 15th day of the third month following the end of the Company’s fiscal year in which the bonus was earned, or (ii) March 15th of the year following the calendar year in which the bonus was earned.


Subject to Plan:

   The bonus goal, and the terms of this Executive Plan, are subject to the applicable terms and conditions of the 2005 Stock Plan.

Maximum Bonus Amount:

   Notwithstanding anything to the contrary in this Executive Plan, no “Covered Employee,” as that term is defined in the 2005 Stock Plan, may receive a bonus, in any fiscal year, greater than the individual Covered Employee’s fiscal year limitation authorized by the terms of the 2005 Stock Plan.
Employment Agreement dated February 24, 2009, Kevin Yeaman

Exhibit 10.2

DOLBY LABORATORIES, INC.

EMPLOYMENT AGREEMENT

This Employment Agreement (the “Agreement”) is entered into as of February 24, 2009, by and between Dolby Laboratories, Inc., a Delaware corporation (the “Company”) and Kevin Yeaman (the “Executive”).

1. Duties and Scope of Employment.

(a) Positions and Duties. As of March 28, 2009, (the “Effective Date”), Executive will serve as the Company’s Chief Executive Officer. Executive will report to the Company’s Board of Directors (the “Board”). As of the Effective Date, Executive will render such business and professional services in the performance of his duties, consistent with Executive’s position within the Company, as will reasonably be assigned to him by the Board. The period Executive is employed by the Company under this Agreement is referred to herein as the “Employment Term”.

(b) Board Membership. Executive will be appointed to serve as a member of the Board as of the Effective Date. Thereafter, at each annual meeting of the Company’s stockholders during the Employment Term, the Company will nominate Executive to serve as a member of the Board. Executive’s service as a member of the Board will be subject to any required stockholder approval. Upon the termination of Executive’s employment for any reason, unless otherwise requested by the Board, Executive will be deemed to have resigned from the Board (and all other positions held at the Company and its affiliates), without any further required action by Executive, as of the end of Executive’s employment and Executive, at the Board’s request, will execute any documents necessary to reflect his resignation.

(c) Obligations. During the Employment Term, Executive will devote Executive’s full business efforts and time to the Company and will use good faith efforts to discharge Executive’s obligations under this Agreement to the best of Executive’s ability and in accordance with each of the Company’s Corporate Governance Guidelines and Code of Business Conduct and Ethics. For the duration of the Employment Term, Executive agrees not to actively engage in any other employment, occupation, or consulting activity for any direct or indirect remuneration without the prior approval of the Board (which approval will not be unreasonably withheld); provided, however, that Executive may, without the approval of the Board (but in accordance with any Company policy then in effect), serve in any capacity with any civic, educational, or charitable organization, provided such services do not interfere with Executive’s obligations to Company.

(d) Other Entities. Executive agrees to serve and will be appointed, without additional compensation, as an officer and director for each of the Company’s subsidiaries, partnerships, joint ventures, limited liability companies and other affiliates, including entities in which the Company has a significant investment as determined by the Company. As used in this Agreement, the term “affiliates” will include any entity controlled by, controlling, or under common control of the Company. As applicable


2. At-Will Employment. Executive and the Company agree that Executive’s employment with the Company constitutes “at-will” employment. Executive and the Company acknowledge that this employment relationship may be terminated at any time, upon written notice to the other party, with or without good cause or for any or no cause, at the option either of the Company or Executive. However, as described in this Agreement, Executive may be entitled to severance benefits depending upon the circumstances of Executive’s termination of employment.

3. Compensation.

(a) Base Salary. As of the Effective Date, the Company will pay Executive an annual salary of $550,000 as compensation for his services (such annual salary, as is then effective, to be referred to herein as “Base Salary”). The Base Salary will be paid periodically in accordance with the Company’s normal payroll practices and be subject to the usual, required withholdings. Executive’s Base Salary will be reviewed on an annual basis by the Compensation Committee of the Board (the “Committee”) and may be increased from time to time, in the discretion of the Committee.

(b) Annual Incentive. Executive will be eligible to receive annual cash incentives payable for the achievement of performance goals established by the Committee. For the Company’s fiscal year 2009, Executive’s target annual cash incentive (“Target Annual Incentive”) will be adjusted to reflect a target not less than 77% of Base Salary. Thereafter and for the remainder of the Employment Term, Executive’s Target Annual Incentive will be not less than 85% of Base Salary. The actual earned annual cash incentive, if any, payable to Executive for any performance period will depend upon the extent to which the applicable performance goal(s) specified by the Committee are achieved or exceeded and may be adjusted for under- or over-performance.

(c) Equity Awards.

(i) As of March 16, 2009, Executive will be granted a nonstatutory stock option to purchase 121,000 shares of the Company’s Class A common stock at a per share exercise price equal to the closing price per share on the New York Stock Exchange on the date of grant (the “Option Grant”). The Option Grant will be granted under and subject to the terms, definitions and provisions of the Company’s 2005 Stock Plan (the “Plan”) and, except as provided in this Agreement, will be scheduled to vest in accordance with the Company’s standard stock option vesting schedule assuming Executive’s continued employment with the Company on each scheduled vesting date. Notwithstanding anything in this Agreement to the contrary, the Option Grant shall be forfeited and Executive shall have no further rights thereunder, should Executive not become the Chief Executive Officer of the Company as of March 28, 2009. Except as provided in this Agreement, the Option Grant will be subject to the Company’s standard terms and conditions for options granted under the Plan.

(ii) As of March 16, 2009, Executive will also be granted 30,000 restricted stock units (the “RSU Grant”). The RSU Grant will be granted under and subject to the terms,

 

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definitions and provisions of the Company’s Plan, and, except as provided in this Agreement, will be scheduled to vest in accordance with the Company’s standard restricted stock unit vesting schedule assuming Executive’s continued employment with the Company on each scheduled vesting date. Notwithstanding anything in this Agreement to the contrary, the RSU Grant shall be forfeited and Executive shall have no further rights thereunder, should Executive not become the Chief Executive Officer of the Company as of March 28, 2009. Except as provided in this Agreement, the RSU Grant will be subject to the Company’s standard terms and conditions for restricted stock units granted under the Plan.

4. Employee Benefits.

(a) Generally. Executive will be eligible to participate in accordance with the terms of all Company employee benefit plans, policies and arrangements that are applicable to other executive officers of the Company, as such plans, policies and arrangements may exist from time to time.

(b) Vacation. Executive will be entitled to receive paid annual vacation in accordance with Company policy for other senior executive officers.

5. Expenses. The Company will reimburse Executive for reasonable travel, entertainment and other expenses incurred by Executive in the furtherance of the performance of Executive’s duties hereunder, in accordance with the Company’s expense reimbursement policy as in effect from time to time.

6. Termination of Employment. In the event Executive’s employment with the Company terminates for any reason, Executive will be entitled to any (a) unpaid Base Salary accrued up to the effective date of termination; (b) pay for accrued but unused vacation; (c) benefits or compensation as provided under the terms of any employee benefit and compensation agreements or plans applicable to Executive (e) unreimbursed business expenses required to be reimbursed to Executive, and (e) rights to indemnification Executive may have under the Company’s Articles of Incorporation, Bylaws, the Agreement, or separate indemnification agreement, as applicable. In addition, if the termination is by the Company without Cause or Executive resigns for Good Reason, Executive will be entitled to the amounts and benefits specified in Section 7.

7. Severance.

(a) Termination Without Cause or Resignation for Good Reason other than in Connection with a Change of Control. If Executive’s employment is terminated by the Company without Cause or if Executive resigns for Good Reason, and such termination is not in Connection with a Change of Control, then, subject to Section 8(a), Executive will receive: (i) a single lump sum cash severance payment equal to 150% of the Executive’s Base Salary for the year in which the termination occurs (less applicable tax withholdings); (ii) a single lump sum cash severance payment in an amount determined by multiplying the Target Annual Incentive by a fraction with a numerator equal to the number of days between the start of the current fiscal year and the date of termination and a denominator equal to 365 (for the avoidance of doubt, Executive shall be paid this severance payment in an amount determined pursuant to this Section 7(a)(ii) in lieu of the actual annual incentive for the year of termination which will be forfeited (regardless of the level of performance

 

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obtained thereunder as of such termination date)); (iii) fifty percent (50%) of Executive’s then outstanding and unvested stock options (including specifically the Initial Option), fifty percent (50%) of unvested restricted stock units (including specifically the RSU Grant) and fifty percent (50%) of any other equity award denominated in shares of Company Class A common stock (collectively the “Equity Awards”) shall become vested and, to the extent applicable, exercisable on the termination date; and (iv) reimbursement for premiums paid for continued health benefits for Executive (and any eligible dependents) under the Company’s health plans until the earlier of (A) eighteen (18) months, payable when such premiums are due (provided Executive validly elects to continue coverage under the Consolidated Omnibus Budget Reconciliation Act (“COBRA”), or (B) the date upon which Executive and Executive’s eligible dependents become covered under similar plans.

(b) Termination Without Cause or Resignation for Good Reason in Connection with a Change of Control. If Executive’s employment is terminated by the Company without Cause or by Executive for Good Reason, and the termination is in Connection with a Change of Control, then, subject to Section 8(a), Executive will receive: (i) a single lump sum cash severance payment equal to 200% of the Executive’s Base Salary for the year in which the termination occurs (less applicable tax withholdings); (ii) a single lump sum cash severance payment equal to 100% of the Target Annual Incentive; (iii) one hundred percent (100%) of Executive’s then outstanding and unvested Equity Awards shall become vested and, to the extent applicable, exercisable on the termination date; and (iv) reimbursement for premiums paid for continued health benefits for Executive (and any eligible dependents) under the Company’s health plans until the earlier of (A) twenty-four (24) months, payable when such premiums are due (provided Executive validly elects to continue coverage under COBRA), or (B) the date upon which Executive and Executive’s eligible dependents become covered under similar plans.

(c) Voluntary Termination Without Good Reason or Termination for Cause. If Executive’s employment is terminated voluntarily, including due to death or Disability, without Good Reason or is terminated for Cause by the Company, then, except as provided in Section 6, (i) all further vesting of Executive’s outstanding Equity Awards will terminate immediately (unless the terms and conditions of the Plan and the applicable Equity Awards provide otherwise); (ii) all payments of compensation by the Company to Executive hereunder will terminate immediately, and (iii) Executive will be eligible for severance benefits only in accordance with the Company’s then established, if any, severance plans and arrangements.

8. Conditions to Receipt of Severance; No Duty to Mitigate.

(a) Separation Agreement and Release of Claims. The receipt of any severance or other benefits pursuant to Section 7 will be subject to Executive signing, returning to the Company within fifty (50) days and not revoking a release of claims in a form attached hereto as Exhibit A. No severance or other benefits will be paid or provided, and Executive will forfeit any rights to such severance or other benefits, until the release agreement becomes effective. Any payments that are delayed until the release of claims becomes effective shall be paid to Executive in a cash lump sum within sixty (60) days following Executive’s termination of employment; provided that, in no event shall severance payments or benefits be paid or provided until the release of claims actually becomes effective and irrevocable.

 

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(b) Non-solicitation. The receipt of any severance or other benefits pursuant to Section 7 will be subject to Executive agreeing that during the Employment Term and Continuance Period, Executive will not solicit any employee of the Company (other than Executive’s personal assistant) for employment other than at the Company.

(c) Non-disparagement. During the Employment Term and the Continuance Period, neither the Company nor the Executive will knowingly and materially disparage, criticize, or otherwise make any derogatory statements regarding the other. Notwithstanding the foregoing, nothing contained in this agreement will be deemed to restrict Executive, the Company or any of the Company’s current or former officers and/or directors from providing information to any governmental or regulatory agency (or in any way limit the content of any such information) to the extent they are requested or required to provide such information pursuant to applicable law or regulation.

(d) Other Requirements. Executive’s receipt of severance payments pursuant to this Agreement will be subject to Executive continuing to comply with the terms of the Confidential Information Agreement and the provisions of this Section 8.

(e) No Duty to Mitigate. Executive will not be required to mitigate the amount of any payment contemplated by this Agreement, nor will any earnings that Executive may receive from any other source reduce any such payment.

9. Excise Tax.

(a) In the event that the severance and other benefits provided in this Agreement or otherwise payable to Executive constitute “parachute payments” under Section 280G of the Internal Revenue Code of 1986, as amended (the “Code”) and would be subject to the excise tax imposed by Section 4999 of the Code, then, except as provided by Section 9(b) below, Executive’s benefits shall be either (i) delivered in full, or (ii) delivered as to such lesser extent which would result in no portion of such benefits being subject to the excise tax, whichever of the foregoing amounts results in the receipt by Executive on an after-tax basis, of the greatest amount of benefits. Any reduction in payments and/or benefits required by this Section shall occur in the following order: (i) reduction of cash payments; (ii) reduction of vesting acceleration of Equity Awards; and (iii) reduction of other benefits paid or provided to Executive. In the event that acceleration of vesting of Equity Awards is to be reduced, such acceleration of vesting shall be cancelled in the reverse order of the date of grant for the Executive’s Equity Awards. If two or more Equity Awards are granted on the same day, the Equity Awards will be reduced on a pro-rata basis.

(b) Unless Executive and the Company agree otherwise in writing, the determination of Executive’s excise tax liability will be made in writing by an independent auditor of national reputation and expertise in assessing liability under Sections 280G or 4999 of the Code as mutually agreed between the Company and Executive (the “Accountants”). For purposes of making the calculations required by this Section 9, the Accountants may make reasonable assumptions and approximations concerning applicable taxes and may rely on reasonable, good faith interpretations concerning the application of Sections 280G and 4999 of the Code. Executive and the Company agree to furnish such information and documents as the Accountants may reasonably request in order to make a determination under this Section 9. The Company will bear all costs the Accountants and/or Executive may reasonably incur in connection with any calculations contemplated by this Section 9.

 

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10. Definitions.

(a) Cause. For purposes of this Agreement, “Cause” will mean:

(i) Executive’s willful, material and continued failure to perform the duties and responsibilities of his position (other than as a result of Executive’s illness or injury) after there has been delivered to Executive a written demand for performance from the CEO which describes the basis for the CEO’s belief that Executive has not substantially performed his duties and provides Executive with thirty (30) days to take corrective action;

(ii) Any willful and material act of personal dishonesty taken by Executive in connection with his responsibilities as an employee of the Company with the intention that such action may result in the substantial personal enrichment of Executive;

(iii) Executive’s conviction of, or plea of nolo contendere to, a felony that the Board in good faith believes has or will have a material detrimental effect on the Company’s financial condition or reputation;

(iv) A willful breach of any fiduciary duty owed to the Company by Executive that has a material detrimental effect on the Company’s financial condition or reputation;

(v) Executive being found liable in any Securities and Exchange Commission or other civil or criminal securities law action (regardless of whether or not Executive admits or denies liability), which the Board in good faith determines will have a material detrimental effect on the Company’s financial condition or reputation;

(vi) Executive entering any cease and desist order with respect to any action which would bar Executive from service as an executive officer or member of a board of directors of any publicly-traded company (regardless of whether or not Executive admits or denies liability);

(vii) Executive (A) obstructing or impeding; (B) endeavoring to obstruct or impede, or (C) failing to materially cooperate with, any investigation authorized by the Board or any governmental or self-regulatory entity (an “Investigation”). However, Executive’s failure to waive attorney-client privilege relating to communications with Executive’s own attorney in connection with an Investigation will not constitute “Cause”; or

(viii) Executive’s disqualification or bar by any governmental or self-regulatory authority from serving in the capacity contemplated by this Agreement, if (A) the disqualification or bar continues for more than thirty (30) days, and (B) during that period the Company uses its commercially reasonable efforts to cause the disqualification or bar to be lifted. While any disqualification or bar continues during Executive’s employment, Executive will serve in the capacity contemplated by this Agreement to whatever extent legally permissible and, if Executive’s employment is not permissible, Executive will be placed on administrative leave (which will be paid to the extent legally permissible).

 

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Other than for a termination pursuant to Section 10(a)(iii), Executive shall receive notice and an opportunity to be heard before the Board with Executive’s own attorney before any termination for Cause is deemed effective. Notwithstanding anything to the contrary, the Board may immediately place Executive on administrative leave (with full pay and benefits to the extent legally permissible) and suspend all access to Company information, employees and business should Executive wish to avail himself of his opportunity to be heard before the Board prior to a termination for Cause. If Executive avails himself of his opportunity to be heard before the Board, and then fails to make himself available to the Board within five (5) business days of such request to be heard, the Board may thereafter cancel the administrative leave and terminate Executive for Cause.

(b) Change of Control. For purposes of this Agreement, “Change of Control” means the occurrence of any of the following events:

(i) Any “person” (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) other than a Permitted Transferee (as defined in the Company’s Amended and Restated Certificate of Incorporation) becomes the “beneficial owner” (as defined in Rule 13d-3 of the Exchange Act), directly or indirectly, of securities of the Company representing more than fifty percent (50%) of the total voting power represented by the Company’s then outstanding voting securities; or

(ii) The consummation of the sale or disposition by the Company of all or substantially all of the Company’s assets; or

(iii) A change in the composition of the Board occurring within a one-year period, as a result of which fewer than a majority of the directors are Incumbent Directors. “Incumbent Directors” means directors who either (A) are directors as of the April 1, 2009, or (B) are elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the directors at the time of such election or nomination (but will not include an individual whose election or nomination is in connection with an actual or threatened proxy contest relating to the election of directors to the Company); or

(iv) The consummation of a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or its parent) at least fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity or its parent outstanding immediately after such merger or consolidation.

(c) Continuance Period. For purposes of this Agreement, “Continuance Period” will mean the period of time beginning on the date of the termination of Executive’s employment and ending on the second anniversary of the date of termination.

(d) Disability. For purposes of this Agreement, “Disability” will have the same meaning as “Disability” is defined in the Plan.

(e) Good Reason. For purposes of this Agreement, “Good Reason” means the occurrence of any of the following, without Executive’s express written consent:

(i) The assignment to or removal from executive of duties or responsibilities, that results in a material reduction of executive duties, authority, title, or scope of responsibilities, whether occurring before or after a Change in Control;

 

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(ii) A material reduction in Executive’s Base Salary or Target Annual Incentive as in effect immediately prior to such reduction other than pursuant to a reduction that also is applied to substantially all other executive officers of the Company and which reduction reduces the Base Salary and/or Target Annual Incentive by a percentage reduction that is no greater than 10%;

(iii) The relocation of Executive to a facility or location outside a fifty (50) mile radius from Executive’s then current place of employment or residence;

(iv) The Company’s material breach of any provision of this Agreement; or

(v) The failure of the Company to obtain the assumption of this Agreement by a successor.

The notification and placement of Executive on administrative leave pending a potential determination by the Board that Executive may be terminated for Cause shall not constitute Good Reason for purposes of this Agreement. Executive will not resign for Good Reason without first providing the Company with written notice of the acts or omissions constituting the grounds for “Good Reason” within ninety (90) days of the initial existence of the grounds for “Good Reason” and, if such grounds are susceptible to cure, a reasonable cure period of up to thirty (30) days following the date of such notice. Any resignation for Good Reason must occur within two years of the initial existence of the grounds constituting Good Reason.

(f) In Connection with a Change of Control. For purposes of this Agreement, a termination of Executive’s employment with the Company is “in Connection with a Change of Control” if Executive’s employment is terminated within twelve (12) months following a Change of Control, or prior to a Change of Control upon the occurrence of all the following: (1) prior to a Change of Control, the termination of the Executive’s employment by the Company without Cause or the termination of the Executive’s employment by the Executive for a Good Reason, (2) the Executive and Board (as constituted immediately prior to the Change of Control) reasonably determines that such termination (or Good Reason event) was the result of a third party who had indicated an intention or taken steps reasonably calculated to effect a Change of Control, and (3) a Change of Control involving such third party (or a party competing with such third party to effectuate a Change of Control) does occur within sixty (60) days from the date of such termination.

11. Indemnification and D&O Insurance. Subject to applicable law, Executive will be provided indemnification to the extent permitted by the Company’s Articles of Incorporation or Bylaws, including, if applicable, any directors and officers insurance policies, with such indemnification to be on terms determined by the Board or any of its committees, but on terms no less favorable than provided to any other Company executive officer or director and subject to the terms of any separate written indemnification agreement. The Company shall also maintain commercially reasonable D&O insurance covering Executive during the Employment Term in such amount and pursuant to such terms as is typical and customary for companies of similar size and nature as the Company.

 

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12. Confidential Information. Executive agrees that he shall remain bound by the Company’s confidential information and intellectual property agreement previously executed by the Executive (the “Confidential Information Agreement”).

13. Assignment. This Agreement will be binding upon and inure to the benefit of (a) the heirs, executors and legal representatives of Executive upon Executive’s death, and (b) any successor of the Company. Any such successor of the Company will be deemed substituted for the Company under the terms of this Agreement for all purposes. For this purpose, “successor” means any person, firm, corporation, or other business entity which at any time, whether by purchase, merger, or otherwise, directly or indirectly acquires all or substantially all of the assets or business of the Company. None of the rights of Executive to receive any form of compensation payable pursuant to this Agreement may be assigned or transferred except by will or the laws of descent and distribution. Any other attempted assignment, transfer, conveyance, or other disposition of Executive’s right to compensation or other benefits will be null and void.

14. Notices. All notices, requests, demands and other communications called for hereunder will be in writing and will be deemed given (a) on the date of delivery if delivered personally; (b) one (1) day after being sent overnight by a well-established commercial overnight service, or (c) four (4) days after being mailed by registered or certified mail, return receipt requested, prepaid and addressed to the parties or their successors at the following addresses, or at such other addresses as the parties may later designate in writing:

If to the Company:

Attn: Chairman of the Compensation Committee

c/o General Counsel

Dolby Laboratories, Inc.

100 Potrero Avenue

San Francisco, CA 94103

If to Executive:

at the last residential address known by the Company.

15. Severability. If any provision hereof becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable, or void, this Agreement will continue in full force and effect without said provision.

16. Arbitration. The Parties agree that any and all disputes arising out of the terms of this Agreement, Executive’s employment by the Company, Executive’s service as an officer or director of the Company, or Executive’s compensation and benefits, their interpretation and any of the matters herein released, will be subject to binding arbitration. In the event of a dispute, the parties (or their legal representatives) will promptly confer to select a single arbitrator mutually acceptable to both parties. If the parties cannot agree on an Arbitrator, then the moving party may file a demand for arbitration with the American Arbitration Association (“AAA”) in San Francisco, California,

 

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who will be selected and appointed consistent with the AAA-Employment Dispute Resolution Rules, except that such arbitrator must have the qualifications set forth in this paragraph. Any arbitration will be conducted in a manner consistent with AAA National Rules for the Resolution of Employment Disputes, supplemented by the California Rules of Civil Procedure. The Parties further agree that the prevailing party in any arbitration will be entitled to injunctive relief in any court of competent jurisdiction to enforce the arbitration award. The Parties hereby agree to waive their right to have any dispute between them resolved in a court of law by a judge or jury. This paragraph will not prevent either party from seeking injunctive relief (or any other provisional remedy) from any court having jurisdiction over the Parties and the subject matter of their dispute relating to Executive’s obligations under this Agreement and the Confidential Information Agreement. The Company will pay the direct costs and expenses of any such arbitration, including the fees and costs of the arbitrator.

17. Integration. This Agreement, together with the Confidential Information Agreement and the standard forms of Equity Award agreements that describe Executive’s outstanding Equity Awards, represents the entire agreement and understanding between the parties as to the subject matter herein and supersedes all prior or contemporaneous agreements whether written or oral. No waiver, alteration, or modification of any of the provisions of this Agreement will be binding unless in a writing and signed by duly authorized representatives of the parties hereto. In entering into this Agreement, no party has relied on or made any representation, warranty, inducement, promise, or understanding that is not in this Agreement. To the extent that any provisions of this Agreement conflict with those of any other agreement to be signed upon Executive’s hire, the terms in this Agreement will prevail.

18. Waiver of Breach. The waiver of a breach of any term or provision of this Agreement, which must be in writing, will not operate as or be construed to be a waiver of any other previous or subsequent breach of this Agreement.

19. Survival. The Confidential Information Agreement and the Company’s and Executive’s responsibilities under Sections 7 and 8 will survive the termination of this Agreement.

20. Headings. All captions and Section headings used in this Agreement are for convenient reference only and do not form a part of this Agreement.

21. Tax Withholding. All payments made pursuant to this Agreement will be subject to withholding of applicable taxes.

22. Governing Law. This Agreement will be governed by the laws of the State of California without regard to its conflict of laws provisions.

23. Acknowledgment. Executive acknowledges that he has had the opportunity to discuss this matter with and obtain advice from his private attorney, has had sufficient time to, and has carefully read and fully understands all the provisions of this Agreement, and is knowingly and voluntarily entering into this Agreement.

 

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24. Code Section 409A.

(a) Notwithstanding anything to the contrary in this Agreement, no Deferred Compensation Separation Benefits (as defined below) will become payable under this Agreement until Executive has a “separation from service” within the meaning of Section 409A of the Code (“Separation from Service”), and the final regulations and guidance promulgated thereunder (“Section 409A”). Further, if Executive is a “specified employee” within the meaning of Section 409A at the time of Executive’s termination (other than due to death), and the severance payable to Executive, if any, pursuant to this Agreement, when considered together with any other severance payments or separation benefits, constitute deferred compensation under Section 409A (together, the “Deferred Compensation Separation Benefits”), such Deferred Compensation Separation Payments that are otherwise payable within the first six (6) months following Executive’s Separation from Service will become payable on the first payroll date that occurs on or after the date six (6) months and one (1) day following the date of Executive’s Separation from Service. All subsequent Deferred Compensation Separation Benefits, if any, will be payable in accordance with the payment schedule applicable to each payment or benefit. Notwithstanding anything herein to the contrary, if Executive dies following his Separation from Service but prior to the six (6) month anniversary of his termination, then any payments delayed in accordance with this paragraph will be payable in a lump sum as soon as administratively practicable after the date of Executive’s death and all other Deferred Compensation Separation Benefits will be payable in accordance with the payment schedule applicable to each payment or benefit. Each payment and benefit payable under this Agreement is intended to constitute separate payments for purposes of Section 1.409A-2(b)(2) of the Treasury Regulations.

(b) Any amount paid under this Agreement that satisfies the requirements of the “short-term deferral” rule set forth in Section 1.409A-1(b)(4) of the Treasury Regulations shall not constitute Deferred Compensation Separation Benefits for purposes of Section 24(a) above.

(c) Any amount paid under this Agreement that qualifies as a payment made as a result of an involuntary separation from service pursuant to Section 1.409A-1(b)(9)(iii) of the Treasury Regulations that does not exceed the Section 409A Limit (as defined below) shall not constitute Deferred Compensation Separation Benefits for purposes of Section 24(a) above. For purposes of this Section 24(c), “Section 409A Limit” will mean the lesser of two (2) times: (i) Executive’s annualized compensation based upon the annual rate of pay paid to Executive during the calendar year preceding the calendar year of Executive’s termination of employment as determined under Treasury Regulation 1.409A-1(b)(9)(iii)(A)(1); or (ii) the maximum amount that may be taken into account under a qualified plan pursuant to Section 401(a)(17) of the Code for the year in which Executive’s employment is terminated.

(d) To the extent that any reimbursements provided to Executive constitute Deferred Compensation, such amounts shall be paid or reimbursed to Executive promptly, but in no event later than December 31 of the year following the year in which the expense is incurred. The amount of any such payments eligible for reimbursement in one year shall not affect the payments or expenses that are eligible for payment or reimbursement in any other taxable year, and Executive’s right to such payments or reimbursement shall not be subject to liquidation or exchange for any other benefit.

(e) The foregoing provisions are intended to comply with the requirements of Section 409A so that none of the severance payments and benefits to be provided hereunder will be

 

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subject to the additional tax imposed under Section 409A, and any ambiguities herein will be interpreted to so comply. The Company and Executive agree to work together in good faith to consider amendments to this Agreement and to take such reasonable actions which are necessary, appropriate or desirable to avoid imposition of any additional tax or income recognition prior to actual payment to Executive under Section 409A.

25. Counterparts. This Agreement may be executed in counterparts, and each counterpart will have the same force and effect as an original and will constitute an effective, binding agreement on the part of each of the undersigned.

26. Attorneys Fees. The Company shall reimburse Executive for reasonable fees and expenses of Executive’s counsel (up to $10,000) incurred in connection with the negotiation and execution of this Agreement and the Release.

 

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IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case of the Company by a duly authorized individual, as of the day and year written below.

 

COMPANY:    

DOLBY LABORATORIES, INC.

   

/s/ N.W. Jasper, Jr.

    Date: February 24, 2009

NAME:

  N.W. Jasper, Jr.    

TITLE:

  President and Chief Executive Officer    

EXECUTIVE:

   

/s/ Kevin Yeaman

    Date: February 24, 2009

KEVIN YEAMAN

   

[SIGNATURE PAGE TO YEAMAN EMPLOYMENT AGREEMENT]

 

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Services Agreement dated February 24, 2009, Peter Gotcher

Exhibit 10.3

DOLBY LABORATORIES, INC.

SERVICES AGREEMENT

This Services Agreement (“Agreement”) is entered into as of February 24, 2009, by and between Dolby Laboratories, Inc., a Delaware corporation (the “Company”) and Peter Gotcher (“Consultant”).

WHEREAS, the Company desires to retain Consultant as an independent contractor to perform consulting services for the Company, and Consultant is willing to perform such services, on the terms described below. In consideration of the mutual promises contained herein, the parties agree as follows:

1. Services. As of March 1, 2009 (the “Effective Date”), Consultant will serve as Executive Chairman of the Company. Consultant will provide overall leadership to the Board of Directors (the “Board”) and advise and consult on technologies and markets and such other matters as the Board may request. The services to be performed by Consultant hereunder shall be referred to herein as the “Services.” The period of the consultancy under this Agreement is referred to herein as the “Consultancy Term.” During the Consultancy Term, Consultant will continue to serve as a member of the Board, subject to any required Board and/or stockholder approval. During the Consultancy Term, Consultant will perform his duties faithfully and to the best of his ability. The Company and Consultant agree that Consultant will devote approximately 30% of his time to performance of the Services.

2. Compensation.

A. Cash Compensation. The Company will pay Consultant $29,166.67 per month ($350,000.00 annually) for the Services, with such amounts to be paid pursuant to the Company’s normal consultant payment practices. In exchange for the compensation provided herein, Consultant hereby declines to accept, and waives any right to receive, for the period during which Consultant provides the Services under this Agreement, any other compensation paid by the Company to its non-employee members of the Board, including specifically all retainers, meeting fees and the automatic grant of Outside Director Awards (as defined in the Company’s 2005 Stock Plan) provided in Section 14 of the Company’s 2005 Stock Plan.

B. Stock Award Grant. The Board (or its Compensation Committee) shall, following the Effective Date, grant Consultant a restricted stock unit award covering 30,000 shares of the Company’s Class A Common Stock. Twenty thousand of the shares subject to the restricted stock unit award shall vest on the first anniversary of the Effective Date subject to Consultant continuing to provide the Services through such date and no shares shall vest before such date and no rights to any vesting shall be earned or accrued prior to such date. The remaining ten thousand of such shares shall vest on second anniversary of the Effective Date subject to Consultant continuing to provide the Services through such date. This restricted stock unit award shall be subject to the terms and conditions of the Company’s 2005 Stock Plan and form of restricted stock unit agreement.


C. Bonus. The Board (or its Compensation Committee) shall, no later than thirty days following the Effective Date, determine the performance goals (which shall relate to the Services Consultant will provide to the Company) required to be met for the future grant to Consultant of a nonstatutory stock option to purchase a number of shares of the Company’s Class A Common Stock in an amount equal to between $100,000 and $300,000 in Black-Scholes value as of the date of grant. The size of the grant shall be determined by the Compensation Committee no later than 30 days prior to the first anniversary of the Effective Date and shall be based on its assessment of the achievement of the performance goals by Consultant. The stock option will become fifty percent (50%) vested on the date of the grant (subject to Consultant continuing to provide Services under this Agreement on such date) and the remaining 50% will fully vest on the first anniversary of the date of the grant (subject to Consultant continuing to provide Services under this Agreement on such date). The grant shall be made on February 15, 2010 (or the first business day thereafter, if February 15, 2010 is not a business day). The stock option shall have an exercise price equal to the fair market value of the Company’s Class A Common Stock on the date of grant as determined under the Company’s 2005 Stock Plan and the option grant policy applicable to grants under such plan. The stock option shall also be subject to the terms and conditions of the Company’s 2005 Stock Plan and form of stock option agreement.

The Board (or its Compensation Committee) shall, no later than thirty days prior to the first anniversary of the Effective Date, determine the performance goals (which shall relate to the Services Consultant will provide to the Company) required to be met for the future grant to Consultant of a nonstatutory stock option to purchase a number of shares of the Company’s Class A Common Stock in an amount equal to between $100,000 and $300,000 in Black-Scholes value as of the date of grant. The size of the grant shall be determined by the Compensation Committee no later than 30 days prior to the second anniversary of the Effective Date and shall be based on its assessment of the achievement of the performance goals by Consultant. The stock option will become fifty percent (50%) vested on the date of the grant (subject to Consultant continuing to provide Services under this Agreement on such date) and the remaining 50% will fully vest on the first anniversary of the date of the grant (subject to Consultant continuing to provide Services under this Agreement on such date or otherwise continuing to provide services to the Company (e.g., as a director) on such date in a manner such that vesting of Consultant’s equity awards has continued under the Company’s 2005 Stock Plan). The grant date shall be February 15, 2011 (or the first business day thereafter if February 15, 2011 is not a business day). The stock option shall have an exercise price equal to the fair market value of the Company’s Class A Common Stock on the date of grant as determined under the Company’s 2005 Stock Plan and the option grant policy applicable to grants under such plan. The stock option shall also be subject to the terms and conditions of the Company’s 2005 Stock Plan and form of stock option agreement.

D. Expense Reimbursement. The Company will reimburse Consultant, in accordance with Company policy, for all reasonable expenses incurred by Consultant in performing the Services pursuant to this Agreement.

3. Withholding. Consultant shall have full responsibility for applicable withholding taxes for all compensation paid to Consultant under this Agreement, and for compliance with all applicable labor and employment requirements with respect to Consultant’s self-employment, sole proprietorship or other form of business organization.

 

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4. Confidentiality/Corporate Opportunity. Consultant will maintain in confidence and will not, directly or indirectly, disclose or use, either during or after the term of this Agreement, any proprietary information, confidential information, know-how or trade secrets belonging to Company, whether or not it is in written or permanent form, except to the extent necessary to perform the Services and to perform Consultant’s duties as a member of the board of directors of the Company. Upon the written request of Company, Consultant shall return to Company all Company proprietary information, confidential information, know-how or trade secrets in Consultant’s possession. Consultant shall not appropriate any corporate opportunity rightfully belonging to the Company.

5. Conflicting Obligations. Consultant certifies that Consultant has no outstanding agreement or obligation that is in conflict with any of the provisions of this Agreement or that would preclude Consultant from complying with the provisions of this Agreement. Consultant will not enter into any such conflicting agreement during the term of this Agreement.

6. Independent Contractor; Benefits. It is the express intention of the Company and Consultant that Consultant performs the Services as an independent contractor to the Company. Nothing in this Agreement shall in any way be construed to constitute Consultant as an employee. Consultant acknowledges and agrees that Consultant is obligated to report as income all compensation received by Consultant pursuant to this Agreement. Consultant agrees to and acknowledges the obligation to pay all self-employment and other taxes on such income.

7. Termination and Survival.

(a) A. Consultancy Term and Termination. The Consultancy Term shall be two years from the Effective Date. The Company may terminate this Agreement for “Cause”. “Cause” means, the Consultant’s: (i) refusal or failure to act in accordance with any specific, lawful direction or order of the Company; (ii) unfitness or unavailability for service or unsatisfactory performance (other than as a result of disability); (iii) performance of any act or failure to perform any act in bad faith and to the detriment of the Company; (iv) dishonesty, intentional misconduct or material breach of any agreement with the Company; or (v) commission of a crime involving dishonesty, breach of trust, or physical or emotional harm to any person. At least 30 days prior to the termination of the Agreement pursuant to (i) or (ii) above, the Company shall provide the Consultant with notice of the Company’s intent to terminate, the reason therefore, and an opportunity for the Consultant to cure such defects in his service to the Company’s satisfaction.

The Agreement will terminate immediately upon the death or disability of Consultant.

B. Survival. Upon any termination, all rights and duties of the Company and Consultant toward each other under this Agreement shall cease except:

(1) The Company will pay, within thirty (30) days after the effective date of termination, all amounts owing to Consultant for Services completed and accepted by the Company prior to the termination date and related reimbursable expenses, if any, submitted in accordance with the Company’s policies; and

 

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(2) All Sections of this Agreement other than Section 1 (Services) and Section 2 (Compensation) will survive termination of this Agreement.

8. Miscellaneous.

A. Governing Law; Consent to Personal Jurisdiction. This Agreement shall be governed by the laws of California without regard to California’s conflicts of law rules. To the extent that any lawsuit is permitted under this Agreement, the parties hereby expressly consent to the personal and exclusive jurisdiction and venue of the state and federal courts located in California.

B. Assignability. This Agreement will be binding upon Consultant’s heirs, executors, assigns, administrators, and other legal representatives, and will be for the benefit of the Company, its successors, and its assigns. There are no intended third-party beneficiaries to this Agreement, except as expressly stated. Except as otherwise provided in this Agreement, Consultant may not sell, assign, or hdelegate any rights or obligations under this Agreement. Notwithstanding anything to the contrary herein, Company may assign this Agreement and its rights and obligations under this Agreement to any successor to all or substantially all of Company’s relevant assets, whether by merger, consolidation, sale of assets or stock, or otherwise.

C. Entire Agreement. This Agreement constitutes the entire agreement between the parties with respect to the subject matter of this Agreement and supersedes all prior written and oral agreements between the parties regarding the subject matter of this Agreement. Consultant represents and warrants that he is not relying on any statement or representation not contained in this Agreement.

D. Headings. Headings are used in this Agreement for reference only and shall not be considered when interpreting this Agreement.

E. Notices. Any notice or other communication required or permitted by this Agreement to be given to a party shall be in writing and shall be deemed given (i) if delivered personally or by commercial messenger or courier service, (ii) when sent by confirmed facsimile; or (iii) mailed by U.S. registered or certified mail (return receipt requested), to the party at the party’s address written below or at such other address as the party may have previously specified by like notice. If sent by mail, delivery shall be deemed effective three business days after mailing in accordance with this Section.

(1) If to the Company, to:

Dolby Laboratories, Inc.

100 Potrero Avenue

San Francisco, CA 94103

Attention: Mark S. Anderson

(2) If to Consultant, to the last address of Consultant provided by Consultant to the Company.

 

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F. Severability. If any provision of this Agreement is found to be illegal or unenforceable, the other provisions shall remain effective and enforceable to the greatest extent permitted by law.

(signature page follows)

 

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IN WITNESS WHEREOF, the parties hereto have executed this Services Agreement as of the date first written above.

 

CONSULTANT     DOLBY LABORATORIES, INC.

/s/ Peter Gotcher

    By:  

/s/ N.W. Jasper, Jr.

Peter Gotcher     Title:  

President and Chief Executive Officer

 

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Separation Agreement and Release dated March 3, 2009, Timothy A. Partridge

Exhibit 10.4

SEPARATION AGREEMENT AND RELEASE

This Separation Agreement and Release (“Agreement”) is made by and between Timothy A. Partridge (“Executive”) and Dolby Laboratories, Inc., a Delaware corporation, and its direct and indirect subsidiaries (together, the “Company”) (collectively referred to as the “Parties” or individually referred to as a “Party”).

RECITALS

WHEREAS, Executive was employed by the Company;

WHEREAS, Executive signed an Employee Proprietary Rights and Non-Disclosure Agreement and Conflict of Interest Policy with the Company on July 6, 1999 (the “Confidentiality Agreement”);

WHEREAS, Executive signed a Policy Regarding Reporting of Financial and Accounting Concerns, an Acknowledgement of Receipt of Code of Business Conduct and Ethics, and an Employee Handbook (the “Business Policies”);

WHEREAS, the Company and Executive have entered into stock option and restricted stock unit agreements on file with the Company, pursuant to the Company’s 2000 and/or 2005 Stock Plans (collectively the “Stock Agreements”);

WHEREAS, Executive’s employment with the Company will terminate effective May 1, 2009 (the “Separation Date”);

WHEREAS, Executive will continue to perform on-site services for the Company through and including March 6, 2009 (the “Transition Date”), except as otherwise requested by the Company, after which Executive will provide certain off-site transitional services through and including the Separation Date (the “Transitional Services”); and

WHEREAS, the Parties wish to resolve any and all disputes, claims, complaints, grievances, charges, actions, petitions, and demands that the Executive may have against the Company and any of the Releasees as defined below, including, but not limited to, any and all claims arising out of or in any way related to Executive’s employment with or separation from the Company;

NOW, THEREFORE, in consideration of the mutual promises made herein, the Company and Executive hereby agree as follows:

COVENANTS

1. Consideration.

a. Payment. The Company agrees to pay Employee a lump sum equivalent to eighteen (18) months of Employee’s base salary, for a total of Four Hundred Ninety Five Thousand Dollars ($495,000.00), less applicable withholding. This payment will be made to Employee within ten (10) business days after the Effective Date of this Agreement.

b. Outplacement Services. The Company agrees, following the Effective Date of this Agreement, to pay up to an aggregate total of Twenty Five Thousand Dollars ($25,000.00) to (i) Right Management Inc. and/or (ii) Executive Edge (together, the “Outplacement Providers”) in


relation to Executive’s personal use of the Outplacement Providers’ transition, coaching, and/or outplacement services (the “Outplacement Services”). Payment for Outplacement Services shall be made by the Company directly to the Outplacement Providers.

Executive acknowledges and agrees that the consideration provided to him hereunder fully satisfies any obligation that the Company had to pay Executive wages or any other compensation for any of the services that Executive rendered to the Company, that the amount paid is in excess of any disputed wage claim, if any, that Executive may have. To the extent any wage dispute exists, Executive specifically acknowledges that the consideration paid shall be deemed to be paid first in satisfaction of any disputed wage claim with the remainder sufficient to act as consideration for the release of claims set forth herein, and that Executive has not earned and is not entitled to receive any additional wages or other form of compensation from the Company.

2. Resignation. Executive will resign from his employment at the Company effective May 1, 2009. Executive agrees to execute any necessary forms or other documents required to effect such resignation as a matter of state or federal law.

3. Transitional Services. The Parties agree that Executive shall remain employed by the Company (but shall no longer be an officer of the Company) between the Transition Date and the Separation Date for the limited purpose of transitioning Executive’s duties, subject to Executive remaining materially compliant with the terms of this Agreement, the Confidentiality Agreement, and the Business Policies (the “Transitional Period”). During the Transitional Period, the Company will continue to pay Executive his base salary, and Executive will remain eligible for such standard Company-sponsored benefits as made generally available to employees of the Company. Executive agrees during the Transitional Period to provide assistance with respect to the Company’s transition to new management as reasonably requested by the Company. Executive is not required or expected to provide on-site services during the Transitional Period, except as reasonably requested by the Company in advance, but Executive agrees to remain generally accessible to the Company by phone, personal email, or other standard communication means, and to cooperate with the Company to the extent reasonably requested. During the Transitional Period, Executive acknowledges and agrees that he is not authorized to act as an agent of the Company in any way outside the scope of Transitional Services requested by the Company.

4. Supplemental Release. Executive agrees, following the end of the Transitional Services, to sign the Supplemental Release attached hereto as Exhibit A (the “Supplemental Release”). Executive agrees he will not sign the Supplemental Release until on or after the Separation Date, and acknowledges and agrees that any payments or benefits provided for under the Supplemental Release are expressly conditioned upon his signing and not revoking the Supplemental Release.

5. Stock. The Parties agree that for purposes of determining vesting under the Stock Agreements, Executive will be considered to have vested only up to the Separation Date. Executive should consult with the grant documents on file with the Company regarding the number of vested stock options and restricted stock units. The terms and conditions, including specifically the forfeiture of unvested awards and the period of post-termination exercise for the stock options, shall continue to be governed by the terms and conditions of the Stock Agreements.

6. Benefits. Executive’s health insurance benefits shall cease on the Separation Date, subject to Executive’s right to continue his health insurance under COBRA. Executive’s participation in all benefits and incidents of employment, including, but not limited to, vesting in stock options, and the accrual of bonuses, vacation, and paid time off, shall cease as of the Separation Date.

 

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7. Payment of Salary and Receipt of All Benefits. Executive acknowledges and represents that, other than the consideration set forth in this Agreement, the Company has paid or provided all salary, wages, bonuses, accrued vacation/paid time off, leave, housing allowances, relocation costs, interest, severance, outplacement costs, fees, reimbursable expenses, commissions, stock, stock options, vesting, and any and all other benefits and compensation due to Executive. Executive further acknowledges and represents that he has received any leave to which he was entitled or which he requested, if any, under the California Family Rights Act and/or the Family Medical Leave Act, and that he did not sustain any workplace injury, during his employment with the Company.

8. Release of Claims. Executive agrees that the foregoing consideration represents settlement in full of all outstanding obligations owed to Executive by the Company and its current and former officers, directors, employees, agents, investors, attorneys, shareholders, administrators, affiliates, benefit plans, plan administrators, insurers, divisions, and subsidiaries, and predecessor and successor corporations and assigns (collectively, the “Releasees”). Executive, on his own behalf and on behalf of his respective heirs, family members, executors, agents, and assigns, hereby and forever releases the Releasees from, and agrees not to sue concerning, or in any manner to institute, prosecute, or pursue, any claim, complaint, charge, duty, obligation, or cause of action relating to any matters of any kind, whether presently known or unknown, suspected or unsuspected, that Executive may possess against any of the Releasees arising from any omissions, acts, facts, or damages that have occurred up until and including the Effective Date of this Agreement, including, without limitation:

a. any and all claims relating to or arising from Executive’s employment relationship with the Company and the termination of that relationship;

b. any and all claims relating to, or arising from, Executive’s right to purchase, or actual purchase of shares of stock of the Company, including, without limitation, any claims for fraud, misrepresentation, breach of fiduciary duty, breach of duty under applicable state corporate law, and securities fraud under any state or federal law;

c. any and all claims for wrongful discharge of employment; termination in violation of public policy; discrimination; harassment; retaliation; breach of contract, both express and implied; breach of covenant of good faith and fair dealing, both express and implied; promissory estoppel; negligent or intentional infliction of emotional distress; fraud; negligent or intentional misrepresentation; negligent or intentional interference with contract or prospective economic advantage; unfair business practices; defamation; libel; slander; negligence; personal injury; assault; battery; invasion of privacy; false imprisonment; conversion; and disability benefits;

d. any and all claims for violation of any federal, state, or municipal statute, including, but not limited to, Title VII of the Civil Rights Act of 1964; Sections 1981 through 1988 of Title 42 of the United States Code, as amended; the Civil Rights Act of 1991; the Rehabilitation Act of 1973; the Americans with Disabilities Act of 1990; the Equal Pay Act; the Fair Labor Standards Act, except as prohibited by law; the Fair Credit Reporting Act; the Immigration Reform and Control Act, as amended; the Occupational Safety and Health Act, as amended; the California Occupational Safety and Health Act, as amended; the Age Discrimination in Employment Act of 1967; the Older Workers Benefit Protection Act; the Employee Retirement Income Security Act of

 

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1974; the Worker Adjustment and Retraining Notification Act; the Family and Medical Leave Act, except as prohibited by law; the Sarbanes-Oxley Act of 2002; the Uniformed Services Employment and Reemployment Rights Act; the California Family Rights Act; the California Labor Code, except as prohibited by law; the California Workers’ Compensation Act, except as prohibited by law; and the California Fair Employment and Housing Act;

e. any and all claims for violation of the federal or any state constitution;

f. any and all claims arising out of any other laws and regulations relating to employment or employment discrimination;

g. any claim for any loss, cost, damage, or expense arising out of any dispute over the non-withholding or other tax treatment of any of the proceeds received by Executive as a result of this Agreement; and

h. any and all claims for attorneys’ fees and costs.

Executive agrees that the release set forth in this section shall be and remain in effect in all respects as a complete general release as to the matters released. This release does not extend to any obligations incurred under this Agreement. This release does not release claims that cannot be released as a matter of law, including, but not limited to: (1) Executive’s right to file a charge with or participate in a charge by the Equal Employment Opportunity Commission, or any other local, state, or federal administrative body or government agency that is authorized to enforce or administer laws related to employment, against the Company (with the understanding that any such filing or participation does not give Executive the right to recover any monetary damages against the Company; Executive’s release of claims herein bars Executive from recovering such monetary relief from the Company); (2) claims under Division 3, Article 2 of the California Labor Code (which includes California Labor Code section 2802 regarding indemnity for necessary expenditures or losses by Executive); and (3) claims prohibited from release as set forth in California Labor Code section 206.5 (specifically “any claim or right on account of wages due, or to become due, or made as an advance on wages to be earned, unless payment of such wages has been made”).

9. Acknowledgment of Waiver of Claims under ADEA. Executive understands and acknowledges that he is waiving and releasing any rights he may have under the Age Discrimination in Employment Act of 1967 (“ADEA”), and that this waiver and release is knowing and voluntary. Executive understands and agrees that this waiver and release does not apply to any rights or claims that may arise under the ADEA after the Effective Date of this Agreement. Executive understands and acknowledges that the consideration given for this waiver and release is in addition to anything of value to which Executive was already entitled. Executive further understands and acknowledges that he has been advised by this writing that: (a) he should consult with an attorney prior to executing this Agreement; (b) he has twenty-one (21) days within which to consider this Agreement; (c) he has seven (7) days following his execution of this Agreement to revoke this Agreement and agrees that any such revocation must be in a writing by email or federal express received by Andrew Dahlkemper by midnight on the seventh day following Executive’s execution of this Supplemental Release; (d) this Agreement shall not be effective until after the revocation period has expired; and (e) nothing in this Agreement prevents or precludes Executive from challenging or seeking a determination in good faith of the validity of this waiver under the ADEA, nor does it impose any condition precedent, penalties, or costs for doing so, unless specifically authorized by federal law. In the event Executive signs this Agreement and returns it to the Company in less than the 21-day period identified above, Executive hereby acknowledges that he has freely and voluntarily chosen to waive the time period allotted for considering this Agreement.

 

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10. California Civil Code Section 1542. Executive acknowledges that he has been advised to consult with legal counsel and is familiar with the provisions of California Civil Code Section 1542, a statute that otherwise prohibits the release of unknown claims, which provides as follows:

A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS OR HER FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM OR HER MUST HAVE MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THE DEBTOR.

Executive, being aware of said code section, agrees to expressly waive any rights he may have thereunder, as well as under any other statute or common law principles of similar effect.

11. No Pending or Future Lawsuits. Executive represents that he has no lawsuits, claims, or actions pending in his name, or on behalf of any other person or entity, against the Company or any of the other Releasees. Executive also represents that he does not intend to bring any claims on his own behalf or on behalf of any other person or entity against the Company or any of the other Releasees.

12. Trade Secrets and Confidential Information/Company Property. Executive reaffirms and agrees to observe and abide by the terms of the Confidentiality Agreement, specifically including the provisions therein regarding nondisclosure of the Company’s trade secrets and confidential and proprietary information, and non-solicitation of Company employees. Executive’s signature below constitutes his certification under penalty of perjury that he has returned all documents and other items provided to Executive by the Company, developed or obtained by Executive in connection with his employment with the Company, or otherwise belonging to the Company.

13. Non-Disparagement and Communications with Company Employees, Customers and Business Partners. Executive agrees to refrain from any disparagement, defamation, libel, or slander of any of the Releasees, and agrees to refrain from any tortious interference with the contracts and relationships of any of the Releasees. The Company agrees to refrain from disparaging statements about Executive, and agrees to refrain from any tortious interference with Executive’s contracts and relationships. Notwithstanding, Executive understands and agrees that the Company’s obligations under the preceding sentence extend only to the Company’s current officers and directors, and only for so long as each is an employee or director of the Company. Executive further agrees that he will refrain from discussing Company confidential business or financial information with third parties, including the Company’s actual and potential customers or business partners. Executive shall direct any inquiries by potential future employers to the Company’s human resources department, which shall use its best efforts to provide only the Executive’s last position and dates of employment.

14. No Cooperation. Executive further agrees that he will not knowingly encourage, counsel, or assist any attorneys or their clients in the presentation or prosecution of any disputes, differences, grievances, claims, charges, or complaints by any third party against any of the Releasees, unless under a subpoena or other court order to do so or as related directly to the ADEA waiver in this Agreement. Executive agrees both to immediately notify the Company upon receipt

 

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of any such subpoena or court order, and to furnish, within three (3) business days of its receipt, a copy of such subpoena or other court order. If approached by anyone for counsel or assistance in the presentation or prosecution of any disputes, differences, grievances, claims, charges, or complaints against any of the Releasees, Executive shall state no more than that he cannot provide counsel or assistance.

15. No Admission of Liability. Executive understands and acknowledges that this Agreement constitutes a compromise and settlement of any and all actual or potential disputed claims by Executive. No action taken by the Company hereto, either previously or in connection with this Agreement, shall be deemed or construed to be (a) an admission of the truth or falsity of any actual or potential claims or (b) an acknowledgment or admission by the Company of any fault or liability whatsoever to Executive or to any third party.

16. Costs. The Parties shall each bear their own costs, attorneys’ fees, and other fees incurred in connection with the preparation of this Agreement.

17. ARBITRATION. THE PARTIES AGREE THAT ANY AND ALL DISPUTES ARISING OUT OF THE TERMS OF THIS AGREEMENT (INCLUDING THE SUPPLEMENTAL RELEASE ATTACHED AS EXHIBIT A HERETO), THEIR INTERPRETATION, AND ANY OF THE MATTERS HEREIN RELEASED, SHALL BE SUBJECT TO ARBITRATION IN SAN FRANCISCO COUNTY, BEFORE JUDICIAL ARBITRATION & MEDIATION SERVICES, INC. (“JAMS”), PURSUANT TO ITS EMPLOYMENT ARBITRATION RULES & PROCEDURES (“JAMS RULES”). THE ARBITRATOR MAY GRANT INJUNCTIONS AND OTHER RELIEF IN SUCH DISPUTES. THE ARBITRATOR SHALL ADMINISTER AND CONDUCT ANY ARBITRATION IN ACCORDANCE WITH CALIFORNIA LAW, INCLUDING THE CALIFORNIA CODE OF CIVIL PROCEDURE, AND THE ARBITRATOR SHALL APPLY SUBSTANTIVE AND PROCEDURAL CALIFORNIA LAW TO ANY DISPUTE OR CLAIM, WITHOUT REFERENCE TO ANY CONFLICT-OF-LAW PROVISIONS OF ANY JURISDICTION. TO THE EXTENT THAT THE JAMS RULES CONFLICT WITH CALIFORNIA LAW, CALIFORNIA LAW SHALL TAKE PRECEDENCE. THE DECISION OF THE ARBITRATOR SHALL BE FINAL, CONCLUSIVE, AND BINDING ON THE PARTIES TO THE ARBITRATION. THE PARTIES AGREE THAT THE PREVAILING PARTY IN ANY ARBITRATION SHALL BE ENTITLED TO INJUNCTIVE RELIEF IN ANY COURT OF COMPETENT JURISDICTION TO ENFORCE THE ARBITRATION AWARD. THE PARTIES TO THE ARBITRATION SHALL EACH SEPARATELY PAY FOR ITS RESPECTIVE COUNSEL FEES AND EXPENSES; PROVIDED, HOWEVER, THAT THE COMPANY SHALL PAY ALL ARBITRATION FEES (EXCEPT, IN THE EVENT OF AN ACTION FILED BY EXECUTIVE, EXECUTIVE SHALL PAY AN AMOUNT OF ARBITRATION FEES EQUAL TO THE FILING FEES THAT EXECUTIVE WOULD HAVE PAID IN A COURT OF LAW) AND THE ARBITRATOR SHALL AWARD ATTORNEYS’ FEES AND COSTS TO THE PREVAILING PARTY, EXCEPT AS PROHIBITED BY LAW. THE PARTIES HEREBY AGREE TO WAIVE THEIR RIGHT TO HAVE ANY DISPUTE BETWEEN THEM RESOLVED IN A COURT OF LAW BY A JUDGE OR JURY. NOTWITHSTANDING THE FOREGOING, THIS SECTION WILL NOT PREVENT EITHER PARTY FROM SEEKING INJUNCTIVE RELIEF (OR ANY OTHER PROVISIONAL REMEDY) FROM ANY COURT HAVING JURISDICTION OVER THE PARTIES AND THE SUBJECT MATTER OF THEIR DISPUTE RELATING TO THIS AGREEMENT AND THE AGREEMENTS INCORPORATED HEREIN BY REFERENCE. SHOULD ANY PART OF THE ARBITRATION AGREEMENT CONTAINED IN THIS PARAGRAPH CONFLICT WITH ANY OTHER ARBITRATION AGREEMENT BETWEEN THE PARTIES, THE PARTIES AGREE THAT THIS ARBITRATION AGREEMENT SHALL GOVERN.

 

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18. Tax Consequences. The Company makes no representations or warranties with respect to the tax consequences of the payments and any other consideration provided to Executive or made on his behalf under the terms of this Agreement. Executive agrees and understands that he is responsible for payment, if any, of local, state, and/or federal taxes on the payments and any other consideration provided hereunder by the Company and any penalties or assessments thereon. Executive further agrees to indemnify and hold the Company harmless from any claims, demands, deficiencies, penalties, interest, assessments, executions, judgments, or recoveries by any government agency against the Company for any amounts claimed due on account of (a) Executive’s failure to pay or the Company’s failure to withhold, or Executive’s delayed payment of, federal or state taxes, or (b) damages sustained by the Company by reason of any such claims, including attorneys’ fees and costs.

19. Section 409A. The severance amounts and the provision of the other benefits provided for under this Agreement are intended to satisfy the requirements of the “short-term deferral” rule set forth in Section 1.409A-1(b)(4) of the Treasury Regulations will not constitute deferred compensation for purposes of Section 409A of the Internal Revenue Code of 1986, as amended (“Section 409A”). The foregoing provisions are intended to comply with the requirements of Section 409A so that none of the severance payments and benefits to be provided hereunder will be subject to the additional tax imposed under Section 409A, and any ambiguities herein will be interpreted to so comply.

20. Authority. The Company represents and warrants that the undersigned has the authority to act on behalf of the Company and to bind the Company and all who may claim through it to the terms and conditions of this Agreement. Executive represents and warrants that he has the capacity to act on his own behalf and on behalf of all who might claim through him to bind them to the terms and conditions of this Agreement. Each Party warrants and represents that there are no liens or claims of lien or assignments in law or equity or otherwise of or against any of the claims or causes of action released herein.

21. No Representations. Executive represents that he has had an opportunity to consult with an attorney, and has carefully read and understands the scope and effect of the provisions of this Agreement. Executive has not relied upon any representations or statements made by the Company that are not specifically set forth in this Agreement.

22. Severability. In the event that any provision or any portion of any provision hereof or any surviving agreement made a part hereof becomes or is declared by a court of competent jurisdiction or arbitrator to be illegal, unenforceable, or void, this Agreement shall continue in full force and effect without said provision or portion of provision.

23. Attorneys’ Fees. Except with regard to a legal action challenging or seeking a determination in good faith of the validity of the waiver herein under the ADEA, in the event that either Party brings an action to enforce or effect its rights under this Agreement, the prevailing Party shall be entitled to recover its costs and expenses, including the costs of mediation, arbitration, litigation, court fees, and reasonable attorneys’ fees incurred in connection with such an action.

24. Entire Agreement. This Agreement, together with the Supplemental Release attached as Exhibit A hereto, represents the entire agreement and understanding between the Company and

 

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Executive concerning the subject matter of this Agreement and Executive’s employment with and separation from the Company and the events leading thereto and associated therewith, and supersedes and replaces any and all prior agreements and understandings concerning the subject matter of this Agreement and Executive’s relationship with the Company, with the exception of the Confidentiality Agreement, the Stock Agreements, and any provisions of the Business Policies that inherently survive following a separation from employment.

25. No Oral Modification. This Agreement may only be amended in a writing signed by Executive and the Company’s Chief Executive Officer.

26. Governing Law. This Agreement shall be governed by the laws of the State of California, without regard for choice-of-law provisions. Executive consents to personal and exclusive jurisdiction and venue in the State of California.

27. Effective Date. Each Party has seven (7) days after that Party signs this Agreement to revoke it. This Agreement will become effective on the eighth (8th) day after Executive signed this Agreement, so long as it has been signed by the Parties and has not been revoked by either Party before that date (the “Effective Date”).

28. Expiration of Agreement. This Agreement shall be null and void if the Company has not received an executed copy of the Agreement on or by the twenty-first date after which it is received by Executive (the “Expiration Date”).

29. Counterparts. This Agreement may be executed in counterparts and by facsimile, and each counterpart and facsimile shall have the same force and effect as an original and shall constitute an effective, binding agreement on the part of each of the undersigned.

30. Voluntary Execution of Agreement. Executive understands and agrees that he executed this Agreement voluntarily, without any duress or undue influence on the part or behalf of the Company or any third party, with the full intent of releasing all of his claims against the Company and any of the other Releasees. Executive acknowledges that: (a) he has read this Agreement; (b) he has been represented in the preparation, negotiation, and execution of this Agreement by legal counsel of his own choice or has elected not to retain legal counsel; (c) he understands the terms and consequences of this Agreement and of the releases it contains; and (d) he is fully aware of the legal and binding effect of this Agreement.

[SIGNATURE PAGE FOLLOWS]

 

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IN WITNESS WHEREOF, the Parties have executed this Agreement on the respective dates set forth below.

 

      TIMOTHY A. PARTRIDGE, an individual
Dated:  

March 3, 2009

   

/s/ Timothy A. Partridge

      Timothy A. Partridge
      DOLBY LABORATORIES, INC.
Dated:  

March 3, 2009

    By  

/s/ Andrew Dahlkemper

        Andrew Dahlkemper
        SVP, Human Resources

 

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EXHIBIT A – SUPPLEMENTAL RELEASE

In consideration for the mutual promises and consideration provided both herein and in the Separation Agreement and Release signed March 3, 2009 (the “Agreement”) between Timothy A. Partridge (“Executive”) and Dolby Laboratories, Inc., a Delaware corporation, and its direct and indirect subsidiaries (together, the “Company”) (collectively the “Parties”), the Parties hereby extend by this Supplemental Release (the “Supplemental Release”) the release and waiver therein to any and all claims that may have arisen between the Effective Date of the Agreement and Executive’s signature date, below.

1. Consideration. As consideration for this Supplemental Release, the Company agrees to pay Executive a lump sum equivalent to three (3) months of Executive’s base salary, for a total of Eighty Two Thousand Five Hundred Dollars ($82,500.00), less applicable withholding (the “Supplemental Payment”). The Supplemental Payment will be provided to Executive within ten (10) business days after Executive signs and returns this Supplemental Release, conditioned upon Executive not first revoking this Supplemental Release.

2. COBRA Reimbursement. As further consideration for this Supplemental Release, the Company agrees to reimburse Executive for the payments Executive makes for COBRA coverage for a period of eighteen (18) months following his Separation Date, or until Executive has secured other employment, whichever occurs first, provided Executive timely elects and pays for COBRA coverage. COBRA reimbursements shall be made by the Company to Executive consistent with the Company’s normal expense reimbursement policy, provided Executive submits documentation to the Company substantiating his payments for COBRA.

3. Supplemental Release. The undersigned Parties expressly acknowledge and agree that the terms of Sections 7-27, 29, and 30 of the Agreement shall apply equally to this Supplemental Release and are incorporated herein. Executive agrees that the foregoing consideration represents settlement in full of all outstanding obligations owed to Executive by the Company and its current and former officers, directors, employees, agents, investors, attorneys, shareholders, administrators, affiliates, benefit plans, plan administrators, insurers, divisions, and subsidiaries, and predecessor and successor corporations and assigns (collectively, the “Releasees”). Executive, on his own behalf and on behalf of his respective heirs, family members, executors, agents, and assigns, hereby and forever releases the Releasees from, and agrees not to sue concerning, or in any manner to institute, prosecute, or pursue, any claim, complaint, charge, duty, obligation, or cause of action relating to any matters of any kind, whether presently known or unknown, suspected or unsuspected, that Executive may possess against any of the Releasees arising from any omissions, acts, facts, or damages that have occurred up until and including the date Executive signs this Supplemental Release.

4. California Civil Code Section 1542. Executive acknowledges that he has been advised to consult with legal counsel and is familiar with the provisions of California Civil Code Section 1542, a statute that otherwise prohibits the release of unknown claims, which provides as follows: “A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS OR HER FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM OR HER MUST HAVE MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THE DEBTOR.” Executive, being aware of said code section, agrees to expressly waive any rights he may have thereunder, as well as under any other statute or common law principles of similar effect.

 

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5. ADEA Waiver. Executive further expressly understands and acknowledges that he is waiving and releasing any rights he may have under the Age Discrimination in Employment Act of 1967 (“ADEA”), and that this waiver and release is knowing and voluntary. Executive understands and agrees that this waiver and release does not apply to any rights or claims that may arise under the ADEA after the date his executes this Supplemental Release. Executive understands and acknowledges that the consideration given for this waiver and release is in addition to anything of value to which Executive was already entitled. Executive further understands and acknowledges that he has been advised by this writing that: (a) he should consult with an attorney prior to executing this Supplemental Release; (b) he has twenty-one (21) days within which to consider this Supplemental Release, by which time the Company must receive an executed copy; (c) he has seven (7) days following his execution of this Supplemental Release to revoke this Supplemental Release, and agrees that any such revocation must be in a writing by email or federal express received by Andrew Dahlkemper by midnight on the seventh day following Executive’s execution of this Supplemental Release; (d) this Supplemental Release shall not be effective until after the revocation period has expired; and (e) nothing in this Supplemental Release prevents or precludes Executive from challenging or seeking a determination in good faith of the validity of this waiver under the ADEA, nor does it impose any condition precedent, penalties, or costs for doing so, unless specifically authorized by federal law. In the event Executive signs this Supplemental Release and returns it to the Company in less than the 21-day period identified above, Executive hereby acknowledges that he has freely and voluntarily chosen to waive the time period allotted for considering this Supplemental Release. Executive understands and agrees that he executed this Supplemental Release voluntarily, without any duress or undue influence on the part or behalf of the Company or any third party, with the full intent of releasing all of his claims against the Releasees.

6. Voluntary Execution of Supplemental Release. Executive understands and agrees that he executed this Supplemental Release voluntarily, without any duress or undue influence on the part or behalf of the Company or any third party, with the full intent of releasing all of his claims against the Company and any of the other Releasees. Executive acknowledges that: (a) he has read this Supplemental Release; (b) he has been represented in the preparation, negotiation, and execution of this Supplemental Release by legal counsel of his own choice or has elected not to retain legal counsel; (c) he understands the terms and consequences of this Supplemental Release and of the releases it contains; and (d) he is fully aware of the legal and binding effect of this Supplemental Release.

IN WITNESS WHEREOF, the Parties have executed this Supplemental Release on the respective dates set forth below.

 

      TIMOTHY A. PARTRIDGE, an individual
Dated:  

 

   

 

      Timothy A. Partridge
      DOLBY LABORATORIES, INC.
Dated:  

 

    By  

 

        Andrew Dahlkemper
        SVP, Human Resources

 

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Separation Agreement and Release dated March 4, 2009, Martin A. Jaffe

Exhibit 10.5