10-K
Table of Contents


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended September 27, 2013
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
(415) 558-0200
(Address of principal executive offices)
(Zip Code)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Class A common stock, $0.001 par value
The New York Stock Exchange
(Title of class)
(Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
Class B common stock, $0.001 par value
 
(Title of class)
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  ý    No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  ¨    No  ý
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  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 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  ý    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by a check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  ý
  
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  ý
The aggregate market value of the voting common equity held by non-affiliates of the registrant as of March 29, 2013 was $1.2 billion. This calculation excludes the shares of Class A and Class B common stock held by executive officers, directors and stockholders whose ownership exceeds 5% of the combined shares of Class A and Class B common stock outstanding at March 29, 2013. This calculation does not reflect a determination that such persons are affiliates for any other purposes.
On October 25, 2013 the registrant had 47,290,710 shares of Class A common stock, par value $0.001 per share, and 54,471,875 shares of Class B common stock, par value $0.001 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Definitive Proxy Statement to be filed with the Commission pursuant to Regulation 14A in connection with the registrant’s 2014 Annual Meeting of Stockholders, to be filed subsequent to the date hereof, are incorporated by reference into Part III of this Report. Such Definitive Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the conclusion of the registrant’s fiscal year ended September 27, 2013. Except with respect to information specifically incorporated by reference in this Form 10-K, the Definitive Proxy Statement is not deemed to be filed as part of this Form 10-K.


Table of Contents


DOLBY LABORATORIES, INC.
FORM 10-K
TABLE OF CONTENTS
 
PART I
 
Item1
Item1A
Item1B
Item 2
Item 3
Item 4
PART II
 
Item 5
Item 6
Item 7
Item 7A
Item 8
Item 9
Item 9A
Item 9B
PART III
 
Item 10
Item 11
Item 12
Item 13
Item 14
PART IV
 
Item 15




Table of Contents


Forward Looking Statements
This Annual Report on Form 10-K contains forward-looking statements including, but not limited to statements regarding: operating results and underlying measures; demand and acceptance for our technologies and products; market growth opportunities and trends; our plans, strategies and expected opportunities; and future competition. Use of words such as may, will, should, expect, plan, anticipate, believe, estimate, predict, potential, continue or similar expressions indicates a forward-looking statement. Such forward-looking statements are based on managements reasonable current assumptions and expectations. 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 Item 1A, Risk Factors. 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. We disclaim any duty to update any of the forward-looking statements to conform our prior statements to actual results.

PART I
ITEM 1. BUSINESS
Overview
Dolby Laboratories creates audio, video, and voice technologies that transform entertainment and communications at the cinema, at home, at work and on mobile devices. Founded in 1965, our core strengths stem from our expertise in digital signal processing and compression technologies that have transformed the ability of artists to convey entertainment experiences to their audiences through recorded media. Such technologies led to the development of our noise-reduction systems for analog tape recordings, and have since evolved into multichannel sound for cinema, digital television transmissions and devices, DVDs and Blu-ray discs and devices, and more recently, into the next generation of audio technologies for the cinema, home entertainment, mobile and gaming experiences. We continue to find new commercial applications for these technologies such as those aimed at enhancing voice conferencing communications. Today, we derive the majority of our revenue from licensing our audio technologies.
We also provide products and services that enable entertainment content creators and distributors to produce, encode, transmit and playback content for optimal consumer experiences. We have extended our know-how into imaging technologies through digital cinema products, our professional monitor and our Dolby 3D glasses-free technology for home and mobile displays.
Our Strategy
Key elements of our strategy include:   
Advancing the Science of Sight and Sound. We apply our understanding of the human senses, and audio and video engineering to develop technologies aimed at improving how people experience and interact with their communications and entertainment content.
Providing Creative Solutions. We promote the use of our solutions as creative tools, and provide our products, services and technologies to filmmakers, sound mixers and other production teams in their creative processes. In doing so, not only does their content reflect their original intent, but content quality, impact and value increase, which helps generate market demand.
Delivering Superior Experiences. We license our technologies for use in various consumer devices and solutions including audio conferencing services. Once integrated, our technologies optimize playback and communications so that users may enjoy sound and sight in Dolby, a more rich, clear, and immersive experience.






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Revenue Generation
The following table presents a summary of the composition of our revenues for all periods presented:
 
Fiscal Year Ended
Revenue
September 27,
2013
September 28,
2012
September 30,
2011
   Licensing
89%
86%
83%
   Products
9%
11%
14%
   Services
2%
3%
3%
Total
100%
100%
100%
We license our technologies in 48 countries, and our licensees distribute products with our technologies throughout the world. We sell our products and services in over 80 countries. As shown in the table below, we generate a significant portion of our revenue from outside the United States. Geographic data for our licensing revenue is based on the location of our licensees’ headquarters. Products revenue is based on the destination to which we ship our products, while services revenue is based on the location where services are performed.
 
Fiscal Year Ended
Revenue By Geographic Location
September 27,
2013
September 28,
2012
September 30,
2011
United States
28%
32%
32%
International
72%
68%
68%
Licensing
We license our technologies to various third parties who incorporate them into their products to enable and enhance audio and video capabilities. These products cover a wide range of end-user experiences whether it be at Home, at Work, in the Cinema or on-the-go with a Mobile Device:
At Home: Software vendors and original equipment manufacturers ("OEMs") of devices such as digital televisions, set-top boxes, home-theater-in-a-box systems ("HTIBs"), audio/video receivers ("AVRs"), DVD and Blu-ray devices as well as gaming consoles;
At Work: OEMs of personal computers ("PCs") as well as an audio and video conference service provider that incorporates specified digital audio technologies into their solutions for superior spatial perception and voice clarity;
At the Cinema: Movie theatres that use our digital audio technology to provide multichannel sound; and
On Mobile Devices: Software vendors and OEMS of devices such as smartphones, tablets, auto entertainment systems as well as portable PCs.
We have three primary licensing models: a two-tier model, an integrated licensing model, and a patent licensing model.
Two-Tier Licensing Model.   Most of our consumer entertainment licensing business consists of a two-tier licensing model whereby our decoding technologies, included in reference software and firmware code, are first provided under license to a semiconductor manufacturer. The manufacturer then incorporates our technologies in integrated circuits (“ICs”). Licensed semiconductor manufacturers, whom we refer to as “implementation licensees,” sell their ICs to OEMs of consumer entertainment products, which we refer to as “system licensees.” System licensees separately obtain licenses from us that allow them to make and sell finished end-user products that incorporate our technologies in ICs purchased from our implementation licensees.
Implementation licensees pay us a one-time, up-front fee per license. In exchange, the licensee receives a licensing package, which includes information useful in implementing our technologies into their chipsets. Once implemented, the licensee sends us a sample chipset for quality control evaluation and if we validate the design, the licensee may sell the chipset for use solely by our system licensees.
System licensees are required to provide us with prototypes of products that incorporate our technologies for which they are licensed for quality control evaluation, or under certain circumstances, with self-test results for our review. If the prototype or test results are approved, the licensee is permitted to buy ICs from any Dolby implementation licensee with a license for the same Dolby technology, and to sell approved products to retailers,

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distributors, and consumers. For the use of our technologies, our system licensees pay an initial licensing fee as well as royalties, which represent the majority of the revenue recognized from these arrangements. The amount of royalties we collect from a system licensee on a particular product depends on a number of factors including the mix of Dolby technologies used, the nature of the implementations, and the volume of products incorporating our technologies that are shipped by the system licensee.
We have active licensing arrangements with approximately 540 electronics product OEMs and software developer licensees, with corporate headquarters located in 48 countries.
Integrated Licensing Model.    We also license our technologies to software operating system vendors and independent software vendors ("ISVs"), and to certain other OEMs that act as combined implementation and system licensees. These licensees incorporate our technologies in their software used on PCs, in mobile applications, or in ICs they manufacture and incorporate into their products. As with the two-tier licensing model, the combined implementation and system licensee pays us an initial licensing fee in addition to royalties as determined by the mix of Dolby technologies used, the nature of the implementations and the volume of products incorporating our technologies that are shipped, and is subject to the same quality control evaluation process.
Patent Licensing.    We license our patents directly to manufacturers that use our intellectual property in their products. We also license our patents indirectly through patent pools, arrangements between multiple patent owners to jointly offer and license pooled patents to licensees. Finally, we generate service fees for managing patent pools on behalf of third party patent owners through our wholly owned subsidiary, Via Licensing Corporation. The Via Licensing patent pools enable product manufacturers to efficiently secure patent licenses for audio coding, interactive television, digital radio and wireless technologies.
Our core technologies and the ways that they are used are as follows:
Technology
Description
Home
Work
Cinema
Mobile
Dolby Digital
A digital audio coding technology used to provide multichannel sound in the home from DVDs, digital terrestrial broadcast, cable, and satellite systems, and in theaters. Dolby Digital enables the storage and transmission of up to five full range audio channels plus a low frequency effects channel.
ü
ü
ü
ü
Dolby Digital Plus
A digital audio coding technology built as an extension to Dolby Digital technologies. Dolby Digital Plus offers greater efficiency in transmission and can support a wide range of current applications such as digital television, mobile, and Internet-based content services. Dolby Digital is forward compatible with all existing Dolby Digital Plus equipped consumer electronics.
ü
ü
 
ü
AAC
A high quality audio coding technology appropriate for broadcast and electronic music distribution applications.
ü
ü
 
ü
HE-AAC
An efficient, high quality audio compression technology designed for broadcast, download and streaming content.
ü
ü
 
ü
Dolby TrueHD
An audio delivery technology that delivers bit-for-bit performance upon playback identical to the original studio master. When applied with HD video content, the coding efficiencies of Dolby TrueHD enable content providers to include a 100% lossless audio track on Blu-ray Disc without using excessive storage capacity.
ü
 
 
 
Post-Processing Technologies
Suites of technologies used by entertainment oriented PCs, mobile devices and TVs to enhance the audio quality of media delivered on the device and the device’s audio playback capabilities.

ü
ü
 
ü
Dolby Headphone
An audio technology that provides the sound of a five speaker multichannel playback system through any pair of headphones by modeling the multichannel sound listening experience of a properly calibrated 5.1 channel speaker system.
ü
ü
 
ü
Dolby HDR
Technologies that increase the contrast ratio of LED backlit LCD televisions through the use of local dimming.
ü
 
 
 
Dolby Pro Logic
- Dolby Pro Logic II is a matrix multichannel decoding technology that detects the naturally occurring directional cues in two channel audio content and transforms the content into five playback channels of full bandwidth multichannel sound.
- Dolby Pro Logic II(x) extends Pro Logic II technology to seven playback channels.
- Dolby Pro Logic IIz is one of our matrix decoding technologies, which adds the dimension of height to multichannel sound playback.
ü
 
 
 
Dolby Volume
An audio leveling technology for CE devices and provides consistent volume and quality across various programs.
ü
ü
 
ü
Dolby Voice
An audio conferencing technology with superior spatial perception, voice clarity and background noise reduction that emulates in-person meetings.
 
ü
 
 
Dolby 3D
(glasses-free)
A suite of technologies (non-theatrical) developed by Dolby and Philips® that is applied to both 3D content and displays. It enables playback and consumption of generic 3D content as well as specially encoded Dolby 3D content without the need for special 3D glasses on glasses-free 3D TVs, tablets, laptops or smartphones.
ü
 
 
 

Home - Digital TVs, STBs (Set-top boxes), HTIBs, AVRs, DVD and Blu-ray devices, Gaming Work - PCs and Enterprise Voice Conferencing Cinema - Movie theatres Mobile - Smartphones, tablets, auto entertainment and portable PCs


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Products
We design and manufacture video and audio products for the film production, cinema, and television broadcast industries. Distributed in over 70 countries, these products are used in content creation, distribution, and playback to enhance image and sound quality, and improve transmission and playback.
Product revenue is derived primarily from sales of the following solutions using our technologies:
Product
Description
Digital Cinema Products
Digital Cinema Products are used for digital encoding, distribution, and playback. Our digital cinema server is used to load, store, decrypt, decode, and re-encrypt digital film files for presentation on digital cinema projectors. We also provide products that encrypt, encode, and package digital films, and digital cinema processors to decode digital cinema soundtracks.
Digital 3D Products
Digital 3D Products deliver a 3D image with an existing digital cinema server and white (or silver) screen. Our Dolby 3D glasses feature high quality multicoated lenses that deliver sharp 3D images.
Digital Media Adapters
Digital Media Adapters are used to convert existing analog cinema audio systems to the latest digital audio technologies.
Film-based Cinema Processors
Film-based Cinema Processors are used to read, decode and playback a film soundtrack and calibrate the sound system in a movie theater.
Dolby Atmos
Dolby Atmos is an object-oriented platform enabling precision and flexibility in sound placement for the most natural and realistic experience in a cinema environment; it is delivered within a selection of our Digital Cinema Products.
Broadcast Products
Broadcast Products 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 loudness of broadcast audio content.
Professional Reference Monitor
Professional Reference Monitor is a video monitor used during the production and post-production of cinematic and video content in situations where grade 1 reference performance is required.
Digital cinema is based on open standards that, unlike standards for film-based cinema, do not include our proprietary audio technologies.
Services
We offer a variety of services to support film production, television broadcast, and music production. Our engineers assist in the use of our products and technologies to create and reproduce content. Such assistance typically involves equipment calibration, mixing room alignment, and equalization. To ensure movie playback with optimal quality, our engineers also provide equipment training, system and venue design consultation, as well as on-site technical expertise to cinema operators throughout the world.
Intellectual Property
We have a substantial base of intellectual property assets, including patents, trademarks, copyrights, and trade secrets such as know-how. As of September 27, 2013, we had over 3,500 issued patents and over 2,700 pending patent applications in more than 50 jurisdictions throughout the world. Our currently issued patents expire at various times through April 2038.
Some of our patents relating to Dolby Digital technologies, from which we derive a significant part of our licensing revenue, have expired and others will expire over the next several years. We have transitioned a number of our Dolby Digital licensees to Dolby Digital Plus technologies, an extension of our Dolby Digital technologies, whose patents generally expire later than the Dolby Digital patents. We are continuing to make progress in transitioning other Dolby Digital licensees to Dolby Digital Plus.
We pursue a general practice of filing patent applications for our technologies in the U.S. and foreign countries where our customers manufacture, distribute, or sell licensed products. We actively pursue new applications to expand our patent portfolio to address new technological innovations. We have multiple patents covering aspects and improvements for many of our technologies.
We have approximately 900 trademark registrations throughout the world for a variety of word marks, logos, and slogans. Our marks cover our various products, technologies, improvements, and features, as well as the services that we provide. Our trademarks are an integral part of our technology licensing program, and licensees typically elect to place our trademarks on their products to inform consumers that their products incorporate our technology and meet our quality specifications.
We protect our intellectual property rights both domestically and internationally. In the past, however, we have experienced problems with OEMs of consumer entertainment products in emerging economies. OEMs have failed to report or underreported shipments of their products that incorporate our technologies. We have also had problems with implementation licensees selling ICs with our technologies to third parties that are not system

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licensees. We anticipate that such problems will continue to occur. We have taken steps in the past to enforce our intellectual property rights and expect to do so in the future.
Moreover, we have relatively few or no issued patents in certain countries. For example, in China, Taiwan, and India, we have only limited patent protection for our Dolby Digital technologies. Consequently, we may recognize less revenue for Dolby Digital from those regions in the future. Maintaining or growing our licensing revenue in developing countries such as China, Taiwan, and India will depend in part on our ability to obtain patent rights in these countries, which is uncertain. Further, because of the limitations of the legal systems in many countries, the effectiveness of patents obtained or that may in the future be obtained, if any, is uncertain.
Industry Standards
Certain of our technologies have been adopted as the explicit or de facto industry standard. Explicit industry standards are adopted through a formal negotiated standards process, whereby government entities, industry standards-setting bodies, trade associations, and others evaluate and then prescribe the use of a technology. For example, as global broadcast standards for digital television and HD television have developed, many countries have adopted Dolby audio technologies as part of their standards.
In North America, Dolby Digital is the mandated audio technology for digital terrestrial and cable television. In Europe, the European Broadcast Union recommends Dolby Digital Plus audio technology for HD terrestrial broadcast. A number of European countries, including France, Italy, the United Kingdom, and Sweden, have adopted Dolby Digital Plus and HE AAC in their HD terrestrial broadcast standards and other countries, such as Brazil, have only adopted HE AAC. In addition, Dolby Digital Plus is now offered by commercial satellite providers throughout Europe as part of their HD services. In the Asia Pacific region, China has selected Dolby Digital and Dolby Digital Plus as optional technologies for the country’s Digital Terrestrial Television specification. South Korea has adopted the Advanced Television Systems Committee ("ATSC") standard for digital television, which includes Dolby Digital, while Japan has adopted advanced audio coding (“AAC”) as its audio technology standard for digital television.
We participate in a broad spectrum of organizations and industry standards bodies worldwide that establish explicit industry standards. In addition, Dolby technologies have become de facto industry standards in many consumer entertainment products. De facto industry standards are adopted by industry participants when technologies are introduced to the marketplace and become widely used. For example, prior to the adoption of HD terrestrial broadcast standards mandating Dolby technologies, many European HD broadcasters began broadcasting in Dolby Digital or Dolby Digital Plus, leading OEMs to include these technologies in their televisions and set-top boxes for the European market.
Research and Development
Historically, we have focused our research and development primarily on audio signal processing and compression technologies. Dolby’s history of producing cutting-edge technology has created many forms of intellectual property. When licensed from us, this intellectual property generates revenue that enables further innovation.
Increasingly, we have expanded our research and development efforts to identify and analyze new audio, voice, and video applications. The research groups also help develop our technology strategy, and provide support for internally developed and externally acquired technologies. Technologies incubated by the research group are further developed by our engineering and technology teams for use in our professional products and by our licensees. These teams are also involved in the commercialization of technologies created by third parties.
We conduct our research and development activities at a number of locations, including Burbank, San Francisco, and Sunnyvale, California. Research and development expenses included in our consolidated statements of operations were as follows (in thousands):
        
 
Fiscal Year Ended
 
September 27,
2013
September 28,
2012
September 30,
2011
Research and Development
$168,746
$140,143
$123,920

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Product Manufacturing
Our product quality is enabled through the use of well-established, and in some cases highly automated, assembly processes along with rigorous testing of our products. We have a single production facility and we also use contract manufacturers for a significant portion of our production capacity. We purchase components and fabricated parts from multiple suppliers; however, we rely on sole source suppliers for certain components used to manufacture our products. We source components and fabricated parts both locally and globally.
Sales and Marketing
Our marketing efforts focus on demonstrating how our technologies improve entertainment and communications. We sell our solutions through an internal sales staff to various customers in the markets where we operate. We promote our solutions and our brand through industry events such as trade-shows, film festivals, movie premieres, product launches, as well as through our website, public relations, direct marketing, co-marketing programs and social media. In addition, we hold the naming rights to the Dolby Theatre, home to the Academy Awards® in Hollywood, California, where we showcase our technology and host high-profile events.
We maintain twenty-two sales offices in key regions around the globe. Sales and marketing expenses included in our consolidated statements of operations were as follows (in thousands):
        
 
Fiscal Year Ended
 
September 27,
2013
September 28,
2012
September 30,
2011
Sales and Marketing
$231,103
$188,486
$155,202
Customers
We license our technologies to a broad range of customers, including the following:
At Home: Software vendors and original equipment manufacturers ("OEMs") of devices such as digital televisions, set-top boxes, home-theater-in-a-box systems ("HTIBs"), audio/video receivers ("AVRs"), DVD and Blu-ray devices as well as gaming consoles;
At Work: OEMs of personal computers ("PCs") as well as an audio and video conference service provider that incorporates specified digital audio technologies into their solutions for superior spatial perception and voice clarity;
At the Cinema: Movie theatres that use our digital audio technology to provide multichannel sound; and
On Mobile Devices: Software vendors and OEMS of devices such as smartphones, tablets, auto entertainment systems as well as portable PCs.
Our customers therefore operate in a wide range of industries, and we sell our professional products either directly to the end user or, more commonly, through dealers and distributors. Users of our professional products and services include movie studios, cinema operators, film distributors, broadcasters, and video game designers.
Samsung is one of our licensees and accounted for approximately 12% of our total revenue in fiscal 2013, which consisted primarily of licensing revenue from our mobile and broadcast markets. Revenue from Samsung did not exceed 10% of our total revenue in the prior periods presented. Although revenue from Microsoft did not exceed 10% of our total revenue in fiscal 2013, revenue from Microsoft represented approximately 14% and 13% of our total revenue in fiscal 2012 and fiscal 2011, respectively, and included licensing revenue from our PC, CE, and other markets.








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Competition
The markets for entertainment industry technologies are highly competitive, and we face competitive threats and pricing pressure in our markets. Our competitors in our respective fields include:
Licensed Technologies
Products
Services
Audyssey Laboratories, Inc.
Barco NV
Deluxe Corporation
Beats Electronics, LLC
Doremi Labs
DTS, Inc.
DTS, Inc.
GDC Technology Limited
Sony Corporation
Fraunhofer Institut Integrierte Schaltungen

IMAX Corporation
Technicolor
Koninklijke Philips Electronics NV
MasterImage 3D, Inc.
 
Technicolor
NEC Corporation
 
Thomson Video Networks
Qube Cinema, Inc.
 
Sony Corporation
QSC Audio Products, LLC
 
Waves Audio Ltd.
RealD, Inc.
 
 
Sony Corporation
 
 
Technicolor
 
 
Ultra Stereo Labs, Inc. (USL)
 
 
XpanD, Inc.
 
Some of our current and 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, some of our current or potential competitors may have an advantage over us based on greater experience in certain technology markets. In addition, some of our current or potential competitors may be able to offer integrated system solutions in certain markets for entertainment technologies, including audio, video, and digital rights management technologies, which could make competing technologies that we develop or acquire obsolete. By offering an integrated system solution, these potential competitors may also be able to offer competing technologies at lower prices than we can, which could adversely affect our operating results.
Many products that include our audio technologies also include audio technologies developed by our competitors. We believe that the principal competitive factors in our markets include some or all of the following:
Degree of access and inclusion in industry standards;
Technological performance, flexibility, and range of application;
Brand recognition and reputation;
Timeliness and relevance of new product introductions;
Quality and reliability of products and services;
Relationships with producers, directors, and distributors in the film industry, with television broadcast industry leaders, and with the management of semiconductor and consumer electronics OEMs;
Availability of compatible high quality audio content; and
Price.
We believe we compete favorably with respect to many of these factors. Our products and services span the audio and video sectors of several distinct and diverse industries, including the cinema, broadcasting, video game, telecommunications and recording industries. The lack of clear definition of the markets in which our products, services, and technologies are sold or licensed, the nature of our technologies, their potential use for various commercial applications, and the diverse nature of and lack of detailed reporting by our competitors, make it impracticable to quantify our position.
Employees
As of September 27, 2013, we had 1,597 employees worldwide, of which 642 employees were based outside of the U.S. None of our employees are subject to a collective bargaining agreement.
Corporate and Available Information
We were founded in London, England in 1965 and incorporated as a New York corporation in 1967. We reincorporated in California in 1976 and reincorporated in Delaware in September 2004. Our principal corporate offices are located at 100 Potrero Avenue, San Francisco, California 94103, and our telephone number is (415) 558-0200.

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Our Internet address is www.dolby.com. We make available on our website, free of charge, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments to those reports, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (SEC). Our SEC reports can be accessed through the Investor Relations section of our Internet website. The information found on our Internet website is not part of this or any other report we file with or furnish to the SEC.

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ITEM 1A. RISK FACTORS
The following risk factors and other information included in this Annual Report on Form 10-K should be carefully considered. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not currently known to us or that we currently deem less significant may also affect our business operations or financial results. If any of the following risks actually occur, our business, operating results and financial condition could be materially adversely affected.

REVENUE GENERATION
    
Markets We Target
Dependence on Sales by Licensees. We depend on original equipment manufacturers (“OEMs”) and other licensees to incorporate our technologies into their products. Our license agreements generally do not have minimum purchase commitments, are typically non-exclusive, and frequently do not require incorporation or use of our technologies. Our revenue will decline if our licensees choose not to incorporate our technologies in their products or they sell fewer products incorporating our technologies.
Impact of PC Sales. Revenue from our personal computer ("PC") market depends on several factors, including underlying PC unit shipment growth, the extent to which our technologies are included on computers, through operating systems or otherwise, and the terms of any royalties or other payments we receive. We face challenges in the PC market, including:
Purchasing trends away from traditional PCs and toward computing devices without optical disc drives, such as ultrabooks and tablets;
PC software that includes our technologies on an unauthorized and infringing basis, for which we receive no royalty payments; and
Continued decreasing inclusion of independent software vendor media applications by PC OEMs.
Declines in Optical Disc Media. For many years, movies have been distributed, purchased, and consumed through optical disc media, such as DVD and more recently, Blu-ray Disc. However, the rapid advancement of online and mobile content delivery has resulted in a trend toward movie downloading and streaming services in various parts of the world. We have seen and we expect to continue to see a shift away from optical disc media to online and mobile media content consumption, which will result in declines in revenue from DVD and Blu-ray Disc players.
Mobile Industry Risks. Successful penetration of the mobile device market is critical to our future growth. The mobile device market, particularly smartphones and tablets, is characterized by rapidly changing market conditions, frequent product introductions and intense competition based on features and price. Our Dolby Digital and Dolby Digital Plus technologies are not mandated as an industry standard for mobile devices. We must continually convince mobile device OEMs and end users of mobile devices of the value of our technologies. To date, we have been more successful in the high-end of the smartphone market, and this segment of the market has recently experienced slower growth compared to the low and mid-tier market segments. With shorter product lifecycles, it is easier for mobile device OEMs to remove our technologies from mobile devices than it was for PC OEMs. In order to increase the value of our technologies in the mobile market, we have worked with online and mobile media content service providers to encode their content with our technologies, which could affect OEM and software vendor demand for our decoding technologies. However, the online and mobile media content services markets are also characterized by intense competition, evolving industry standards and business and distribution models, disruptive software and hardware technology developments, frequent product and service introductions and short life cycles, and price sensitivity on the part of consumers, all of which may result in downward pressure on pricing or the removal of our technologies by these providers.
Cinema Industry Risks. Our cinema product sales are subject to fluctuations based on events and conditions in the cinema industry, such as the construction of new screens or upgrade of existing screens. A decrease in our ability to develop and introduce new cinema products and services successfully could affect licensing of our consumer technologies, because the strength of our brand and our ability to use professional product developments to introduce new consumer technologies would be impaired. A number of factors can affect the number of movies that are produced, including strikes and work stoppages within the cinema industry and budgetary constraints and changes in cinema industry business models.

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Maturity of Digital Cinema Market. The industry transition to digital cinema is nearing completion, and the demand for new digital cinema screens has dropped significantly, leading to lower sales volumes of our cinema products. Future cinema product growth depends on a number of factors, including new theater construction, the introduction of new technologies, such as Dolby Atmos, and entering into a replacement cycle where previously purchased cinema products are upgraded or replaced. We face a number of challenges relating to the maturity of the digital cinema market, including: 
Exhibitors may choose competing products with different features or lower prices;
Some of our competitors have a significantly greater installed base of digital cinema servers than we do, which may limit our share of the market, particularly in the U.S.; and
Pricing and other competitive pressures have caused us to implement pricing strategies which have adversely affected gross margins of our cinema products.
3D Cinema Market Risks. We face risks related to the 3D cinema market, including:
Exclusive licensing arrangements between our competitors and exhibitors;
Future demand for new 3D enabled screens; and
Decreases in the number of 3D cinema releases and the commercial success of those releases.

Customers and Distributors
Loss of Key Licensee or Customer. A small number of our licensees or customers may represent a significant percentage of our licensing, products, or services revenue. Although we generally have agreements with these licensees or customers, these agreements typically do not require any minimum purchases or minimum royalty fees and do not prohibit licensees from using competing technologies or customers from purchasing products and services from competitors. Because many of our markets are rapidly evolving, customer demand for our technologies and products can shift quickly. Because of our increased presence in the mobile market where our Dolby Digital and Dolby Digital Plus technologies are not mandated as industry standards, the risk that a large licensee may reduce or eliminate its use of our technologies has increased.
Reliance on Semiconductor Manufacturers. Our licensing revenue from system licensees depends in large part upon the availability of integrated circuits (“ICs”) that implement our technologies. IC manufacturers incorporate our technologies into these ICs, which are then incorporated in consumer entertainment products. We do not manufacture these ICs, but rather depend on IC manufacturers to develop, produce, and then sell them to system licensees in accordance with their agreements. 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.
Consumer Spending Weakness. Weakness in general economic conditions may suppress consumer demand in our markets. Many of the products in which our technologies are incorporated are discretionary goods, such as PCs, televisions, set-top boxes, Blu-ray Disc players, video game consoles, audio/video receivers, mobile devices, in-car entertainment systems, and home-theater systems. Weakness in general economic conditions may also lead to licensees and customers becoming delinquent on their obligations to us or being unable to pay, resulting in a higher level of write-offs. Economic conditions may increase underreporting and non-reporting of royalty-bearing revenue by our licensees as well as increase the unauthorized use of our technologies.
Reliance on Distributors. We rely significantly on a global network of independent, regional distributors to market and distribute our cinema and broadcast products. Our distributor arrangements are non-exclusive and our distributors are not obligated to buy our products and can represent competing products, and they may be unwilling or unable to dedicate the resources necessary to promote our portfolio of products. Our distributors could retain product channel inventory levels that exceed future anticipated sales, which could affect future sales to those distributors. In addition, failure of our distributors to adhere to our policies designed to promote compliance with global anticorruption laws, export controls, and local laws, could subject us to criminal or civil penalties and stockholder litigation.
Marketing and Branding
Importance of Brand Strength. Maintaining and strengthening the Dolby brand is critical to maintaining and expanding our licensing, products, and services business, as well as to our ability to enter the new markets we are pursuing for our technologies, including Dolby Voice for the communications market, video solutions for the consumer market, and others. Our continued success depends on our reputation for providing high quality technologies, products, and services across a wide range of entertainment markets, including the consumer

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entertainment, PC, broadcast, and gaming markets. If we fail to promote and maintain the Dolby brand successfully in licensing, products or services, our business will suffer. Furthermore, we believe that the strength of our brand may affect the likelihood that our technologies are adopted as industry standards in various markets and for various applications. Our ability to maintain and strengthen our brand will depend heavily on our ability to develop innovative technologies for the entertainment industry, to enter into new markets successfully, and to provide high quality products and services in these new markets.

Industry Standards
The entertainment industry depends upon industry standards to ensure compatibility across delivery platforms and a wide variety of consumer entertainment products. 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. To have our products and technologies adopted as industry standards, we must convince a broad spectrum of standards-setting organizations throughout the world, as well as our major customers and licensees who are members of such organizations, to adopt them as such. The market for broadcast technologies has traditionally been heavily based on industry standards, often mandated by governments choosing from among alternative standards, and we expect this to be the case in the future.
Difficulty Becoming Incorporated in an Industry Standard. Standards-setting organizations establish technology standards for use in a wide range of consumer entertainment products. It can be difficult for companies to have their technologies adopted as an industry standard, as multiple companies, including ones that typically compete against one another, are involved in the development of new technology standards for use in entertainment-oriented products.
Participants May Choose Among Alternative Technologies within Standards. Even when a standards-setting organization incorporates our technologies in an industry standard for a particular market, our technologies may not be the sole technologies adopted for that market. 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 global adoption of digital television generally and the choice to use our technologies where it is one of several accepted industry standards.
Being Part of a Standard May Limit Our Licensing Practices. When a standards-setting organization mandates our technologies, 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 and we may be unable to limit to whom we license such technologies or to restrict many terms of the license. We have in the past, and may in the future, be subject to claims that our licensing of industry standard technologies may not conform to the requirements of the standards-setting organization. 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.

Royalty Reporting
Our operating results fluctuate based on the risks set forth in this section, as well as on:
Timing of royalty reports from our licensees and meeting revenue recognition criteria;
Royalty reports including positive or negative corrective adjustments;
Retroactive royalties that cover extended periods of time; and
The recognition of unusually large amounts of revenue in any given quarter because not all of our revenue recognition criteria were met in prior periods.
Inaccurate Licensee Royalty Reporting. We generate licensing revenue primarily from OEMs who license our technologies and incorporate those technologies in their products. Our license agreements generally obligate our licensees to pay us a specified royalty for every product they ship that incorporates our technologies, and we rely on our licensees to report their shipments accurately. However, we have difficulty independently determining whether our licensees are reporting shipments accurately, particularly with respect to software incorporating our technologies because unauthorized copies of such software can be made relatively easily. 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

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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 licensees regarding license terms. Most of our license agreements permit us to audit our licensees’ records and we routinely exercise these rights, but audits are generally expensive, time-consuming, and potentially detrimental to our ongoing business relationships with our licensees. In the past, licensees 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 royalties by our licensees.
Royalties We Owe Others. In some cases, 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 result in the termination of a license agreement or an increase in the amount of royalties we have to pay to the third party.

TECHNOLOGY TRENDS AND DEVELOPMENTS
Technology Innovation. The future growth of our licensing revenue will depend upon our success in new and existing markets for our technologies, such as digital broadcast, mobile devices, online and mobile media distribution, consumer video and voice. The markets for our technologies and products are defined by: 
Rapid technological change;
New and improved technology and frequent product introductions;
Changing consumer and licensee demands;
Evolving industry standards; and
Technology and product obsolescence.
Our future success depends on our ability to enhance our technologies and products and to develop new technologies and products that address the needs of the market in a timely manner. The development of enhanced and new technologies and products is a complex, uncertain process requiring high levels of innovation, highly-skilled engineering and development personnel, and the accurate anticipation of technological and market trends. We may not be able to identify, develop, acquire, market, or support new or enhanced technologies or products on a timely basis, if at all.
Experience with New Markets and Business Models. Our future growth will depend, in part, upon our expansion into areas beyond our core audio and cinema markets. In addition to our digital cinema initiatives, we are exploring other areas that facilitate delivery of digital entertainment, such as video solutions for the consumer market and Dolby Voice technology for the communications market. As we enter into these new markets, we will face new sources of competition, new business models, and new customer relationships. In order to be successful in these markets, we will need to cultivate new industry relationships to bring our products, services, and technologies to market. Our inexperience in one or more of these markets could limit our ability to successfully execute on our growth strategy.
INTELLECTUAL PROPERTY
Our business is dependent upon protecting our patents, trademarks, trade secrets, copyrights, and other intellectual property rights. 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. The efforts we have taken to protect our proprietary rights may not be sufficient or effective. We also seek to maintain select intellectual property as trade secrets, and third parties or our employees could intentionally or accidentally compromise the intellectual property that we maintain as trade secrets. 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 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 some countries or where the initiation of a claim might harm our business relationships.
We generally seek patent protection for our innovations. However, our patent program faces a number of challenges, including:

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Possibility that some of these innovations may not be protectable;
Failure to protect innovations that later turn out to be important;
Insufficient patent protection to prevent third parties from designing around our patent claims; and
Possibility that an issued patent may later be found to be invalid or unenforceable.

Patent Royalties and Expiration. Many of the technologies that we license to our system licensees are covered by patents, and the licensing revenue that we receive from those licenses depends in large part upon the life of such patents. In general, our agreements with our licensees require them to pay us a full royalty with respect to a particular technology only until the last patent covering that technology expires in a particular country. As of September 27, 2013, we had over 3,500 issued patents and over 2,700 pending patent applications in more than 50 jurisdictions throughout the world. Our currently issued patents expire at various times through April 2038.
We seek to mitigate this risk in a variety of ways. We regularly look for opportunities to expand our patent portfolio through organic development and acquisitions. We develop proprietary technologies to replace licensing revenue from technologies covered by expiring patents with licensing revenue supported by patents with a longer remaining life. And we develop and license our technologies in a manner designed to minimize the chance that a system licensee would develop competing technologies.
In particular, some of our patents relating to Dolby Digital technologies, from which we derive a significant part of our licensing revenue, have expired and others will expire over the next several years. We have transitioned a number of our Dolby Digital licensees, and continue to make progress in transitioning other Dolby Digital licensees, to Dolby Digital Plus technologies, an extension of our Dolby Digital technologies, whose patents generally expire later than the Dolby Digital patents. We now derive a significant part of our licensing revenue from Dolby Digital Plus. To be successful, we must continue to transition licensees to Dolby Digital Plus, and discourage licensees of Dolby Digital Plus to transition back to Dolby Digital as our original patents covering this technology expire.
Unauthorized Use of Our Intellectual Property. We have often experienced, and expect to continue to experience, problems with non-licensee OEMs and software vendors, particularly in emerging economies, such as China, incorporating our technologies and trademarks into their products without our authorization and without paying us any licensing fees. Manufacturers of integrated circuits, or ICs, containing our technologies occasionally sell these ICs to third parties who are not our system licensees. These sales, and the failure of such manufacturers to report the sales, facilitate the unauthorized use of our intellectual property. As emerging economies transition from analog to digital content, such as the transition from analog to digital broadcast, we expect to experience increased problems with this form of piracy.
Intellectual Property Litigation. Companies in the technology and entertainment industries frequently engage in 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. 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, which may not be available on reasonable terms or at all. Licensors could also require us to pay significant royalties. 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 aspects of our business found to be infringing, we may be forced to limit our product and service offerings and may be unable to compete effectively.
In some instances, we have contractually agreed to provide indemnifications to licensees relating to our intellectual property. Additionally, at times 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.
Licensee Disputes. At times, 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 based on potential antitrust claims or regarding our licensing royalty rate practices. Damages and requests for injunctive relief asserted in claims like these could be

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significant, and could be disruptive to our business.
U.S. and Foreign Patent Rights. Our licensing business depends in part on the uniform and consistent treatment of patent rights in the U.S. and abroad. Changes to the patent laws and regulations in the U.S. and abroad may limit our ability to obtain, license, and enforce our rights. Additionally, court and administrative rulings may interpret existing patent laws and regulations in ways that hurt our ability to obtain, license, and enforce our patents. We face challenges protecting our intellectual property in foreign jurisdictions, including:
Our ability to enforce our contractual and intellectual property rights, especially in countries that do not recognize and enforce intellectual property rights to the same extent as the U.S., Japan, Korea, and European countries do, which increases the risk of unauthorized use of our technologies;
Limited or no patent protection for our Dolby Digital technologies in countries such as China, Taiwan, and India, which may require us to obtain patent rights for new and existing technologies in order to grow or maintain our revenue; and
Because of limitations in the legal systems in many countries, our ability to obtain and enforce patents in many countries is uncertain, and we must strengthen and develop 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.

OPERATIONS
Reliance on Key Suppliers. 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 generally have no formal agreements in place with our suppliers for the 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 delays in our operations and increase our production costs. In addition, our suppliers may not be able to meet our 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 production delays, increased costs, and reductions in shipments of our products.
Product Quality. Our products, and products that incorporate our technologies, are complex and sometimes contain undetected software or hardware errors, particularly when first introduced or when new versions are released. In addition, we do not have as much control over manufacturing performed by contract manufacturers, which could result in quality problems. Furthermore, our products and technologies are sometimes combined with or incorporated into products from other vendors, sometimes making it difficult to identify the source of a problem. Any negative publicity or impact relating to these product problems could affect the perception of our brand and market acceptance of our products or technologies. 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 or technologies 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 incur substantial costs in defending and settling product liability claims. Although we generally attempt to contractually limit our liability, 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.
Production Processes and Production. 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 have a single production facility and increasingly use contract manufacturers for a significant portion of our production capacity. Our reliance on contract manufacturers for the manufacture of our products involves risks, including limited control over timely delivery and quality of such products. If production of our products is interrupted, we may not be able to manufacture products on a timely basis. A shortage of manufacturing capacity for our products could materially adversely affect our operating results and damage our customer relationships. We may be unable to quickly adapt our manufacturing capacity to rapidly changing market conditions and a contract manufacturer may encounter similar difficulties. Likewise, we may be unable to quickly respond to fluctuations in customer demand or contract manufacturer interruptions. At times we underutilize our manufacturing facilities as a

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result of reduced demand for some of our products.
Cybersecurity. We rely on information technology systems in the conduct of our business, including systems designed and managed by third parties. Many of these systems contain confidential information, including personal information, trade secrets and other intellectual property. While we have taken a number of steps to protect these systems, the number and sophistication of malicious attacks that companies have experienced from third parties has increased over the past few years. Disruptions to these systems, due to outages, breaches or other causes, can have severe consequences to our business, including financial loss and reputational damage.

COMPETITION
The markets for entertainment industry technologies are highly competitive, and we face competitive threats and pricing pressure in our markets. Consumers may perceive the quality of the audio experience produced by some of our competitors’ technologies to be equivalent or superior to the audio experience produced by our technologies. Some of our current 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, particularly in the market for online media content. These competitors may also be able to offer integrated system solutions in markets for entertainment technologies on a royalty-free basis or at a lower price than our technologies, including audio, video, and other technologies, which could make competing technologies that we develop less attractive.
Pricing Pressures. The markets for the consumer entertainment products in which our technologies are incorporated are intensely competitive and price sensitive. We expect to face increased royalty pricing pressure for our technologies as we seek to drive the adoption of our technologies into online content and portable devices, such as tablets and smartphones. Retail prices for consumer entertainment products that include our sound technologies, such as DVD players and home theater systems, have decreased significantly, and we expect prices to decrease for the foreseeable future. In response, OEMs have sought to reduce their product costs, which can result in downward pressure on the licensing fees we charge.
Customers as Competitors. We face competitive risks in situations where our customers are also current or potential competitors. For example, Sony and Technicolor are significant licensee customers, but are also competitors with respect to some of our consumer, broadcast, and cinema technologies. Our customers may choose to use competing technologies they have developed or in which they have an interest rather than use our technologies. The existence of important customer relationships may influence which strategic opportunities we pursue, as we may forgo some opportunities in the interests of preserving a critical customer relationship.
Competition from Other Audio Formats. We believe that the success we have had licensing our technologies to system licensees is due, in part, to the strength of our brand and the perception that our technologies provide a high quality solution for multichannel audio. However, both free and proprietary sound technologies are becoming increasingly prevalent, and we expect competitors to continue to enter this field with other solutions. Furthermore, to the extent that customers perceive our competitors’ solutions to provide the same advantages as our technologies at a lower or comparable price, there is a risk that these customers may treat sound encoding technologies as commodities, resulting in loss of status of our technologies, decline in their use, and significant pricing pressure.
Competition for Employees. In order to be successful, we must attract, develop, and retain employees, including employees to work on our growth initiatives where our current employees may lack experience with the business models and markets we are pursuing. Competition for experienced employees in our markets can be intense. In order to attract and retain employees, we must provide a competitive compensation package, including cash and equity compensation. Our equity awards include stock options and restricted stock units, and the future value of these awards is uncertain, and depends on our stock price performance over time. In order for our compensation packages to be viewed as competitive, prospective employees must perceive our equity awards as a valuable benefit.

STRATEGIC ACTIVITIES
Importance of Relationships with Entertainment Industry. To be successful, we must maintain and grow our relationships with a broad range of entertainment industry participants, including:
Content creators, such as film directors, studios, music producers and mobile and online content producers;

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Content distributors, such as film exhibitors, broadcasters, operators, and over-the-top ("OTT") video services providers and video game publishers; and
Device manufacturers.
Relationships have historically played an important role in the entertainment markets that we serve. For example, sales of our products and services are particularly dependent upon our relationships with major film studios and broadcasters, and licensing of our technologies is particularly dependent upon our relationships with system licensees and IC manufacturers. If we fail to maintain and strengthen these relationships, these entertainment industry participants may be less likely to purchase and use our technologies, products, and services, or create content incorporating our technologies.

Consequences of M&A Activity. We evaluate a wide array of possible strategic transactions, including acquisitions. We consider these types of transactions in connection with, among other things, our efforts to strengthen our core audio business and expand our business beyond sound technologies. 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 significant 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. 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 economic, political, and regulatory environment in specific countries. Future acquisitions could result in potentially dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities, amortization expenses, and write-offs of goodwill. Future acquisitions may also require us to obtain additional equity or debt financing, which may not be available on favorable terms or at all. Also, the anticipated benefits of our acquisitions may not materialize.
We face various risks in integrating acquired businesses, including: 
Diversion of management time and focus from operating our business to acquisition integration challenges;
Cultural and logistical challenges associated with integrating employees from acquired businesses into our organization;
Retaining employees, suppliers and customers 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.

LEGAL AND REGULATORY COMPLIANCE
Costs of Environmental Laws and Regulation. Our operations use substances regulated under 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. In addition, future environmental laws and regulations have the potential to affect our operations, increase our costs, decrease our revenue, or change the way we design or manufacture our products. We face increasing complexity in our product design as we adjust to requirements relating to the materials composition of our products. For some products, substituting particular components containing regulated hazardous substances is more difficult or costly, and additional redesign efforts could result in production delays. 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.
International Business and Compliance. We are dependent on international sales for a substantial amount of our total revenue. We are subject to a number of risks related to conducting business internationally, including: 
U.S. and foreign government trade restrictions, including those which may impose restrictions on importation of programming, technology, or components to or from the U.S.;
Compliance with applicable international laws and regulations that may differ or conflict with laws in other countries where we conduct business, or are otherwise not harmonized with one another;

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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 U.S., and other laws limiting our ability to repatriate funds to the U.S.;
Changes in diplomatic and trade relationships;
Difficulty in establishing, staffing, and managing foreign operations;
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 or social instability, natural disasters, war or events of terrorism; and
The strength of international economies.
In many foreign countries, particularly in those with developing economies, it is common to engage in business practices that are prohibited by U.S. regulations applicable to us such as the Foreign Corrupt Practices Act ("FCPA") and U.S. export controls. Although we implement policies and procedures designed to ensure compliance with the FCPA and U.S. export controls, there can be no assurance that all of our employees, distributors, dealers, and agents will not take actions in violation of our policies or these regulations.
Conflict Minerals. The SEC has adopted rules regarding disclosure of the use of conflict minerals (commonly referred to as tantalum, tin, tungsten, and gold), which are mined from the Democratic Republic of the Congo and surrounding countries. This requirement could affect the sourcing of materials used in our products as well as the companies we use to manufacture our products. In circumstances where conflict minerals in our products are found to be sourced from the Democratic Republic of the Congo or surrounding countries, Dolby may take actions to change materials or designs to reduce the possibility that Dolby's purchase of conflict minerals may fund armed groups in the region. These actions could add engineering and other costs to the manufacture of our products.
We expect to incur costs to design and implement a process to discover the origin of the tantalum, tin, tungsten, and gold used in our products, including components we purchase from third parties, and to audit our conflict minerals disclosures. Our reputation may also suffer if we have included conflict minerals originating in the Democratic Republic of the Congo or surrounding countries in our products, and those conflict minerals funded armed groups in the region.
Tax Rates and Liabilities. Changes in the valuation of our deferred tax assets and liabilities, the geographic mix of our revenue, or changes in tax laws or their interpretation could affect our future effective tax rates. We file income tax returns in the U.S. and in several U.S. state and foreign jurisdictions, and must use judgment in determining our worldwide provision for income taxes. For example, the following could affect our income taxes: 
Earnings being lower than anticipated in countries that have lower tax rates and higher than anticipated in countries that have higher tax rates;
Changes in the valuation of our deferred tax assets and liabilities;
Expiration of or lapses in the R&D tax credit laws;
Fluctuations in tax exempt interest income;
Transfer pricing adjustments;
Tax effects of nondeductible compensation;
Tax costs related to intercompany realignments;
Any obligations or decisions to repatriate earnings from abroad earlier than anticipated;
Changes in accounting principles; or
Changes in tax laws and regulations in the countries in which we operate including possible U.S. changes to the taxation of earnings of our foreign subsidiaries, the deductibility of expenses attributable to foreign income, or the foreign tax credit rules.
We are subject to the periodic examination of our income tax returns by tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes, but an adverse decision by tax authorities could significantly impact our financial results. Additionally, due to the evolving nature of tax rules combined with the large number of jurisdictions in which we operate, it is possible that our estimates of our tax liability and the realizability of our deferred tax assets could change in the future, which may result in additional tax liabilities.

STOCK-RELATED ISSUES
Controlling Stockholder. On September 12, 2013, our founder, Ray Dolby, passed away. At September 27, 2013, Ray Dolby’s family members and their affiliates owned 21,554 shares of our Class A common stock and

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54,751,378 shares of our Class B common stock. As of September 27, 2013, Ray Dolby’s family members and their affiliates had voting power of approximately 99.8% of our outstanding Class B common stock, which in the aggregate represented approximately 91.9% 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’s family members and their affiliates 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.
Moreover, these persons may take actions in their own interests that our 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.
Insider Sales of Common Stock. If our founder’s family, 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.
Stock Repurchase Program. Our stock repurchase program may reduce the public float of shares available for trading on a daily basis. Such purchases may be limited, suspended, or terminated at any time without prior notice. There can be no assurance that we will buy additional shares of our Class A common stock under our stock repurchase program or that any future repurchases will have a positive impact on our stock price or earnings per share. Important factors that could cause us to discontinue or decrease our share repurchases include, among others, unfavorable market conditions, the market price of our Class A common stock, the nature of other investment or strategic opportunities presented to us, the rate of dilution of our equity compensation programs, our ability to make appropriate, timely, and beneficial decisions as to when, how, and whether to purchase shares under the stock repurchase program, and the availability of funds necessary to continue purchasing stock. If we curtail our repurchase program, our stock price may be negatively affected.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
Facilities
Our principal corporate office, which we lease from the Dolby Family Trust, is located at 100 Potrero Avenue, San Francisco, California. This office provides approximately 70,000 square feet of space. The lease for this office expires on April 30, 2014, but we have options to renew the lease for two additional five-year terms.
Dolby Wootton Bassett, LLC, of which Dagmar Dolby as Trustee of the Dolby Family Trust is the sole member, the Ray Dolby Trust (together with Dolby Holdings II LLC, of which Dagmar Dolby is the sole Manager), or the Dolby Family Trust own a majority financial interest in real estate entities that own and lease to us certain of our other facilities in California and the United Kingdom. We own the remaining financial interests in these real estate entities. We lease from these real estate entities approximately 122,000 square feet of space at 999 Brannan Street, San Francisco, California for our principal administrative offices, approximately 43,500 square feet of space in Brisbane, California for manufacturing facilities and approximately 43,000 combined square feet of space at two locations in Burbank, California used for research and development and for sales, services, and administrative facilities. In addition, we lease from these real estate entities approximately 66,000 square feet of space in Wootton Bassett, England, which was used for manufacturing, sales, services and administrative facilities. In fiscal 2009, we consolidated our Wootton Bassett, U.K. manufacturing operations into our Brisbane, California facility to improve operational efficiencies. The leases for these facilities expire at various times through 2015.
In fiscal 2012, we purchased an approximately 354,000 square foot property in San Francisco, California for approximately $109.8 million. After making certain improvements to the property to prepare the building for our use, we intend to use the space as our worldwide headquarters.
We also lease additional research and development, sales, product testing, and administrative facilities from third parties in California, New York, Indiana, Pennsylvania, and internationally, including in Asia, Europe, Australia, Dubai and Brazil.
We believe that our current facilities are adequate to meet our needs for the near future and that suitable additional or alternative space will be available on commercially reasonable terms to accommodate our foreseeable future operations.
ITEM 3. 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 pending matters is not expected to have a material adverse impact on our operating results or financial condition. Given the unpredictable nature of legal proceedings, 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; however, based on the information known by us as of the date of this filing and the rules and regulations applicable to the preparation of our financial statements, any such amount is either immaterial or it is not possible to provide an estimated amount of any such potential loss.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our Class A common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “DLB.” The following table sets forth the range of high and low sales prices on the NYSE of the Class A common stock for the periods indicated, as reported by the NYSE.
 
Fiscal 2013
 
Fiscal 2012
 
High
Low
 
High
Low
First Quarter
$34.84
$28.48
 
$33.12
$26.28
Second Quarter
33.56
29.33
 
39.54
30.68
Third Quarter
35.60
31.38
 
45.11
36.33
Fourth Quarter
35.03
31.38
 
42.69
30.67
Our Class B common stock is neither listed nor publicly traded. As of October 25, 2013, there were 15 holders of record of our Class A common stock and 49 holders of record of our Class B common stock. The number of Class A beneficial stockholders is substantially greater than the number of holders of record since a large portion of our common stock is held through brokerage firms.
Dividend Policy
Prior to fiscal 2013, we had never declared nor paid a cash dividend on our common stock.
On December 11, 2012, our Board of Directors declared a special dividend in the amount of $4.00 per share on our Class A and Class B Common Stock. Payment of the special dividend was made on December 27, 2012 to all stockholders of record as of the close of business on December 21, 2012 ("Record Date"). Based on the 102,051,386 shares of Class A and Class B Common Stock outstanding as of the record date, the total special dividend payment was $408.2 million.
The declaration of this special dividend is considered a one-time occurrence, and in light of the fact that we have not historically declared nor paid cash dividends, the declaration of this special dividend in fiscal 2013 is not indicative of future expected dividend payments.
We currently intend to retain any future earnings and do not currently plan to pay any dividends. The payment of future dividends on the common stock and the rate of such dividends, if any, will be determined by our Board of Directors in light of our results of operations, financial condition, capital requirements, and any other relevant factors. See Note 6Stockholders’ Equity and Stock-Based Compensation” for additional information related to the special dividend.
Sales of Unregistered Securities
During the fiscal quarter ended September 27, 2013, we issued an aggregate of 14,542 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; from September 28, 2013 through October 25, 2013, we issued an aggregate of 250 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 $0.1 million in the fiscal quarter ended September 27, 2013 and less than $0.1 million in the period from September 28, 2013 through October 25, 2013 as a result of the exercise of these options. We believe these transactions were exempt from the registration requirements of the Securities Act of 1933, as amended (“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 October 25, 2013 options to purchase an aggregate of 116,295 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, and 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.

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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.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Our Board of Directors announced a $250.0 million stock repurchase program on November 3, 2009. The program, which has no expiration date, approved the repurchase of shares of our Class A common stock, $0.001 par value per share. The authorized maximum was subsequently increased by $300.0 million, $250.0 million, and $100.0 million as announced on July 27, 2010, August 4, 2011, and February 8, 2012, respectively. Stock repurchases under this program may be made through open market transactions, negotiated purchases, or otherwise, at times and in such amounts as we consider appropriate. The following table provides information regarding our share repurchases made during the fourth quarter of fiscal 2013:
 
Total Number
of Shares
Purchased
Average Price
Paid per Share 
(1)
Total Number of Shares Repurchased
Approximate Dollar Value of Remaining Authorized Share Repurchases (2)
June 29, 2013 - July 26, 2013
$—
$124.1 million
July 27, 2013 - August 23, 2013
149,600
32.65
149,600
$119.3 million
August 24, 2013 - September 27, 2013
100,400
32.02
100,400
$116.1 million
Total
250,000
 
250,000
 
(1)
Average price paid per share excludes commission costs.
(2)
Amounts represent the remaining maximum number of shares (or the approximate dollar value) that may yet be purchased under the stock repurchase program.

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Stock Price Performance Graph
The following graph compares the total cumulative return of our Class A common stock with the total cumulative return for the New York Stock Exchange Composite Index (“NYSE Composite”) and the Russell 3000 Index (“Russell 3000”) for the five fiscal years ended September 27, 2013. The figures represented below assume an investment of $100 in our Class A common stock at the closing price of $36.04 on September 26, 2008, and in the NYSE Composite and Russell 3000 on the same date and the reinvestment of dividends into shares of common stock. The comparisons in the table are required by the Securities and Exchange Commission and are not intended to forecast or be indicative of possible future performance of our Class A common stock. This graph shall not be deemed “filed” for purposes of Section 18 of Securities Exchange Act of 1934, as amended (“Exchange Act”) or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any of our filings under the Securities Act or the Exchange Act.




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ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our audited consolidated financial statements and the accompanying notes included elsewhere in this filing. The consolidated balance sheet data for the fiscal years ended September 27, 2013 and September 28, 2012, and consolidated statements of operations data for the fiscal years ended September 27, 2013, September 28, 2012, and September 30, 2011 were derived from our audited consolidated financial statements included in this report. The consolidated statements of operations and balance sheet data for the fiscal years ended September 24, 2010 and September 25, 2009 were derived from our audited consolidated financial statements not included in this report. The historical results presented below are not necessarily indicative of financial results to be achieved in future periods. Note that fiscal 2011 consisted of 53 weeks, while all other fiscal years presented consisted of 52 weeks.
Beginning in the first quarter of fiscal 2013, settlements from implementation licensees have been classified as licensing revenue rather than an offset to sales and marketing expenses. For additional details on the reclassification, see Note 1Basis of Presentation” to our consolidated financial statements. In order to conform to the current period's presentation, we have reclassified these settlements for the prior periods presented within our consolidated statements of operations as follows (in thousands):
 
Fiscal Year Ended
 
September 27, 2013
September 28, 2012
September 30, 2011
September 24, 2010
September 25, 2009
Reclassified implementation licensee settlements
N/A
$6,750
$5,560
$7,840
$5,977
 
Fiscal Year Ended
 
September 27, 2013
September 28, 2012
September 30, 2011
September 24, 2010
September 25, 2009
 
(in thousands, except per share amounts)
Operations:
 
 
 
 
 
Revenue
$909,674
$933,014
$961,065
$930,553
$725,480
Gross margin
812,955
840,987
849,894
790,898
654,735
Operating expenses
567,693
478,995
420,161
369,357
297,046
Income before provision for income taxes
250,646
368,991
440,643
437,012
371,419
Net income attributable to Dolby Laboratories, Inc.
189,271
264,302
309,267
283,447
242,991
Net income per share:
 
 
 
 
 
Basic
$1.86
$2.47
$2.78
$2.50
$2.15
Diluted
$1.84
$2.46
$2.75
$2.46
$2.11
Weighted-average shares outstanding:
 
 
 
 
 
Basic
101,879
106,926
111,444
113,452
113,101
Diluted
102,788
107,541
112,554
115,388
115,367
 
 
 
 
 
 
Cash dividends paid per common share
$4.00
$—
$—
$—
$—
 
 
September 27, 2013
September 28, 2012
September 30, 2011
September 24, 2010
September 25, 2009
 
(in thousands)
Cash and cash equivalents
$454,397
$492,600
$551,512
$545,861
$451,678
Working capital
639,907
813,446
999,213
894,657
744,254
Short-term and long-term investments
446,605
664,307
664,078
493,106
489,746
Total assets
1,737,945
1,960,798
1,884,387
1,711,772
1,581,315
Long-term debt
5,825
Total stockholders’ equity—Dolby Laboratories, Inc.
1,481,110
1,720,269
1,663,513
1,473,737
1,341,108

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion contains forward-looking statements that are subject to risks and uncertainties. Actual results may differ substantially from those referred to herein due to a number of factors, including but not limited to risks described in Item 1A, “Risk Factors” and elsewhere in this Annual Report on Form 10-K. We disclaim any duty to update any of the forward-looking statements to conform our prior statements to actual results.
Executive Summary
At the beginning of fiscal 2013, we highlighted several priorities that we planned to focus on during the year. The following represents a summary of our progress made in these priority areas to date:
Mobile. We expanded the use of our technologies in high-end smartphones and tablets, further establishing our strong position across the mobile ecosystem. In the Windows ecosystem, our technologies are embedded in the Windows 8 operating system for tablets and PCs, and Netflix is now sending Dolby-enabled content to select Windows 8 devices. In the Android ecosystem, our technologies are now on a growing share of smartphones and tablets, and various service providers send Dolby-enabled content to Android devices. Likewise, in the Amazon ecosystem, Amazon Instant Video is distributing movies and TV shows with Dolby Digital Plus soundtracks to various Kindle models.
Broadcast. In broadcast, we strengthened our position as the adopted standard in digital television and high definition content in North America and throughout much of Europe. We also extended the use of our technologies in a number of emerging markets. In China, new operators have adopted Dolby Digital Plus in their set-top boxes and we estimate that Dolby technologies are deployed in over half of the High Definition channels on air in China. In addition, several new operators in Malaysia, Vietnam and the Philippines adopted Dolby Digital Plus in their set-top boxes. Our technologies are now featured in a number of over-the-top services including iTunes, Netflix, Amazon, HBO GO, VUDU, and Cinema Now. Additionally, Target has included our technology in Target Ticket, their new digital video service that launched during the fourth quarter of fiscal 2013.
Cinema. We began shipping and generating revenues from Dolby Atmos, an object-oriented platform that provides precision and flexibility in sound placement to deliver the most natural and realistic experience in a cinema environment. As of September 27, 2013, over seventy-five Dolby Atmos movie titles have been released or announced by the major Hollywood studios as well as by international distributors, and more than three hundred Atmos-enabled screens have been installed or are committed for installment. The following is a sampling of some of the more notable titles that have been or will be shown in Dolby Atmos:
Title
Release Date
Distributor
Life Of Pi
November 2012
20th Century Fox
The Hobbit: An Unexpected Journey
December 2012
Warner Bros.
Oz: The Great and Powerful
March 2013
Disney
Oblivion
April 2013
Universal
Iron Man 3
May 2013
Disney
Star Trek: Into Darkness
May 2013
Paramount
Man Of Steel
June 2013
Warner Bros.
Pacific Rim
July 2013
Warner Bros.
The Wolverine
July 2013
20th Century Fox
Elysium
August 2013
Sony Pictures
Gravity
October 2013
Warner Bros.
Thor 2 The Dark World
November 2013
Disney
The Hunger Games: Catching Fire
November 2013
Lions Gate
The Hobbit: The Desolation of Smaug
December 2013
Warner Bros.
New Solutions. We continued to develop new technologies and solutions including the following:

Dolby Voice. Dolby Voice is one of our newest offerings. It represents an audio conferencing solution that enables virtual meetings to sound and feel more like in-person meetings. During this past year, we announced a global partnership with BT, a leading provider of audio and video conferencing solutions. As part of this arrangement, BT will incorporate Dolby voice into their offerings under a limited exclusivity period. In October 2013, BT launched their "BT MeetMe" with Dolby Voice service which will be available to customers worldwide.

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Dolby 3D for the Home. In association with Philips and the Cameron Pace Group (CPG) led by director James Cameron, Dolby entered into an agreement to integrate the Dolby® 3D format into CPG's 3D video content production workflow. We believe that glasses-free 3D presentation in the home can be improved by using the Dolby 3D format and we are developing products and solutions aimed at this potential market.

Opportunities, Challenges, and Risks
Today, content is captured, delivered, and played back in more ways than ever before. Consumers access content at will and on the go through multiple channels, including cinema, optical disc, digital broadcast, wired internet, and cellular networks. As consumers are presented with more options for receiving content, competition across delivery channels has intensified. As such, our licensing and product markets are characterized by rapid technological changes, new product introductions, changing customer and licensee demands and evolving industry standards that present a high risk of obsolescence. However, we believe that these changes also present us with opportunities to provide realistic and multi-channel audio, video and communications experiences to consumers through new and emerging delivery channels.
Licensing
The following table presents the composition of our licensing business and revenues for all periods presented:
 
Fiscal Year Ended
 
Market
September 27,
2013
September 28,
2012
September 30,
2011
Main Products Incorporating Our Technologies
Broadcast
37%
34%
31%
Televisions and set-top boxes
PC
24%
28%
30%
Microsoft Windows operating systems and DVD software players
Consumer Electronics
16%
19%
21%
DVD and Blu-ray Disc players and recorders, audio/video receivers, and home-theater-in-a-box systems
Mobile
12%
8%
7%
Smartphones, tablets and other mobile devices
Other
11%
11%
11%
Video game consoles, Automotive (in-car DVD players)
Total
100%
100%
100%
 
Content creators and distributors are increasingly focused on delivering content for online consumption across a multitude of media and devices with varying bandwidth and performance capabilities, including PCs, connected TVs, set-top boxes, gaming consoles, connected Blu-ray Disc players, and various mobile devices. Many mobile devices now designed for enhanced capture and playback present a challenge for content creators and device manufacturers seeking consistent audio quality. We believe this challenge provides opportunities whereby we can provide solutions to optimize the audio experience across the online and portable device markets.
With the continued evolution of consumer entertainment choices and our efforts to provide competitive audio and video technologies for a wide variety of devices, the composition of our optical and non-optical based licensing revenue has changed. Our optical disc-based revenue is generated from the licensing of technologies that enable DVD or Blu-ray Disc playback, including those incorporated in the Microsoft Windows 7 and 8 operating systems, independent PC DVD software players, and consumer DVD and Blu-ray Disc players. Non-optical disc based licensing revenue includes revenue derived from products such as TVs, set-top boxes, and mobile phones, as well as our post-processing technologies on a range of devices. The portion of our total licensing revenue comprised of our non-optical disc based licensing has been increasing over time, as shown in the following table:
 
Fiscal Year Ended
Licensing Revenue
September 27,
2013
September 28,
2012
September 30,
2011
Non-Optical
66%
57%
52%
Optical
34%
43%
48%
Broadcast Market
In our broadcast market we derive the majority of our revenue from licensing our technologies to OEMs of televisions and set-top boxes. The efficiency and quality of our multichannel technologies are well suited to digital broadcast bandwidth requirements and to delivering a premium HD content experience. As evidenced by the high percentage of global sales of TV and set-top boxes shipped with our technologies, we continue to maintain strong market share.

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As countries within emerging markets convert to digital television, we are well positioned to benefit from this transition, and our growth in this market is dependent in part upon continued adoption of our technologies. Broadcast services that operate under bandwidth constraints, such as terrestrial broadcast or Internet protocol television (“IPTV”) services, benefit from Dolby technologies, which enable the delivery of high quality audio content at reduced bit rates, thereby conserving bandwidth.
PC Market
Our technologies are in the majority of PCs sold today due to their incorporation in Microsoft Windows 8 for disc and online content playback and, for versions prior to Windows 8, primarily because of their inclusion in DVD and Blu-ray Disc playback functionality. Historically, we have licensed our technologies to a range of PC licensees, including independent software vendors (“ISV”), PC OEMs, and operating system providers. The release of new versions of major PC operating systems has sometimes resulted in changes in the mix of our PC licensees. The impact on us from the transition to Windows 8 will depend on several factors, including the extent to which Windows 8 is adopted, unit shipments in the marketplace, and our direct licensing relationships with PC OEMs.
Consumer Electronics ("CE") Market
Our CE market is primarily driven by revenue attributable to DVD and Blu-ray Disc players and recorders. Sales of DVD players are declining as a result of the maturity of the DVD platform and a shift to Blu-ray players and other connected devices capable of delivering content. The decline in DVD revenue is only partially offset by revenue from Blu-ray players which have not reached the annual volumes generated by DVD players in prior periods. This is in part due to the large number of competing products and services that currently deliver content over the Internet.
Mobile Market
Our mobile market is largely driven by sales of smartphones and tablet devices that incorporate our technologies. Our growth in this market is dependent not only on the performance of the mobile device market as a whole, but also on our success of collaborating with manufacturers of mobile devices to incorporate our technologies. Currently, these devices include various Android smartphones and tablets, certain Amazon Kindle models, and Microsoft Windows 8 smartphones and tablets. However, the rate of new product development in this sector is rapid and can result in dramatic swings in consumer adoption trends. As a result, we must continue to align our technologies with a shifting array of mobile devices in order to maintain and grow the use of our solutions in mobile devices.
Other Markets
Revenue generated from our other markets typically stems from gaming devices and peripherals, automotive and licensing services. Revenue attributable to gaming and automotive is primarily driven by sales of video game consoles and in-car entertainment systems that incorporate our Dolby Digital, Dolby Digital Plus, AAC, and Dolby TrueHD technologies. Licensing services revenue, from the administration of our patent pools through our wholly-owned subsidiary Via Licensing Corporation, is primarily driven by demand for standards-based audio compression technologies for broadcast, CE, and mobile products.
Products
The following table presents the composition of our products revenue for all periods presented:
 
Fiscal Year Ended
Market
September 27,
2013
September 28,
2012
September 30,
2011
Cinema
87%
87%
87%
Broadcast
9%
10%
10%
Other
4%
3%
3%
Total
100%
100%
100%
Revenue from our cinema products tends to fluctuate based on the underlying trends in the cinema industry, including technology adoption and replacement cycles. One such significant trend is the industry's transition from film-based to digital cinema, the latter of which eliminates film printing and distribution costs, combats piracy and

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enables repeated movie playback without image or audio degradation.
Digital cinema products
Our cinema products include our digital audio processor that provides multichannel surround playback for our digital cinema servers, screen server and central library server for the storage and playback of digital content, as well as our Dolby Digital Cinema Integrated Media Block (“IMB”) which performs audio and video decoding and playback. As the market for digital cinema servers and related equipment has become increasingly competitive and the industry's transition from film to digital nears completion, revenue from our cinema products will likely further decline until the industry’s replacement cycle reverses this trend. We will need to manage our products through such a decline.
Our Dolby Atmos object-oriented sound platform, introduced last year, enhances the cinema experience and provides more flexibility and control for sound designers and mixers to deliver more natural and realistic sound. To date, no standards exist for object audio playback in cinema, however both the North American Theatre Owners ("NATO") and Digital Cinema Initiative ("DCI"), a group representing the top Hollywood studios, have encouraged the development of an industry standard for object-oriented audio. We will continue to collaborate with these industry participants since the outcome may impact future adoption of our products.
Digital 3D products
Our digital cinema 3D products for cinema provide 3D image capabilities when combined with a digital cinema projector and server. Our revenue in this area has been negatively impacted by declines in unit shipments and lower selling prices for 3D products, as the market for 3D cinema equipment has become increasingly competitive and the adoption rate of new 3D screens has slowed considerably.
Broadcast products
Our broadcast products are used to encode, transmit, and decode multiple channels of high quality audio content for DTV and HDTV program production and broadcast distribution and to measure the subjective loudness of audio content within broadcast programming. Since our broadcast products support the use of our encoding technologies, revenue from these products will increase or decline commensurate with the adoption of our encoding technologies especially in new and emerging markets.
Film-based products
Our film cinema products are used primarily to read, decode, and play back film soundtracks, to calibrate cinema sound systems, and to enable soundtracks encoded in digital audio to be played back on analog cinema audio systems. As the cinema industry has increasingly adopted digital-based formats, revenue from our film cinema products has declined, and we anticipate this decline to continue.
Services
Services revenue is primarily tied to activity in the cinema industry, and has been adversely impacted by the industry's transition from film to digital-based production. Services are also dependent upon the volume of film production by studios and independent filmmakers. Several factors influence the number of movies produced in a given fiscal period, including strikes and work stoppages within the cinema industry and budgetary constraints and changes in cinema industry business models. Our services revenue continues to face significant competition from full-service post-production companies.
Strategic Initiatives
Developing Voice Technologies
With the growth of voice transmission over Internet protocol networks and the proliferation of devices that connect to these networks, we believe the quality of the voice experience can often be less than desirable. Our expertise in sound signal processing and compression technologies addresses some of the inherent shortcomings and provides noticeable improvement in voice quality and clarity. However, new or existing competitor technologies could adversely affect our ability to penetrate, grow and sustain market share in this industry.

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Developing Video Technologies
Our success in audio has resulted in part from our ability to develop and deliver the products, services, tools, and technologies needed to deliver a consistent, high quality audio experience across multiple channels. We believe these core competencies can be applied to video to significantly improve the technology currently used to deliver premium video to displays. In the cinema market, we offer exhibitors our digital cinema servers and 3D digital cinema products, which deliver a vivid movie experience with sharp images and natural colors.
We also offer a Professional Reference Monitor, a flat-panel video reference display for post-production professionals. These professionals use our monitor for critical tasks, such as calibrating color accuracy to professional reference standards. Our Professional Reference Monitor uses our dynamic range imaging technologies, which compared to competing products, enable enhanced contrast, extended brightness and dynamic range, along with reduced power consumption in LED backlit televisions.
Building on the Strength of the Dolby Brand
We are building on the strength of the Dolby brand among consumers and our reputation among licensees and customers as a trusted provider of high quality sound and imaging technologies. Our solutions are critical to providing high quality audio and video experiences in the cinema, home, at work or on the go. We actively encourage our customers to place our trademarks on their products in conjunction with the inclusion of our technologies.
The inclusion of the Dolby trademark on a product informs audiences and consumers that the product incorporates our technologies and meets our quality standards, and we believe this helps OEMs sell their products. We will continue to encourage the use of our trademarks throughout the entertainment industry as an indicator to both professionals and consumers of consistently high quality.
Addressing Ongoing Content Creator Needs
Technology innovations for entertainment are often adopted first for professional use, as filmmakers, music producers, broadcasters, and video game designers look for ways to excite their audiences. We are collaborating with industry professionals to develop new technologies that facilitate and improve content recording, distribution, and playback. Our professional solutions often have applicability to the consumer arena, and when they apply, we intend to continue to adapt these technologies for use in consumer applications. Our noise reduction, multichannel sound, and digital audio technologies were all initially developed for professional use and later adapted for use in consumer products. We believe that our success in developing technologies for professional use contributes greatly to the appeal of our technologies and brand for consumer use.
Promoting the Adoption of Dolby Technologies in Industry Standards
As the entertainment industry develops technical standards for content creation, delivery, and playback, we are often actively involved in those efforts, and we seek to have our technologies included in industry standards. We actively develop, maintain, and strengthen relationships across the broad spectrum of entertainment industry participants, professional organizations, and global standards-setting bodies.
Revenue from Significant Customers
Revenue from Samsung represented approximately 12% of our total revenue in fiscal 2013, and consisted primarily of licensing revenue from our mobile and broadcast markets. Revenue from Samsung did not exceed 10% of our total revenue in the prior periods presented. Although revenue from Microsoft did not exceed 10% of our total revenue in fiscal 2013, revenue from Microsoft did represent approximately 14% and 13% of our total revenue in fiscal 2012 and fiscal 2011, respectively, and included licensing revenue from our PC, CE, and other markets. Under the Windows 8 licensing agreement, we now receive certain royalties directly from PC OEMs, which differs from the prior Windows 7 arrangement where these royalties came from Microsoft.

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Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”), and pursuant to Securities and Exchange Commission (“SEC”) rules and regulations. The preparation of these financial statements requires us to establish 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 and estimate to be critical if it is both important to a company’s financial condition and/or results of operations and requires significant judgment on the part of management in its application. On a regular basis, we evaluate our assumptions, judgment, and estimates. We have discussed the selection and development of the critical accounting policies and estimates with the Audit Committee of our Board of Directors. The Audit Committee has reviewed our related disclosures in this Annual Report on Form 10-K. Although we believe that our judgments and estimates are appropriate and correct, actual results may differ from these estimates.
We consider the following accounting policies and estimates listed below to be the most critical due to both their importance on our financial condition and results of operations and the level of management judgment required. If actual results or events differ materially, our reported financial condition and results of operation for future periods could be materially affected. Historically, our estimates and assumptions have not significantly differed from actual results. The estimates and/or assumptions relevant to these critical policies have not significantly changed in recent years, nor do we anticipate them to significantly change in the future. For additional information describing all of our significant accounting policies and methods used in the preparation of our financial statements, refer to Note 2, “Summary of Significant Accounting Policies” of the Notes to the Consolidated Financial Statements in Part II, Item 8, while further information regarding the potential risks to our future results of operations are included within “Risk Factors” in Part I, Item 1A of this Form 10-K.
Goodwill, Intangible Assets, and Long-Lived Assets
Description
We test goodwill for impairment annually during our third fiscal quarter and whenever events or changes in circumstances indicate that the carrying amount may be impaired. Intangible assets with definite lives are amortized over their estimated useful lives. Our intangible assets principally consist of acquired technology, patents, trademarks, customer relationships and contracts, which are amortized on a straight-line basis over their useful lives ranging from three to seventeen years.

We review long-lived assets, including intangible assets, for impairment whenever events or a change in circumstances indicate that an asset’s carrying value may not be recoverable. Recoverability of an asset is measured by comparing its carrying value to the total 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 value of the asset exceeds its estimated fair value.
Judgments And Uncertainties
Beginning in the third quarter of fiscal 2012, we adopted the provisions of the FASB's recently issued accounting standard (ASU 2011-08) which permits the execution of a qualitative assessment as a determinant for whether the two-step annual goodwill impairment test should be performed. In performing our annual goodwill impairment test, we first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform a two-step goodwill test. In performing the qualitative assessment, we consider events and circumstances, including but not limited to, macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, changes in management or key personnel, changes in strategy, changes in customers, changes in the composition or carrying amount of a reporting unit's net assets and changes in the price of our common stock. If, after assessing the totality of events or circumstances, we determine that it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, then the two-step goodwill impairment test is not performed.

If the two-step goodwill test is performed, we evaluate and test our goodwill for impairment at a reporting-unit level using expected future cash flows to be generated by the reporting unit. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of the reporting unit's goodwill over the calculated fair value of the goodwill. A reporting unit is an operating segment or one level below.

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Revenue Recognition
Description
We enter into revenue arrangements with our customers to license technologies, trademarks and know-how and to sell products and services. We recognize revenue when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been completed, the seller's price to the buyer is fixed or determinable and collectibility is probable.
Multiple-Element Arrangements.   Some of our revenue arrangements include multiple elements (“MEs”), such as hardware, software, maintenance and other services. We evaluate each element in a multiple element arrangement to determine whether it represents a separate unit of accounting. An element constitutes a separate unit of accounting when it has standalone value and delivery of an undelivered element is both probable and within our control. When these criteria are not met, the delivered and undelivered elements are combined and the arrangement fees are allocated to this combined single unit. If the unit separation criteria are met, we account for each element within a ME arrangement (such as hardware, software, maintenance and other services) separately, whereby the total arrangement fees are allocated to each element based on its relative selling price, which we establish using a selling price hierarchy. We determine the selling price of each element based on its vendor specific objective evidence (“VSOE”), if available, third party evidence (“TPE”), if VSOE is not available, or estimated selling price (“ESP”), if neither VSOE nor TPE is available.
For some arrangements, customers receive certain elements over a period of time, after delivery of the initial product. These elements may include support and maintenance and/or the right to receive upgrades. Revenue allocated to the undelivered element is recognized either over its estimated service period or when the upgrade is delivered. We do not recognize revenue that is contingent upon the future delivery of products or services or upon future performance obligations. We recognize revenue for delivered elements only when we have completed all contractual obligations.
We determine our ESP for an individual element within a ME revenue arrangement using the same methods used to determine the selling price of an element sold on a standalone basis. If we sell the element on a standalone basis, we estimate the selling price by considering actual sales prices. Otherwise, we estimate the selling price by considering internal factors such as pricing practices and margin objectives. Consideration is also given to market conditions such as competitor pricing.
We account for the majority of our digital cinema server and processor sales as ME arrangements that may include up to four separate units, or elements, of accounting.

1. The first element consists of our digital cinema server hardware and the accompanying software, which is essential to the functionality of the hardware. This element is typically delivered at the time of sale.
2. The second element is the right to receive support and maintenance, which is included with the purchase of the hardware element and is typically delivered over a service period subsequent to the initial sale.
3. The third element is the right to receive specified upgrades, which is included with the purchase of the hardware element and is typically delivered when a specified upgrade is available, subsequent to the initial sale. Under revenue recognition accounting standards, sales of our digital cinema servers typically result in the allocation of a substantial majority of the arrangement fees to the delivered hardware element based on its ESP, which we recognize as revenue at the time of sale once delivery has occurred. A small portion of the arrangement fees are allocated to the undelivered support and maintenance element, and in some cases to the undelivered specified upgrade element, based on the VSOE or ESP of each element. The portion of the arrangement fees allocated to the support and maintenance element are recognized as revenue ratably over the estimated service period, and the portion of the arrangement fees allocated to specified upgrades are recognized as revenue upon delivery of the upgrade.
4. The fourth element is the right to receive commissioning services performed solely in connection with our digital servers necessary for the installation of Dolby Atmos-enabled theatres. These services consist of the review of venue designs specifying proposed speaker placement, as well as calibration services performed for installed speakers to ensure optimal playback. A small portion of the arrangement fee is allocated to these services based on their ESP which we recognize as revenue once the services have been completed.
Software Arrangements.  Revenue recognition for transactions that involve software, such as fees we earn from certain system licensees, may include multiple elements. For some of our ME arrangements, customers receive certain elements over a period of time or after delivery of the initial software. These elements may include support and maintenance. The fair values of these elements are recognized over the estimated period for which these elements will be delivered, which is sometimes the estimated life of the software. If we do not have VSOE of fair value for any undelivered element included in these ME arrangements for 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.

In certain cases, our arrangements require the licensee to pay a fixed fee for units they may distribute in the future. These fees are generally recognized upon contract execution, unless the arrangement includes contingency terms or is considered a ME arrangement.
Judgments And Uncertainties
Revenue recognition for transactions that may include multiple elements, such as fees we earn from certain system licensees, requires judgment in several possible areas including the following:
• Identifying the significant deliverables within the arrangements and determining whether the significant deliverables constitute separate units of accounting;
• Timing of delivery or performance of service for the significant deliverables;
• The assumptions and inputs used to determine selling price (whether vendor-specific objective evidence, third-party evidence, or estimated selling price) for the significant deliverables;
• To the extent that customers receive certain elements of the arrangement over a period of time following initial delivery, as necessary, we estimate the period of time over which revenue is recognized; and
• 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.

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Income Taxes
Description
We use the asset and liability method, under which deferred income tax assets and liabilities are determined based upon the difference between the financial statement carrying amounts and the tax bases of assets and liabilities and net operating loss carryforwards and tax credits are measured using the enacted tax rate expected to apply to taxable income in the years in which the differences are expected to be reversed.

Our policy is to recognize a tax benefit from an uncertain tax position only if it is more likely than not that the tax position is sustainable upon examination by tax authorities. In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The realization of deferred tax assets is additionally dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. We consider the scheduled reversal of deferred tax liabilities and projected future taxable income in making this assessment. We record a valuation allowance to reduce our deferred tax assets when uncertainty regarding their realizability exists.

We include interest and penalties related to gross unrecognized tax benefits within our provision for income taxes. To the extent accrued interest and penalties do not ultimately become payable, amounts accrued are reduced in the period that such determination is made and are reflected as a reduction of the overall income tax provision.
Judgments And Uncertainties
We make estimates and judgments that affect our accounting for income taxes. This includes estimating actual tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences, including the timing of the recognition of stock-based compensation expense, result in deferred tax assets and liabilities, which are included in our 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 establish a valuation allowance.

Significant judgment is required in determining the provision for income taxes, the deferred tax asset and liability balances, the valuation allowance against our deferred tax assets and the reserve resulting from uncertainties in income tax positions. Our financial position and results of operations may be materially affected if actual results differ significantly from these estimates or if the estimates are adjusted in future periods.
Investments
Description
Valuation. Our investments are recorded at fair value in our consolidated balance sheets. Fair value is 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. We evaluate our investment portfolio for credit losses and other-than-temporary impairments by comparing the fair value with the cost basis for each of our investment securities. An investment is impaired if the fair value is less than its cost basis. If any portion of the impairment is deemed to be the result of a credit loss, the credit loss portion of the impairment is included as a component of net income. If we deem it probable that we will not recover the full cost basis of the security, the security is other-than-temporarily impaired and the impairment loss is recognized as a component of net income. The degree to which estimates and judgment are used in determining fair value is generally dependent upon the market pricing information available for the investments, the availability of observable inputs and input from independent third parties, the frequency of trading in the investments, and the investment’s complexity. If different judgments regarding inputs were made, we could potentially reach different conclusions regarding the fair value of our investments.

Classification. All of our investments are classified as available-for-sale securities, with the exception of our investments held in our supplemental retirement plan, which are classified as trading securities. Investments that have an original maturity of 91 days or more at the date of purchase and a current maturity of less than one year are classified as short-term investments, while investments with a current maturity of more than one year are classified as long-term investments.

We classify our financial assets and liabilities measured at fair value using a three-level hierarchy that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are those that reflect the assumptions market participants would use in pricing the investment that are based on market data obtained from sources independent of the reporting entity, such as market quoted prices.
Judgments And Uncertainties
The degree to which estimates and judgment are used in determining fair value, is generally dependent upon the market pricing information available for the investments, the availability of observable inputs, the frequency of trading in the investments and the investment’s complexity. If different judgments regarding inputs were made, we could potentially reach different conclusions regarding the fair value of our investments.

GAAP establishes a three-level hierarchy prioritizing the observable inputs used in measuring the fair value of financial assets and liabilities as follows: the fair value hierarchy gives the highest priority to quoted prices in active markets that are accessible by us at the measurement date for identical investments, described as Level 1, and the lowest priority to valuation techniques using unobservable inputs, described as Level 3. We obtain the fair value of our Level 2 financial instruments from a professional pricing service, which may use quoted market prices for identical or comparable instruments. Fair value from this professional pricing source can also be based on pricing models whereby all significant inputs, including maturity dates, issue dates, settlement dates, benchmark yields, reported trades, broker-dealer quotes, issuer spreads, benchmark securities, bids, offers and other market related data, are observable or can be derived from or corroborated by observable market data for substantially the full term of the asset.


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Stock-Based Compensation
Description
We determine the expense for all employee stock-based compensation awards by estimating their fair value and recognizing that value as an expense, on a ratable basis, in our consolidated financial statements over the requisite service period in which our employees earn the awards. We use the Black-Scholes option pricing model to determine the fair value of employee stock options at the date of the grant.
Judgments And Uncertainties
To determine the fair value of a stock-based award using the Black-Scholes option pricing model, we make assumptions 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 of the award. We estimate the expected term of our stock-based awards by evaluating historical exercise patterns of our employees. We use a blend of the historical volatility of our common stock and the implied volatility of our traded options 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. We reduce the stock-based compensation expense for estimated forfeitures based on our historical experience. We are required to estimate forfeitures at the time of the grant and revise our estimate, if necessary, in subsequent periods if actual forfeitures differ from our estimate.

 
Results of Operations
Revenue and Gross Margin
Licensing
We license intellectual property to our customers that may be internally developed, acquired by us, or licensed from third parties. Our cost of licensing consists mainly of amortization of purchased intangible assets and intangible assets acquired in business combinations as well as third party royalty obligations paid to license intellectual property that we then sublicense to our customers.
 
Fiscal Year Ended
 
2013 vs. 2012
 
2012 vs. 2011
 
September 27,
2013
September 28,
2012
September 30,
2011
 
$
%
 
$
%
Licensing
($ in thousands)
 


 
 
 
Revenue
$807,081
$801,313
$795,900
 
$5,768
1%
 
$5,413
1%
Percentage Of Total Revenue
89%
86%
83%
 


 
 
 
Cost Of Licensing
16,856
12,924
17,620
 
3,932
30%
 
(4,696)
(27)%
Gross Margin
790,225
788,389
778,280
 
1,836
—%
 
10,109
1%
Gross Margin Percentage
98%
98%
98%
 


 
 
 
Beginning in the first quarter of fiscal 2013, we have recorded settlements from implementation licensees as licensing revenue rather than as an offset to sales and marketing expenses. In order to conform to the current period's presentation, we have reclassified these settlements for the prior periods presented within our consolidated statements of operations. For additional details on the reclassification, see Note 1Basis of Presentation” to our consolidated financial statements.
Key drivers identified throughout this section reflect their order of magnitude in descending order for the respective periods noted.

FY 2013 vs. FY 2012
Key Drivers
Revenue
Gross Margin
Mobile
á
Driven by higher shipments of smartphones that incorporate our technologies as well as the recognition of previously deferred tablet revenue
Although licensing gross margin percentage remained consistent at 98% from fiscal 2012 to fiscal 2013, cost of licensing increased over the comparative period, primarily due to an increase in fees paid to a third party resulting from increased royalty revenue and a $3.9 million charge recorded during fiscal 2013 in connection with certain revenue-sharing agreements
Broadcast
á
Driven by higher shipments of digital televisions and set-top boxes that incorporate our technologies
PC
â
Driven primarily by market declines of shipments
CE
â
Attributable to decreases in revenue from DVD and Blu-ray Disc devices

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FY 2012 vs. FY 2011
Key Drivers
Revenue
Gross Margin
Broadcast
á
Driven by higher shipments of digital televisions and set-top boxes that incorporate our technologies
Licensing gross margin remain unchanged from fiscal 2011 to fiscal 2012
Mobile
á
Driven by increases in sales of mobile and tablet devices that incorporate our technologies
CE
â
Attributable to decreases in revenue from DVD and Blu-ray Disc players
PC
â
Driven by decreased ISV media applications in PC shipments

Products
Cost of products primarily consists of the cost of materials related to products sold, applied labor and manufacturing overhead, and, to a lesser extent, amortization of certain intangible assets. Our cost of products also includes third party royalty obligations paid to license intellectual property that we include in our products.
 
Fiscal Year Ended
 
2013 vs. 2012
 
2012 vs. 2011
 
September 27,
2013
September 28,
2012
September 30,
2011
 
$
%
 
$
%
Products
($ in thousands)
 
 
 
 
 
 
Revenue
$80,603
$103,388
$131,611
 
$(22,785)
(22)%
 
$(28,223)
(21)%
Percentage Of Total Revenue
9%
11%
14%
 
 
 
 
 
 
Cost Of Products
64,270
66,325
81,328
 
(2,055)
(3)%
 
(15,003)
(18)%
Gross Margin
16,333
37,063
50,283
 
(20,730)
(56)%
 
(13,220)
(26)%
Gross Margin Percentage
20%
36%
38%
 
 
 
 
 
 

FY 2013 vs. FY 2012
Key Drivers
Revenue
Gross Margin
Digital Cinema (Video)
â
The decrease in revenue from digital cinema video products was primarily due to lower unit shipments and average selling prices amid increased competition
â
Driven by a combination of lower average selling prices and increased unit standard costs on our highest-priced product
Film-Based Cinema
â
Driven by lower shipments resulting from the industry transition to digital cinema
á
Driven by lower unit standard costs in addition to higher average selling prices
Broadcast
â
Driven by lower shipments as our customers transition to software licensing solutions
á
Driven by higher average selling prices and unchanged or lower unit standard costs on our products.
Atmos
á
Driven by installations of the Dolby Atmos processor in theaters around the world and for which we began recognizing revenue in fiscal 2013
á
Driven by higher margins realized on installations of Dolby Atmos processors
Digital Cinema (Audio)
á
Driven by increased shipments of our digital cinema audio processors
â
Driven by lower average selling prices and higher unit standard costs
Other
 
No material fluctuations
â
Driven by $3.1 million higher discrete charges related to write-downs of excess inventory and unfavorable manufacturing overhead variances

FY 2012 vs. FY 2011
Key Drivers
Revenue
Gross Margin
3D Products
â
Driven by lower shipments and lower average selling prices resulting from increased competition
â
Due to lower shipments and lower average selling prices
Film-Based Cinema
â
Driven by lower shipments and lower average selling prices as more exhibitors converted to digital cinema
â
Driven by lower average selling prices
Digital Cinema
 
No material fluctuations
â
Due to lower average selling prices
Broadcast
 
No material fluctuations
â
Due to lower shipments and lower average selling prices
Other
 
No material fluctuations
â
The decrease in products gross margin was further impacted by higher excess manufacturing capacity charges
á
The total decrease in products gross margin was partially offset by a decrease in discrete charges related to inventory valuation and other inventory adjustments


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Services
Cost of services primarily consists of personnel and personnel-related costs for employees performing our professional services, the cost of outside consultants, and other direct expenses incurred on behalf of customers.
 
Fiscal Year Ended
 
2013 vs. 2012
 
2012 vs. 2011
 
September 27,
2013
September 28,
2012
September 30,
2011
 
$
%
 
$
%
Services
($ in thousands)
 
 
 
 
 
 
Revenue
$21,990
$28,313
$33,554
 
$(6,323)
(22)%
 
$(5,241)
(16)%
Percentage Of Total Revenue
2%
3%
3%
 
 
 
 
 
 
Cost Of Services
15,593
12,778
12,223
 
2,815
22%
 
555
5%
Gross Margin
6,397
15,535
21,331
 
(9,138)
(59)%
 
(5,796)
(27)%
Gross Margin Percentage
29%
55%
64%
 
 
 
 
 
 

FY 2013 vs. FY 2012
Key Drivers
Revenue
Gross Margin
Film-based production services
â
Driven by declines in film-based production services consistent with the industry transition to digital cinema
â
Driven by a decrease in revenues from certain higher margin service offerings
Other
á
Driven by an increase in revenue from support and maintenance services that resulted from a higher volume of equipment in the field which are covered under our service programs
â
Driven by an increase in costs associated with exhibitor installations of Dolby Atmos equipment

FY 2012 vs. FY 2011
Key Drivers
Revenue
Gross Margin
Film-based production services
â
Driven by declines in film-based production services consistent with the industry transition to digital cinema
â
Driven by a decrease in revenues from certain higher margin service offerings
Virtual print fees
â
Driven by a decrease in virtual print fees from certain leased digital cinema assets; this program was discontinued during fiscal 2012
 
No material fluctuations
Other
á
Driven by an increase in maintenance and support services
â
Due primarily to decreased revenues from certain higher margin service offerings

Operating Expenses
Research and Development
Research and development expenses consist primarily of employee compensation and benefits expenses, stock-based compensation, consulting and contract labor costs, depreciation and amortization expenses, facilities costs, costs for outside materials and services, and information technology expenses.
 
Fiscal Year Ended
 
2013 vs. 2012
 
2012 vs. 2011
 
September 27,
2013
September 28,
2012
September 30,
2011
 
$
%
 
$
%
 
($ in thousands)
 
 
 
 
 
 
Research and Development
$168,746
$140,143
$123,920
 
$28,603
20%
 
$16,223
13%
Percentage of total revenue
19%
15%
13%
 
 
 
 
 
 

FY 2013 vs. FY 2012
Expense Category
Key Drivers
Compensation and benefits
á
Driven by increased headcount aimed at increasing the amount of new product offerings and solutions
Stock-based compensation
á
Driven by increased headcount and incremental expense related to equity award modifications that occurred following the special dividend made in the first quarter of fiscal 2013 (refer to footnote 6 for additional information)
Information technology
á
Driven by an increase in projects and activities aimed at developing new products and technologies
Product development
á


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FY 2012 vs. FY 2011
Expense Category
Key Drivers
Compensation and benefits
á
Driven by increased headcount
Information technology
á
Driven by an increase in the number of offices where research and development is conducted
Facilities and related costs
á
Prototypes
á
Driven by new Cinema and Professional Reference Monitor products

Sales and Marketing
Sales and marketing expenses consist primarily of employee compensation and benefits expenses, stock-based compensation, marketing and promotional expenses particularly for events such as trade shows and conferences, travel-related expenses for our sales and marketing personnel, consulting fees, facilities costs, depreciation and amortization expenses, and information technology expenses.
 
Fiscal Year Ended
 
2013 vs. 2012
 
2012 vs. 2011
 
September 27,
2013
September 28,
2012
September 30,
2011
 
$
%
 
$
%
 
($ in thousands)
 
 
 
 
 
 
Sales and Marketing
$231,103
$188,486
$155,202
 
$42,617
23%
 
$33,284
21%
Percentage of total revenue
25%
20%
16%
 
 
 
 
 
 
As discussed above, we began recording settlements from implementation licensees as licensing revenue rather than as an offset to sales and marketing expenses in the first quarter of fiscal 2013. In order to conform to the current period's presentation, we have reclassified these settlements for the prior periods presented within our consolidated statements of operations. For additional details on the reclassification, see Note 1Basis of Presentation” to our consolidated financial statements.

FY 2013 vs. FY 2012
Expense Category
Key Drivers
Compensation and benefits
á
Driven by increased headcount as we expanded our sales and marketing efforts broadly across our target markets and related geographic locations
Travel-related expenses
á
Stock-based compensation
á
Driven by increased headcount and incremental expense related to equity award modifications that occurred following the special dividend made in the first quarter of fiscal 2013 (refer to footnote 6 for additional information)
Consulting and external labor costs
á
Driven by promotional events and expenses, including those associated with the launch of Dolby Atmos and our naming rights agreement for the Dolby Theatre
Marketing
á
Facilities and related costs
á
Driven by an increase in the number of offices and leasehold improvements at both new and existing locations where sales and marketing is conducted
Depreciation and amortization
á
FY 2012 vs. FY 2011
Expense Category
Key Drivers
Compensation and benefits
á
Driven by increased headcount
Stock-based compensation
á
Consulting and external labor costs
á
Driven by promotional events and expenses, including those associated with our naming rights agreement for the Dolby Theatre and due to the launch of Dolby Atmos
Marketing
á
Facilities and related costs
á
Driven by an increase in the number of offices where sales and marketing is conducted

General and Administrative
General and administrative expenses consist primarily of employee compensation and benefits expenses, stock-based compensation, depreciation, information technology expenses, professional fees, consulting and contract labor and facilities costs.

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Fiscal Year Ended
 
2013 vs. 2012
 
2012 vs. 2011
 
September 27,
2013
September 28,
2012
September 30,
2011
 
$
%
 
$
%
 
($ in thousands)
 
 
 
 
 
 
General and Administrative
$161,970
$149,175
$137,633
 
$12,795
9%
 
$11,542
8%
Percentage of total revenue
18%
16%
14%
 
 
 
 
 
 

FY 2013 vs. FY 2012
Expense Category
Key Drivers
Compensation and benefits
á
Driven by increased headcount
Stock-based compensation
á
Driven by increased headcount and incremental expense related to equity award modifications that occurred following the special dividend made in the first quarter of fiscal 2013 (refer to footnote 6 for additional information)
Legal and professional fees
á
Attributed to patent filings and other legal activities
Consulting and external labor costs
â
Due to conversions from consultants to full-time hires and lower volume of contracted resources

FY 2012 vs. FY 2011
Expense Category
Key Drivers
Compensation and benefits
á
Driven by increased headcount
Professional fees
á
Attributed to patent filings and other legal activities
Depreciation expense
á
Related to implementation of information technology-related projects
Consulting and external labor costs
â
Decreases in contracted resources

Restructuring
 
Fiscal Year Ended
 
2013 vs. 2012
 
2012 vs. 2011
 
September 27,
2013
September 28,
2012
September 30,
2011
 
$
%
 
$
%
 
($ in thousands)
 
 
 
 
 
 
Restructuring
$5,874
$1,191
$3,406
 
$4,683
393%
 
$(2,215)
(65)%
Percentage of total revenue
1%
—%
—%
 
 
 
 
 
 
Restructuring charges for fiscal 2013 include the expenses we incurred in relation to a strategic restructuring program implemented in the current year to reorganize certain activities and responsibilities within our marketing function. These charges were primarily related to severance and other related benefits provided to affected employees in addition to costs associated with the exit of a facility.
Restructuring charges for fiscal 2012 and fiscal 2011 primarily include severance charges attributable to the reorganization of our global business infrastructure and a strategic restructuring program. Restructuring charges for fiscal 2011 also included an impairment charge related to the decision to sell one of our buildings in the U.K. For additional information on our Restructuring programs, see Note 7Restructuring” to our consolidated financial statements.

Other Income/(Expense)
Other income/(expense) primarily consists of interest income earned on cash, cash equivalents, and investments and other income/(expense) related to net gains/losses from foreign currency transactions, derivative instruments, and sales of available-for-sale or trading securities.
 
Fiscal Year Ended
 
2013 vs. 2012
 
2012 vs. 2011
 
September 27,
2013
September 28,
2012
September 30,
2011
 
$
%
 
$
%
Other Income/(Expense)
($ in thousands)
 
 
 
 
 
 
Interest income
$3,848
$6,411
$8,976
 
$(2,563)
(40)%
 
$(2,565)
(29)%
Interest expense
(575)
(196)
1,027
 
(379)
193%
 
(1,223)
(119)%
Other income, net
2,111
784
907
 
1,327
169%
 
(123)
(14)%
Total other income, net
$5,384
$6,999
$10,910
 
$(1,615)
(23)%
 
$(3,911)
(36)%

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FY 2013 vs. FY 2012
Expense Category
Key Drivers
Interest income
â
Attributed to lower average investment portfolio balances following the payment of a $408.2 million special dividend in the first quarter of fiscal 2013 in addition to lower average interest rates
Interest expense
á
Attributed to accrued interest recorded on a patent obligation
Other income/(expense)
á
Realized gains on the sale of investment securities and the recognition of the accumulated currency translation adjustment balance of a foreign subsidiary into income following its dissolution in fiscal 2013

FY 2012 vs. FY 2011
Expense Category
Key Drivers
Interest income
â
Due to a decrease in cash, cash equivalents and investment balances, in aggregate, compared to fiscal 2011 and lower average interest rates on our investments
Interest expense
á
Increase as interest expense in fiscal 2011 included the impact of the reversal of interest expense related to the release of VAT reserves
Income Taxes
Our effective tax rate is based on a projection of our annual fiscal year results, and is affected each quarter-end by several factors. These include changes in our projected fiscal year results, recurring items such as tax rates and relative income earned in foreign jurisdictions as well as discrete items that may occur in, but are not necessarily consistent between periods. For additional information related to effective tax rates, see Note 8Income Taxes” to our consolidated financial statements.
 
Fiscal Year Ended
 
September 27,
2013
September 28,
2012
September 30,
2011
 
($ in thousands)
Provision for income taxes
$(60,344)
$(103,857)
$(130,061)
Effective tax rate
24%
28%
30%

FY 2013 vs. FY 2012
Factor
Impact On Effective Tax Rate
Reinstatement of Federal R&D Tax Credits
â
Our effective tax rate in fiscal 2013 reflects the benefit from an increase in federal research and development tax credits in fiscal 2013 as compared to fiscal 2012 resulting from a change in the tax law in January 2013. This change retroactively reinstated these credits for a portion of fiscal 2012
Foreign Operations Reorganization
â
In fiscal 2013, we reorganized the operations of certain foreign subsidiaries associated with previous acquisitions. The reorganizations resulted in the release of $7.4 million in deferred tax liabilities representing accrued domestic taxes and amortization of intangible assets, which benefited our effective tax rate for fiscal 2013 by 3%

FY 2012 vs. FY 2011
Factor
Impact On Effective Tax Rate
Indefinite reinvest election (undistributed earnings)
â
Our effective tax rate in fiscal 2012 reflects the additional benefits from our election in fiscal 2011 to begin indefinitely reinvesting a portion of our undistributed earnings in certain foreign subsidiaries
Change in California state apportionment sourcing rules
â
We benefited from a change in the State of California apportionment sourcing rules, which began to affect our current California taxes beginning in the first quarter of fiscal 2012
Expiration of Federal R&D Tax Credits
á
The expiration of the federal research and development tax credits, beginning January 1, 2012, resulted in an increase in our effective tax rate

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Liquidity, Capital Resources, and Financial Condition
Our principal sources of liquidity are our cash, cash equivalents, and investments, as well as cash flows from 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 twelve months.
As of September 27, 2013, we had cash and cash equivalents of $454.4 million, which consisted of cash and highly-liquid money market funds. In addition, we had short-term and long-term investments of $446.6 million, which consisted primarily of municipal debt securities, commercial paper, corporate bonds, and U.S. agency securities. Of our total cash, cash equivalents, and investments held as of September 27, 2013, $266.0 million, or 30%, was held by our foreign subsidiaries. This represented a $31.6 million increase from the $234.4 million that was held by our foreign subsidiaries as of September 28, 2012. A majority of the amounts held outside of the U.S. are utilized to support non-U.S. liquidity needs in order to fund operations and other growth of our non-U.S. subsidiaries and acquisitions. Our policy is to indefinitely reinvest a portion of our undistributed earnings in certain foreign subsidiaries. If these undistributed earnings held by foreign subsidiaries are repatriated to the U.S., they may be subject to U.S. federal income taxes and foreign withholding taxes, less applicable foreign tax credits.
 
 
September 27,
2013
September 28,
2012
 
(in thousands)
Cash and cash equivalents
$454,397
$492,600
Short-term investments
140,267
302,693
Long-term investments
306,338
361,614
Accounts receivable, net
97,460
43,495
Accounts payable and accrued liabilities
148,490
130,923
Working capital (1)
639,907
813,446
 
 
 
 
Fiscal Year Ended
 
September 27,
2013
September 28,
2012
 
(in thousands)
Net cash provided by operating activities
$274,661
$389,797
Capital expenditures
(26,711)
(167,349)
Repurchase of common stock
(82,245)
(268,203)
Net cash provided by/(used in) investing activities
176,865
(194,679)
Net cash used in financing activities
(487,964)
(254,318)
(1)
Working capital consists of total current assets less total current liabilities.
Capital Expenditures and Uses of Capital
Our capital expenditures consist of purchases of land, building, building fixtures, office equipment, computer hardware and software, leasehold improvements, and production and test equipment. We continue to invest in sales and marketing and research and development that contribute to the overall growth of our business and technological innovation. In fiscal 2012, we purchased an approximately 354,000 square foot property in San Francisco, California for $109.8 million, using existing cash. We are in the process of making substantial improvements to the property in order to prepare the building for its intended use as our new worldwide headquarters.
On December 11, 2012, our Board of Directors declared a special dividend in the amount of $4.00 per share on our Class A and Class B Common Stock. Payment of the special dividend was made on December 27, 2012 to eligible stockholders of record as of the close of business on December 21, 2012 ("Record Date"). Based on the 102,051,386 shares of Class A and Class B Common Stock outstanding as of the record date, the total special dividend payment was $408.2 million. To fund the dividend payment, we used existing cash along with proceeds from the sale of securities from our investment portfolio.
We retain sufficient cash holdings to support our operations and we also purchase investment grade securities diversified among security types, industries, and issuers. We have used cash generated from our operations to fund a variety of activities related to our business in addition to our ongoing operations, including business expansion and growth, acquisitions, and repurchases of our common stock. We have historically generated significant cash from operations, however these cash flows and the value of our investment portfolio could be affected by various risks and uncertainties, as described in Part II, Item 1A “Risk Factors.”

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Indemnification
We are party to certain contractual agreements under which we have agreed to provide indemnifications of varying scope and duration to the other party relating to our licensed intellectual property. Historically, we have not made any payments for these indemnification obligations and no amounts have been accrued in our consolidated financial statements with respect to these obligations. Due to their varying terms and conditions, we are unable to make a reasonable estimate of the maximum potential amount we could be required to pay.
Cash Flows
Factors identified below reflect their order of magnitude in descending order.
Operating Activities
Net cash provided by operating activities decreased $115.1 million from fiscal 2012 as compared to fiscal 2013, primarily due to the following:
Factor
Impact On Cash Flows
Net Income
â
A decrease in net income
Changes in operating assets and liabilities
â
Decreased resulting from increases in current assets exceeding decreases in current liabilities largely due to an increase in accounts receivable primarily due to timing differences
Investing Activities
Net cash provided by/(used in) investing activities increased $371.5 million from fiscal 2012 as compared to fiscal 2013, primarily due to the following:
Factor
Impact On Cash Flows
Sale of marketable securities
á
An increase in proceeds received from the sale of available-for-sale securities as these securities were sold in part to fund the payment of a $408.2 million special dividend made in the first quarter of fiscal 2013
Capital expenditures
á
Increased as less capital expenditures were made in fiscal 2013 compared to fiscal 2012 when the building to be used as our new headquarters was acquired
Purchases of marketable securities
á
Increased as we purchased less available-for-sale securities in fiscal 2013 following the payment of a $408.2 million special dividend made in the first quarter of fiscal 2013
Proceeds from maturities of securities
â
Decreased due to a lower volume of proceeds from maturities
Financing Activities
Net cash used in financing activities was $233.6 million higher in fiscal 2013 as compared to fiscal 2012, primarily due to the following:
Factor
Impact On Cash Flows
Dividend
â
Due to the payment of a special dividend to holders of our Class A and Class B common stock
Share repurchases
á
Fewer share repurchases of our Class A common stock in fiscal 2013 compared to fiscal 2012
Distributions
â
Due to an increase in distributions made to our controlling interest in fiscal 2013
Off-Balance-Sheet and Contractual Obligations
Our liquidity is not dependent upon the use of off-balance sheet financing arrangements, and we have not entered into any arrangements that are expected to have a material affect on liquidity or the availability of capital resources. The following table presents a summary of our contractual obligations and commitments as of September 27, 2013 (in thousands):
 
Payments Due By Period
 
1 Year
2 - 3
Years
4 - 5
Years
More Than
5 Years
Total
Naming rights
$7,341
$14,957
$15,334
$118,699
$156,331
Operating leases
17,094
15,530
7,276
3,028
42,928
Purchase obligations
4,261
1,542
39
5,842
Total
$28,696
$32,029
$22,649
$121,727
$205,101

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Naming rights.    In fiscal 2012, we entered into an agreement for naming rights and related benefits with respect to the Dolby Theatre in Hollywood, California, the location of the Academy Awards®. The term of the agreement is 20 years, over which we will make payments on a semi-annual basis. Our payment obligations are conditioned in part on the Academy Awards® being held and broadcast from the Dolby Theatre.
Operating leases.    Operating lease payments include future minimum rental commitments, including those payable to our principal stockholder and portions attributable to the controlling interests in our wholly owned subsidiaries, for non-cancelable operating leases of office space as of September 27, 2013.
Purchase obligations.    Our purchase obligations consist of agreements to purchase goods and services, entered into in the ordinary course of business. These represent non-cancelable commitments for which a penalty would be imposed if the agreement was canceled for any reason other than an event of default as described by the agreement.
Unrecognized Tax Benefits.    As of September 27, 2013, we had an accrued liability for unrecognized tax benefits and related interest and penalties, net of related deferred tax assets, totaling $32.5 million. We are unable to estimate when any cash settlement with a taxing authority might occur.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Sensitivity
Cash, Cash Equivalents and Investments
As of September 27, 2013, we had cash and cash equivalents of $454.4 million, which consisted of cash and highly-liquid money market funds. In addition, we had short-term and long-term investments of $446.6 million, which consisted primarily of municipal debt securities, corporate bonds, and U.S. agency securities. Our investment policy and strategy are focused on the preservation of capital and on supporting our liquidity requirements. We do not invest in financial instruments for trading or speculative purposes, nor do we use leveraged financial instruments. Our holdings of cash and cash equivalents and marketable securities, the majority of which are managed by external managers, meet the guidelines of our investment policy. We invest in highly rated securities with a minimum credit rating of A- and our policy limits the amount of credit exposure to any one issuer other than the U.S. government. At September 27, 2013, our weighted-average portfolio credit quality was AA and the weighted-average maturity of our investment portfolio was approximately fourteen months.
The investments within our fixed-income portfolio are subject to fluctuations in interest rates, which could affect our financial position, and to a lesser extent, results of operations. Based on our investment portfolio balance as of September 27, 2013, hypothetical changes in interest rates of 1% and 0.5% would have an impact on the carrying value of our portfolio of approximately $5.4 million and $2.7 million, respectively.
Foreign Currency Exchange Risk
We maintain business operations in foreign countries, most significantly in the United Kingdom, Australia, China, Germany and the Netherlands. We also conduct a growing portion of our business outside of the U.S. through subsidiaries with functional currencies other than the U.S. dollar (primarily British Pound, Australian Dollar, Chinese Yuan Renminbi, Indian Rupee, Japanese Yen, Korean Won and Euro). 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. The majority of our revenue generated from international markets is denominated in U.S. dollars, while the operating expenses of our foreign subsidiaries are predominantly denominated in local currencies. Therefore, our operating expenses will increase when the U.S. dollar weakens against the local currency and decrease when the U.S. dollar strengthens against the local currency. 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 consolidated statements of operations. Our foreign operations are subject to the same risks present when conducting business internationally, including, but not limited to, differing economic conditions, changes in political climate, differing tax structures, foreign exchange rate volatility and other regulations and restrictions.
In an effort to reduce the risk that our earnings will be adversely affected by foreign currency exchange rate fluctuations, we enter into foreign currency forward contracts to hedge against assets and liabilities for which we have foreign currency exchange rate exposure. These derivative instruments are carried at fair value with changes in the fair value recorded to other income, net, in our consolidated statements of operations. While not designated

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as hedging instruments, these foreign currency forward contracts are used to reduce the exchange rate risk associated primarily with intercompany receivables and payables. These contracts do not subject us to material balance sheet risk due to exchange rate movements as gains and losses on these derivatives are intended to offset gains and losses on the related receivables and payables for which we have foreign currency exchange rate exposure. As of September 27, 2013 and September 28, 2012, the outstanding derivative instruments had maturities of 31 days or less and the total notional amounts of outstanding contracts were $11.6 million and $5.0 million, respectively. The fair values of these contracts were nominal as of September 27, 2013 and September 28, 2012, and were included within prepaid expenses and other current assets and within accrued liabilities in our consolidated balance sheets. For additional information related to our foreign currency forward contracts, see Note 5Fair Value Measurements” to our consolidated financial statements.
A sensitivity analysis was performed on all of our foreign currency forward contracts as of September 27, 2013. This sensitivity analysis was based on a modeling technique that measures the hypothetical market value resulting from a 10% shift in the value of exchange rates relative to the U.S. dollar. For these forward contracts, duration modeling was used where hypothetical changes are made to the spot rates of the currency. A 10% increase in the value of the U.S. dollar would lead to a decrease in the fair value of our financial instruments by $0.3 million. Conversely, a 10% decrease in the value of the U.S. dollar would result in an increase in the fair value of these financial instruments by $0.3 million.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
DOLBY LABORATORIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
 


42


Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Dolby Laboratories, Inc.:
We have audited the accompanying consolidated balance sheets of Dolby Laboratories, Inc. and subsidiaries as of September 27, 2013 and September 28, 2012, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended September 27, 2013. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Dolby Laboratories, Inc. and subsidiaries as of September 27, 2013 and September 28, 2012, and the results of their operations and their cash flows for each of the years in the three-year period ended September 27, 2013, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Dolby Laboratories, Inc. internal control over financial reporting as of September 27, 2013, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"), and our report dated November 14, 2013 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ KPMG LLP
San Francisco, California
November 14, 2013

43


Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Dolby Laboratories, Inc.:
We have audited Dolby Laboratories, Inc. internal control over financial reporting as of September 27, 2013, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Dolby Laboratories, Inc. management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Controls over Financial Reporting in Item 9A. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Dolby Laboratories, Inc. maintained, in all material respects, effective internal control over financial reporting as of September 27, 2013, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Dolby Laboratories, Inc. and subsidiaries as of September 27, 2013 and September 28, 2012, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended September 27, 2013, and our report dated November 14, 2013 expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP
San Francisco, California
November 14, 2013

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DOLBY LABORATORIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
 

 
September 27,
2013
September 28,
2012
ASSETS
 
 
Current assets:
 
 
Cash and cash equivalents
$
454,397

$
492,600

Short-term investments
140,267

302,693

Accounts receivable, net of allowance of $514 at September 27, 2013 and $956 at September 28, 2012
97,460

43,495

Inventories
10,093

16,700

Deferred taxes
78,381

80,966

Prepaid expenses and other current assets
32,124

33,832

Total current assets
812,722

970,286

Long-term investments
306,338

361,614

Property, plant and equipment, net
242,917

254,676

Intangible assets, net
41,315

56,526

Goodwill
279,724

281,375

Deferred taxes
43,291

22,634

Other non-current assets
11,638

13,687

Total assets
$
1,737,945

$
1,960,798

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
Current liabilities:
 
 
Accounts payable
$
10,695

$
14,831

Accrued liabilities
137,795

116,092

Income taxes payable
3,394

2,424

Deferred revenue
20,931

23,493

Total current liabilities
172,815

156,840

Long-term deferred revenue
19,663

18,192

Deferred taxes

2,696

Other non-current liabilities
45,441

39,837

Total liabilities
237,919

217,565

Stockholders’ equity:
 
 
Class A common stock, $0.001 par value, one vote per share, 500,000,000 shares authorized: 46,862,893 shares issued and outstanding at September 27, 2013 and 46,496,635 at September 28, 2012
47

46

Class B common stock, $0.001 par value, ten votes per share, 500,000,000 shares authorized: 54,876,494 shares issued and outstanding at September 27, 2013 and 56,598,829 at September 28, 2012
55

57

Additional paid-in capital
18,812


Retained earnings
1,454,382

1,709,479

Accumulated other comprehensive income
7,814

10,687

Total stockholders’ equity – Dolby Laboratories, Inc.
1,481,110

1,720,269

Controlling interest
18,916

22,964

Total stockholders’ equity
1,500,026

1,743,233

Total liabilities and stockholders’ equity
$
1,737,945

$
1,960,798



See accompanying notes to consolidated financial statements

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DOLBY LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)

 
 
Fiscal Year Ended
 
September 27,
2013
September 28,
2012
September 30,
2011
Revenue:
 
 
 
Licensing
$
807,081

$
801,313

$
795,900

Products
80,603

103,388

131,611

Services
21,990

28,313

33,554

Total revenue
909,674

933,014

961,065

Cost of revenue:
 
 
 
Cost of licensing
16,856

12,924

17,620

Cost of products
64,270

66,325

81,328

Cost of services
15,593

12,778

12,223

Total cost of revenue
96,719

92,027

111,171

Gross margin
812,955

840,987

849,894

Operating expenses:
 
 
 
Research and development
168,746

140,143

123,920

Sales and marketing
231,103

188,486

155,202

General and administrative
161,970

149,175

137,633

Restructuring charges
5,874

1,191

3,406

Total operating expenses
567,693

478,995

420,161

Operating income
245,262

361,992

429,733

Interest income
3,848

6,411

8,976

Interest expense
(575
)
(196
)
1,027

Other income, net
2,111

784

907

Income before income taxes
250,646

368,991

440,643

Provision for income taxes
(60,344
)
(103,857
)
(130,061
)
Net income including controlling interest
190,302

265,134

310,582

Less: net (income) attributable to controlling interest
(1,031
)
(832
)
(1,315
)
Net income attributable to Dolby Laboratories, Inc.
$
189,271

$
264,302

$
309,267

Net income per share:
 
 
 
Basic
$
1.86

$
2.47

$
2.78

Diluted
$
1.84

$
2.46

$
2.75

Weighted-average shares outstanding:
 
 
 
Basic
101,879

106,926

111,444

Diluted
102,788

107,541

112,554

 
 
 
 
Related party rent expense included in operating expenses
$
2,526

$
1,372

$
1,372

Related party rent expense included in net income attributable to controlling interest
$
3,636

$
3,270

$
3,098

See accompanying notes to consolidated financial statements

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DOLBY LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)

 
Fiscal Year Ended
 
September 27,
2013
September 28,
2012
September 30,
2011
Net income including controlling interest
$
190,302

$
265,134

$
310,582

Other comprehensive income/(loss):


 
Foreign currency translation adjustments, net of tax
(2,037
)
3,082

509

Unrealized gains/(losses) on available-for-sale securities, net of tax
(876
)
380

(907
)
Comprehensive income
187,389

268,596

310,184

Less: comprehensive (income) attributable to controlling interest
(991
)
(1,140
)
(1,185
)
Comprehensive income attributable to Dolby Laboratories, Inc.
$
186,398

$
267,456

$
308,999

See accompanying notes to consolidated financial statements


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DOLBY LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
 
Dolby Laboratories, Inc.
 
 
 
Shares of
Class A
common
stock
Class A
common
stock
Shares of
Class B
common
stock
Class B
common
stock
Additional
paid-in
capital
Retained
earnings
Accumulated
other
comprehensive
income
Total Dolby
Laboratories,
Inc.
Controlling
Interest
Total
Balance at September 24, 2010
52,856

$
53

59,228

$
59

$
329,902

$
1,135,922

$
7,801

$
1,473,737

$
20,942

$
1,494,679

Net income





309,267


309,267

1,315

310,582

Translation adjustments, net of tax of $2






639

639

(130
)
509

Unrealized losses on available-for-sale securities, net of tax of $599






(907
)
(907
)

(907
)
Distributions to controlling interest








(290
)
(290
)
Stock-based compensation expense




43,218



43,218


43,218

Capitalized stock-based compensation expense




635



635


635

Repurchase of common stock
(4,135
)
(4
)


(192,406
)


(192,410
)

(192,410
)
Tax benefit/(deficiency) from stock incentive plans




6,015



6,015


6,015

Class A common stock issued under employee stock plans
1,079

1



26,786



26,787


26,787

Shares repurchased for tax withholdings on vesting of restricted stock
(86
)



(4,599
)


(4,599
)

(4,599
)
Common stock transfers - Class B to Class A
2,147

2

(2,147
)
(2
)






Exercise of Class B stock options


479

1

1,130



1,131


1,131

Balance at September 30, 2011
51,861

52

57,560

58

210,681

1,445,189

7,533

1,663,513

21,837

1,685,350

Net income





264,302


264,302

832

265,134

Translation adjustments, net of tax of $30






2,774

2,774

308

3,082

Unrealized gains on available-for-sale securities, net of tax of $(210)






380

380


380

Distributions to controlling interest








(13
)
(13
)
Stock-based compensation expense




47,184



47,184


47,184

Capitalized stock-based compensation expense




352



352


352

Repurchase of common stock
(7,213
)
(7
)


(268,184
)
(12
)

(268,203
)

(268,203
)
Tax benefit/(deficiency) from stock incentive plans




(3,585
)


(3,585
)

(3,585
)
Class A common stock issued under employee stock plans
911




17,279



17,279


17,279

Shares repurchased for tax withholdings on vesting of restricted stock
(106
)



(3,835
)


(3,835
)

(3,835
)
Common stock transfers - Class B to Class A
1,044

1

(1,044
)
(1
)






Exercise of Class B stock options


83


108



108


108

Balance at September 28, 2012
46,497

46

56,599

57

$

1,709,479

10,687

1,720,269

22,964

1,743,233

Net income





189,271


189,271

1,031

190,302

Translation adjustments, net of tax of $497






(1,997
)
(1,997
)
(40
)
(2,037
)
Unrealized losses on available-for-sale securities, net of tax of $493